Q1 2023 WeWork Inc Earnings Call
Good day and welcome to the <unk> first quarter 2023 earnings call.
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I'd now like to welcome Kevin Berry to begin the conference Kevin over to you.
Thank you Gavin and good morning, everyone and welcome to <unk> first quarter 2023 earnings conference call. During this call we will refer to our earnings release, and Investor presentation, which have been furnished with the SEC and can be accessed at investors that we worked dot com.
This discussion will include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.
Additional information concerning factors that could cause actual results to differ materially is contained in our latest.
Fuel and quarterly and periodic reports filed with the SEC.
We will also discuss certain non-GAAP financial measures, which we believe are meaningful in evaluating the companys performance additional disclosures regarding these non-GAAP measures, including a GAAP to non-GAAP reconciliation are included in our earnings release and supplemental presentation and will also be included in our Form 10-Q to be filed tomorrow.
I'd like to introduce <unk>, Chairman and Chief Executive Officer, and Andre Fernandez, Chief Financial Officer with that let me turn it over to Sandy. Thank you, Kevin and good morning, everyone.
I'll review the trends, we are seeing in the flex industry. According to the results recent restructuring and then Andre will provide further comments on the quarter and the outlook.
First I want to talk about flex industry trends and about why I think this as we look at moment, we look it's all about flexibility across cost time and space at a time with the commercial office industry is in flux and fundamentally changing for the long term, we look at not only solving for the needs of businesses of all sizes seeking.
Speaking of turnkey flexible solution, but we're also working to cement our product offerings at the long term alternative to traditional office.
Ironically as I walk this morning down fifth Avenue I bumped into a CEO of a retail company.
We actually looked at me and said aren't you glad you're on the right space in the commercial sector.
<unk> is coming your way.
It is all over.
The industry that flexibility is the key for turnkey solutions and immediate occupancy.
More than ever before businesses are seeking a solution that is unique complete and doesn't require any capital investment.
Pandemic HR departments could predict 10 years out what the head count growth could be and CFO as well, okay, taking on real estate to accommodate that growth today that is unknown occupies need to be able to manage.
Agile decisions as the head count and in office last change and we will offer us the flexibility to that on an immediate basis.
We continue to read how different types of companies that either entering new markets growing in the existing markets. While they have a return to work policies starting in.
In may or June this year to space.
Their employees now.
Why you don't realize and why and what we see and feel firsthand is that in each case. These companies are turning to we love for their solution.
One. Recent example is we signed in April two separate locations in New York City totaling 310000 square feet.
Large enterprise company that needed the space within two weeks in order to house employees by their magnitude return to office. This same client is now taking over 100000 square feet with us in London.
This is the kind of flexibility, we're able to offer that sets us apart from our legacy commercial real estate, we provide turnkey solutions for immediate occupancy.
As the trend continues in New York, how first quarter desk equated to 23% of the total square footage leased in the traditional market, while our portfolio accounts for only 1% of the total office stock.
Over the last few quarters, our share that we have taken of the market has steadily increased.
Similarly in Boston, a market share was 16% Chicago, 9%, Miami, 17% in San Francisco at 21%, Dublin, 27% <unk>, 12% in Berlin, 9%.
We can now see over the last four quarters each quarter, we continued to take market share demonstrating the trend towards flex and co working.
The other side of the equation that is important to remember is that we work as a tenant which is a critical element of our business model that it takes us sometimes underappreciated, we don't own the buildings. So we're not handicapped by mortgages and lender covenants. In addition, we're not required to give concessions that allows us to grow occupancy.
There is undoubtedly uncertainty the market is creates opportunities as flexibility and agility become even more important as constant as companies considered their office footprints.
I believe this is a moment more than ever.
Turning to our first quarter results.
Revenue in the quarter was $849 million, which is in line with our guidance range occupancy increased 6% from the first quarter last year and was slight was down slightly from year end as we said on the call for the last quarter, we typically see higher churn in December resulting in a slowest started the year this quarter it created.
Klein and memberships was a function of known enterprise churn the <unk>.
Planned closure of some of our locations and franchising of South Africa, the known enterprise churn was to be replaced.
Which fell from the end of March to the beginning of April with a 300000 square feet enterprise client I mentioned, a little earlier.
In April we saw a reversal in enterprise demand as we saw net sales in the U S turn positive for the first time in 12 months.
