Q2 2023 WeWork Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the we were Q2 2023 earnings call I would now like to turn the call over to Kevin Berry. Please go ahead.

Thank you Mollie and welcome everyone to <unk> second quarter 2023 earnings Conference call.

This call we will refer to our earnings press release and Form 10-Q filed yesterday with the SEC and is available in the investors section of our website.

This discussion may include forward looking statements that are subject to various risks and uncertainties that may materially impact our future financial results.

Additional information concerning factors that may impact our future financial results are explained in our quarterly annual and periodic filings with the SEC.

We will mention non-GAAP financial measures that we believe are meaningful to investors when reviewing our financial results.

Disclosures regarding these non-GAAP metrics, including a reconciliation to us GAAP comparable measure are also available in our SEC filings participating.

Participating in this quarters call from the company as executive team, David Tolley, Chief Executive Officer, and Curt Leaner Chief Financial Officer.

This quarter, we requested any questions from the investment community to be sent to us in advance of this morning's call.

Following Davids prepared remarks, we will provide answers to selected questions. Please know that we are also available to answer additional questions. After the call. It is now my pleasure to introduce David Kelley, Our Chief Executive Officer.

Okay.

Thank you Kevin good morning, everyone.

Since taking this position about two months ago I've invested my time in three primary areas.

First on learning from our employees listening carefully to their insights about