International has been carrying the day as I've mentioned over and over again on these goals and we are pleased to see the U S. Finally turn the corner as we move forward. We continue to see demand pick up, particularly as I mentioned more companies are executing mandatory return to office dates for employees that need space immediately.
Again as I have mentioned in the past with all the headlines of all the layoffs. Many of these companies still have more employees today and they did pre pandemic and our need for space to house their employees.
Adjusted EBITDA attributable to we work was negative $17 million.
An improvement of $169 million over the first quarter last year due to continued revenue growth and expense reduction.
Free cash flow was negative 343 million in the quarter and also came in $18 million better than we expected.
ARPA ticked up a little bit to $490.
All access memberships an increase of 75000.
The trend continues as we've mentioned over and over again to increase our all access by about 1000 members or so a month.
And this time around it's up about 5000 over the last quarters of slightly over a 1000 a month.
While all of US as memberships are not included in there in either a membership count or our occupancy total it represents an additional utilization and monetization of our space and contributed $59 million of revenue this quarter.
The trend of the all access membership also has a tremendous impact on our assay revenue as our utilization of conference rooms, and private offices improves.
Our workplace solution, which we launched in partnership with Yardy continues to grow with 63000 licenses sold.
Since launch to approximately 370 companies throughout the world.
For the second quarter, we expect revenue to be between $840 $865 million and adjusted EBITDA to be between negative $10 million and positive $15 million.
Our second quarter projected adjusted EBITDA made in connection with our debt restructuring was better than this range, partially due to approximately $30 million of lower costs on a GAAP basis, we will realize the benefit of the same $30 million on a cash basis.
Again, I'm running this business for revenue and increase in cash flow.
We expect our cash and cash equivalents at the end of the second quarter to be consistent with or slightly better than our original projections.
Activities and decisions to reduce our expense structure has been occurring since I became CEO in early 2020 and continue.
Been very diligent in right sizing the organization and streamlining the portfolio. This process never ends we're grateful to our landlord partners agreed and green to reduce our rent obligations for the near term.
Which is what's the assisted and providing the.
Gains on a cash basis through the second quarter and through the end of the year.
In addition, as part of our restructuring we've guided to approximately $620 million of SG&A and indirect location operating expense of this year, we expect that to come in closer to $575 million.
Turning to the global portfolio as of quarter end, we will have 781 location system wide 617 consolidated.
Remember ships as of quarter end was 664000 system wide 527 consolidated.
As mentioned earlier occupancy increased 6% from the first quarter last year and was down slightly from year end looking at our major regions, both the United States, and Canada and international were up 5% year over year, and Interestingly, Japan, finally rebounded and was up 16% year over year.
As mentioned previously we are constantly reviewing the portfolio in the interest of increasing its overall quality.
Since the beginning of this year, we have agreed to exit a partially exit an additional eight locations in the U S and six outside the U S of those additional locations.
All members of those spaces have been notified.
We continue to pursue asset light growth opportunities throughout the world.
In March we signed a franchise agreement with C. C beds out of patent Africa, and real estate Investor for our South African business.
Throughout this partnership TC Penza will operate we're able to existing locations in South Africa, and whole exclusive rights to grow and operate we look franchises in Ghana, Kenya, Mauritius and Nigeria.
Additionally, we continued to see growth across our portfolio with nine new locations, including a few expansions closed so far this year, primarily outside the U S.
Turning to our balance sheet, we are very pleased with the tremendous support from my investors to strengthen <unk> balance sheet to provide the company with a sound financial footing aligned with its outlook.
The restructuring significantly improved our liquidity by providing 1 billion of cash reduced outside outstanding debt by over $1 2 billion reduced annual cash interest expense by $90 million and extended the maturities to 2027.
We now have the runway we need to grow our business and go on the office versus being on the defence. This.
This transaction is evidence of our investors' strong conviction in the business model.
On behalf of my colleagues, we're grateful and humbled with a strong showing us a bolt.
Andrea will now provide some additional perspective on the quarter and our financial condition.
Thanks, Sandeep and good morning, everyone.
Consolidated revenue in the first quarter was $849 million, which was up 11% year over year, essentially flat to the fourth quarter of last year and at the high end of our guidance range.
Revenue was also helped by foreign exchange, namely a stronger euro and stronger British pound.
As Sandeep mentioned occupancy increased 6% from the first quarter of last year. So it was down sequentially due to higher than anticipated customer churn.
Consolidated physical membership ARPA am rose to $490 also helped by FX and marking two consecutive quarters of pricing growth.
And year over year, <unk> was 1% better than the first quarter of last year.
Our first quarter building margin of $138 million was up $104 million year over year, but declined slightly versus the fourth quarter due to higher operating costs associated with a few building openings in Europe and FX.
Despite this increase we continue to mitigate the overall increase in our location operating expenses through plans building exits.
After building exits we announced last fall, we have been able to retain approximately 70% of our revenue through member relocation efforts.
On the earnings line adjusted EBITDA in the first quarter was negative $29 million slightly lower than the fourth quarter and just outside of our EBITDA guidance range.
Excluding noncontrolling interests adjusted EBITDA attributable to we work was negative $17 million.
While our rent reduction conversations to date with our landlord partners have been fruitful and are yielding material cash savings on a cash basis for 2023 and 2024.
The impact on EBITDA in the first quarter was minimal as the cash savings. We are achieving are straight lined over the life of the lease.
As a result, while we remain confident in our full year savings assumptions on a cash basis, which is in excess of $100 million the.
Full year EBITDA impact is expected to be less due to the straight lining of leases.
We will continue to quantify this impact as we get deeper into the year and have a greater number of these reductions executed.
Our adjusted EBITDA also benefited from sequentially lower SG&A helped by the head count actions, we took at the end of January .
Since many of those actions, particularly internationally were not effective until March we expect to see further sequential improvement in SG&A for the remainder of this year.
And when comparing the fourth quarter of last year to the first quarter of this year recall that fourth quarter of last year's SG&A benefited from a partial reversal of incentive compensation due to lower annual bonuses as well as known terminations.
So on a normalized basis, a sequential SG&A decline from the fourth quarter to the first quarter was even greater.
Below the EBITDA line, our net loss for the first quarter was $299 million driven by several significant noncash items, including impairments of lease hold improvements of buildings, we are exiting and DNA, partially offset by restructuring gains on those same exited buildings.
As we wrote off previously impaired assets and their related liabilities from the balance sheet.
Moving on now to cash and liquidity.
We ended the first quarter was $306 million of consolidated cash on the balance sheet, which included $82 million of restricted and held for sale cash.
Free cash flow for the quarter was negative $343 million.
Which would be our plan published in connection with the debt restructuring and was helped by lower net capex.
First quarter cash burn was higher than the fourth quarter due to the payout of our annual bonuses.
Timing of cash interest payments and other working capital all of which were planned.
And consistent with our published projections, we expect our free cash flow to improve in the second quarter as revenue and earnings continue to improve as cash rent reductions are achieved and as net capex continues to decline to a more maintenance level of spend.
Sandeep mentioned, we couldnt be more pleased with the results of our recently closed debt restructuring transaction and the support received throughout both from Softbank, a largest shareholder as well as our bondholders.
As we disclosed last week as part of the exchange offer 75, 8% of the aggregate principal amount of $7 seven eights notes outstanding.
And 98, 3% of the old 5% notes outstanding where tender.
We've included pro forma debt and equity cap tables on pages, 20, and 21 of our investor presentation.
As Sandeep mentioned the transaction reduces our net debt provides us with additional capital lowers our annual interest cost cash interest cost and extend the bulk of our debt maturities to 2027.
As you can see on page 19, we prepared a simple pro forma view of our cash and commitments.
That restructuring had closed on March 31.
And on that basis, you will see our as adjusted cash and commitments were just under $900 million at the end of the first quarter and providing us with sufficient liquidity to fund the business plan, we produced in connection with the transaction.
In addition, the cleansing materials, we published on March 17th in connection with the launch of the debt restructuring contain additional assumptions, including cash projections pro forma for the new capital structure.
And while certain assumptions and exclusions are footnoted in the same we provide many key metrics, including free cash flow net capex cash interest and other relevant data.
Regarding the second quarter, we expect consolidated Q2 revenue to be in the range of $840 to $865 million and adjusted EBITDA in the range of negative $10 million to positive $15 million.
Our revenue estimate is tempered by higher than expected customer churn we've experienced in the first few months of the year. So we are likewise encouraged by positive net sales growth realized in our U S business in the month of April .
And on the earnings side, our Q2, EBITDA guide will be impacted by the lower book rent savings that I mentioned previously as the cash savings are straight lines.
Overall, we will continue to see sequential reductions in our cash rents SG&A and capex as we outlined in the debt transaction.
That concludes our prepared remarks once again, thanks again to all of our investors for your continued support and of course to our employees for your tireless dedication to our success.
With that I'll turn it back to the operator to open the lines of questions.
Yes.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad will close with just a moment to compile the Q&A roster.
Your first question comes from the line of Vikram Malhotra from Mizuho. Your line is open.
Maybe just to start off.
Can you talk about.
The occupancy trajectory into April .
Obviously sequentially, but you've talked about higher sales in U S and Canada, but they put sort of more broad based in the UK and Europe as well. So can you give us some flavor on what's going on in those markets and how the occupancy trajectory is likely into the second quarter.
As well as relative to your your business plan.
Good morning, Vikram and again, we saw sequentially in the month of April occupancy pick up in the international markets to above 80% from 79%. So again thats a function of timing.
Again as I mentioned, the large enterprise client predominantly one client in one building in London, the occupancy down which is an enterprise client.
And Thats places being replay it replaced.
In the month of May as I mentioned in my comments with a 100000 square feet enterprise clients.
The good news is it's more.
Off by a month the timing than it is a vintage is something a change in market sentiment. So it's more timing related than demand related.
Okay, and just to clarify so based on the business plan are you still hoping that trajectory trend towards that 82% at year end.
Again, as I've mentioned I am not going to we have a projection for each quarter. All we can we are we feel pretty comfortable that on a sequential basis occupancy will continue to improve.
Q1, being the floor. So we do see a trajectory from here.
To have occupancy improved sequentially quarter over quarter from year to year end and.
We achieved that 80% golden number by year end.
Makes sense.
So one on just cash flow or EBITDA.
Ultimately free cash flow, if I heard you correctly.
Adjustments between EBITDA and cash EBITDA is about 30 million or so.
If I heard that correct and can you sort of bridge.
The cash you have on hand today relative to sort of the burn assuming occupancy remains flattish is there a need.
For additional cash earlier than anticipated, meaning to draw on the delayed notes.
We don't anticipate any of that we anticipate.
Achieving the.
The.
The revenue numbers and reducing the <unk>.
Operating expenses.
Even if we took our revenue down by $25 million to $50 million in the second and the third third and the fourth quarter, sorry, and ran the sensitivities there would be no need to draw on the delayed notes.
Okay.
Sorry go ahead.
Yes, we had assumed about <unk> about starting the second quarter of about $30 million in the in the cleansing materials about $30 million of both cash and EBITDA savings a quarter. So I think the point that we're saying is hey, we're achieving a cash savings.
We're getting a cash savings only over 2023, and 2024 more or less so when you straight line that you get a lower EBITDA impact on <unk>, but the cash is there. So we're feeling confident about the cash.
Okay, and then just last one to clarify the ultimately the cash.
We're obviously close to hitting EBITDA at least suggested EBITDA neutral, but ultimately the free cash flow our cash flow.
Breakeven positive is that based on your business plan. It sounds like that as of year end 'twenty. Four objective now can you just clarify that.
Yes, I would say if you look at the cleansing materials Youll see a projection of the pro forma cash flow. So you get close to it briefly at the end of the end of this year, but that a lot of that is just timing of interest payments, but then you get to free cash flow breakeven in the second half of 'twenty four.
Great. Thank you.
Yes.
Your next question comes from the line of OMA Tayo Okusanya from Credit Suisse. Your line is open.
Hi, Yes, good morning, everyone.
Sandy I guess, when you kind of look at COSE.
The debt restructuring.
Event.
Have a stock that has kind of dropped below a dollar clearly to transaction was dilutive to.
To current shareholders.
What exactly is the message to that group of shareholders, you've kind of gone through this now.
This kind of dilution.
Perfect.
Ill ask a few questions about it.
And the stock's really done worse.
Kind of what they should expect going forward.
What exactly is his message to them.
Good morning.
And I would say to sit back and say that I don't think we all contemplated that the stock would drop below $1.
More importantly drop below where it was pre transaction because effectively what you are doing is replacing the equity value by the debt to the equity value. So effectively you took $1 billion two of debt off it should really reflect back into 1 billion too.
Equity.
So it is.
I don't think we expected it because that business continues to perform.
And at.
At this moment in time.
Volatility in the stock is driven by a very small float.
<unk> is about 40 million shares you only have about 143 million shares.
That are not owned by Softbank.
What I would say the insiders are people who are in the pipe.
And so you only have 143 million shares and up 143 million shares about 100 million shares are owned by large institutional investors. So the float is very small and the volatility is very high.
I don't think its representative.
<unk>.
Where the business is or what the anticipation of the equity to debt conversion would have done to the stock price.
Okay. That's helpful.
And then.
And we just kind of blew much like the five year business plan.
That was kind of put in the documents back in March.
Full year EBIT, adjusted EBITDA of almost $250 million in fiscal year.
2023.
First half of the year based on your <unk> your projected <unk> numbers are basically flattish.
Just kind of talk about this kind of delta that needs to happen in the back half of 'twenty three to kind of get to this $247 million projected adjusted EBITDA in the five years again.
To echo the words of Andre.
And my words in my commentary.
Adjusted EBITDA as a GAAP basis, okay versus a cash basis. So we will bridge the gap on cash which is really because of the.
The reductions in tenancy costs and operating costs in 'twenty, three and 'twenty four get straight line.
So again GAAP straight lines it over the term of the lease cash is current so we feel fairly good on a cash basis that we will achieve.
We will be better than.
The cash and cash equivalents, we projected through 2023.
Perhaps there are one more for me if you may indulge me again, the delisting notice from the from the stock exchange could you just talk a little bit about.
What you intend to kind of do over the next six months to kind of address that and prevent us from being <unk>.
Possibly de listed.
Well one I can assure you that we will make sure of the stock is not be listed.
Our alternatives as youll be app for the loss.
Sure.
For the next six months, we will see how the stock reacts based on our performance over the next quarter.
We have filed a proxy to be able to do a reverse split.
And I'm often reminded of a great companies.
Paypal within a reverse split and we all know what happened to that company.
So.
And so there is there is obviously the option to do a reverse split.
And be able to not be in violation of the rules of the Neocart exchange.
Okay. Thank you.
Comes from the line of Alexander Goldfarb from Piper Sandler Your line is open.
Thanks.
Hey morning morning.
I just wanted to go back to the free cash flow of Sandy.
In previous calls it's been sort of a steady question for me and others on pace of free cash flow and breaking even.
And.
A few calls ago, there was some FX headwinds so instead of being sort of middle of this year was going to be towards the end of this year, but now you guys are laying out that it's going to be second half of 'twenty. Four I just wanted to make sure that we're talking apples to apples because.
I think our expectation.
What we have forecast for over a year has been early 'twenty for you guys have continuously been emphasizing that youll be ahead of that weather. Initially it was middle of 'twenty three than it was late 'twenty three because of FX, but now youre, saying its second half of 2004. So I just wanted to make sure we're talking apples to apples and also.
If it is the case why is free cash flow being.
Delayed that far if youre saving $90 billion of cash interest.
Okay.
Hi, This is Andre yes, listen I think we have these projections out for at least for two months. So at least for the last two months.
Been consistent that the free cash flow breakeven point at some time in the second half of <unk>.
2024.
Recall wasn't I think you've seen there we've got some pretty significant uses of cash just below EBITDA. Obviously, we're getting we're getting some cash interest savings, but nonetheless, the interest is a pretty significant.
A burden on the company. We also have as you know we've got cash.
Cash lease expense in excess of book expense is also a considerable use of cash burn.
So as you can see I think that's been that's been pretty consistent I think it's been difficult for us to time, it but we've always known is spend more or less.
More or less.
Sometime in 2024 mid year mid year third quarter and then we've also got some restructuring because we're as you know we're exiting a number of.
Number of leases and that requires cash payments to get out of those get out of those leases, but on a cash basis. It makes sense for us. So so I think we've been at least and we certainly for the last couple of quarters, I think pretty consistent about when we believe the cash flow the free cash flow breakeven point is.
Okay, So Andre I'm going to just go.
I'll go back it hasnt been consistent.
This has been a topic that you guys know I regularly ask can focus on.
And this is the first earnings call since the recap. So that's the first time, we've had a chance to publicly to ask about the free cash flow.
This is a change from what you guys laid out before and it's a little troubling because.
$90 million of cash interest savings was supposed to be an acceleration as far as paying to get out of leases. You guys have said that you would exit leases when your corporate guarantee.
The letters of credit burned off.
I haven't really heard much.
Conversation of you guys paying to terminate those so I'm a little bit confused on that point, maybe you can elaborate yes.
I can I can answer that question I think because I didn't go back and say what Andre was you do get to free cash flow.
Towards the end of this year, Okay. And then you have additional costs in Q1, and Q2 and you get back into free cash flow. So you get that sort of answer. The question is that you get to free cash flow. The point is that you're going to be consistently free cash flow quarter over quarter and that should start to see more towards next year, but you do get that.
The auto being free cash flow at the end of this year I might just add.
Yes.
Let me just finish off so yes, thank you Josh.
We're not paying for the terminations in the SaaS. What we've said is that we will pay on a monthly basis as if we look paying rent.
Generally exited the deals with about 12 months or less of rent payment is standard payment. It goes from being in the vantage energy line item.
Two below the line so effectively it is still the cash to be projected.
So you are paying to get out of leases and generally paid no more than 12 months rent to exit leases. So if I actually look at just Q4 as an example of this year.
The below the line termination fee, which is nothing more than the rent payments. So it was always in cash because it would be $40 million, if I take the $40 million out which is a one time cost that is focused on a what is recurring business looked like European free cash flow net okay.
Okay. So so sandeep, let me ask you this going back to Vikram question on the delayed term draw.
We are saying is even with this negative cash and.
And especially in the first part of next year to exit some of these things even with that this new projections, which is new from what was previously outlined you guys do not see a need to access additional.
Term loan or additional capital right.
Correct.
Okay. So basically investors can rest easy that you guys can achieve this cash profitability breakeven without the company increasing the depth that it has already taken on.
Correct.
When you look at the cleansing that gets laid out and we're saying we're confident we're going to hit the projections and the and the cleansing deck. You'll also see when we exactly plan to draw and even at the low point of free cash flow, which we're saying is sometime in the second half of 2020 for what's still the available liquidity is at that point, which is still north of $400 million.
At the low point right, but hopefully you guys can appreciate how us on the outside who have heard one message now it's being pushed out a year. So hopefully.
That also.
The bigger message is and I appreciate you're feeling that had been pushed out a year. The bigger message is you'd have you'd have variations in quarters. Okay. Just like any industry does.
So like I said Q4, Youll actually see daylight and then Q1 and Q2 because of this.
Cyclicality of the churns in December and then the lower occupancy in January which happens every year, you're going to start to see a dip as you start to see it come back. So the question that having a bigger question is will 2024 via three Castro, yes. The answer is yes.
Thank you Sandeep.
Your next question comes from the line of Tom Catherwood from <unk>. Your line is open.
Thank you and good morning, everybody.
Kind of sticking with that the opex topic there.
Little confusing some things to see if you can just help me understand it.
Andre It sounds like and correct me if I'm wrong.
You came up.
With agreements with landlords, so lower rents and that's cash basis and it is being straight line. So it's not reflected necessarily but it sounded like that was shorter term just a benefit in 'twenty three 'twenty four so kind of first question is does that then step back up in 'twenty five and then the second part to it is the.
Sandeep, what you were saying about paying for the year's worth of rent as the de facto termination fee. You had previously commented that that rolls off at the beginning of 2004 for those leases you exited in the fourth quarter.
Is that still the case, so if you kind of effectively some of some of that comes out in cash, but some of it just rolls off completely because those leases are no longer there correct.
So to your second question is correct, which is like 2020.
2023 will be the year that we continue to pay for the 40 terminations. We did in in December of 2022, we did exit some locations in the beginning of 2023 as I said in my prepared remarks, but the bulk of the termination fee. If you will but just being monthly rolls off by year end.
All of that is correct.
And Tom on your on your first question. The savings are not just some of the savings go beyond 'twenty three and 'twenty four it. They just don't go for the full life of the lease.
And so there is some point at which the savings drop but it's more than just a two year savings on a number of these.
All of these renegotiated and I'll add one more thing as I've mentioned over and over again, what I do like about the business is at the expense line item will continue to decline over time and the reason for that is out the eight that you get these cash savings in 'twenty three 'twenty four over time, the corporate guarantees in the network that has continued to do.
<unk>.
We've not been in business for over 10 years, and so our leases are coming towards renewals and when they do come towards renewables.
We do believe that we will be able to decrease our rent and tenancy costs going forward just simplistically because.
Corporate guarantee.
<unk> continued to burn down and our lease terms come to an end.
Got it I appreciate that.
Can you give us some magnitude of the savings when the expenses on those 40 locations burn off.
Paul.
It's too early because we've only we've only concluded about maybe a quarter of these so so I think once were deeper than I think I've said that Eric.
Eric remarks, we'll give you a sense for exactly what the savings you can expect over the next few years, but but again only a small portion have been concluded.
Yes.
And again, we said we said assumed in our model is 100 plus million dollars of savings in each of 2000 to 2023 and 'twenty four once we get deeper we will update that and also give you a sense for what goes beyond 24 as well.
Got it I appreciate that Andre and then last one for me.
Kind of struggling to align some of the positive commentary you have on demand with occupancy and desk sales and Sandeep I know you said, it's more timing related than demand related but.
Yes.
Okay.
Maybe it is.
Our occupancy gains from here.
Primarily going to be driven by leasing with enterprise members or how much can you pick up with your small and medium business members from here and how is demand been trending with that segment.
Again over the last three quarters.
The SMB small medium businesses have been driving occupancy not enterprise identifies is actually as you know I've said it over and over again has created churn in 2022.
Finally in the month of April that was I think the first month, we had a 50 50 split between enterprise and SMB and Thats. The first time, we've seen enterprise clients come back if.
Have I seen it globally so.
But I do think in the near term is the SMB clients look at that.
Will drive occupancy and why do I feel that you can think of but I often give this comparison.
The 1% to nine person office sort of 10% to 49% office as a commodity.
You can price to clear like an apartment.
So we can drive occupancy in the SMB sector pretty aggressively from now to the end of the year, because it's more like I said, a commodity driven price aspect and the combination of that with now watching net sales positive in the U S. In April and we are going to continue to see that.
Momentum in May, but we do see the enterprise client base in may to be again, almost an all time high and our experience in the history of this company in the U S.
What gives us confidence that sequentially, you'll continue to see occupancy gains from now till the end of the year.
Got it I appreciate the commentary thanks, everyone.
Your next question comes on at Bretton overlap Cantor Fitzgerald. Your line is open.
Hi, guys. Thanks for taking my question.
I guess similar to it because the last line of questioning I guess can you just help me parse through.
Next quarter guide.
Flat sequentially on a growth perspective, despite U S turning more quarter, despite a lot of large enterprises.
Pretty much executing these return to office initiatives.
Seems like demand for flex space based on the prepared remarks is only accelerating.
We're not quite seeing that flow through in your guidance.
Again as I mentioned to you or you are seeing <unk> Hudson.
Not seeing sequentially occupancy gains I might just add.
And I am very appreciative of the conversation.
Look at how many square feet was leased in this quarter.
It's about 8 million square feet.
I think we should do.
They take a little.
And so that number.
8 million square feet is I think more than.
Most companies combined in the office sector. So what you are seeing as you are seeing a shift towards flex one of the point I'll make is that is that the denominator is not getting bigger we're taking market share. So even if you look at New York City as I mentioned in my in my remarks, I think last quarter, we took <unk>.
60% to 18% market share in Q1, we did 23% we continue to take market share. So this is a continuously shift.
From traditional to flexible working.
And we do view Q1 to be the trough and we do see occupancy gains quarter to quarter. So I do think you're going to you'll see that these numbers are quite large.
Look at the amount of leasing activity done during Q1 and again, we watch it.
It will be very strong and maybe being a follow on.
And I guess, a follow up to that I mean, your system wide growth and consolidated gross organization sales are down call. It.
15% to 17% just from the last quarter.
So I guess should we expect those trends to reverse or is that more of a function of kind of weak commercial market at least for that Joe.
Large enterprise us actually it's a function of two things, we actually think two things. Once you once you get above 80% occupancy, which is where we are in.
In the international markets market, like Korea, which over 90% occupied all south.
Southeast Asia, and the mid <unk> occupancy you just have less to sell.
Fundamentally it.
It's not a function of demand, it's a function of space.
And so in a way.
You'll continue to see occupancy gains rapidly as more in the United States. Because you still have you still have space available to sell so it's more a function of two things are more a function of.
Space in the international markets and demand in the international market. So just naturally you have less space to lease a new lease that space.
Mentally.
The more than half the reason of the dip is not a demand issue its a space issue.
Okay got it that makes sense.
One follow up I just want to clarify you said you would expect your kind of ending cash balance in the second quarter to be near that $422 million adjusted cash balance that you've kind of put in your presentation.
Yes, I can see that exactly and just looking at the pro forma Q2 cash balance of four to 7 million referring to that.
Perfect I.
I appreciate it.
Got it.
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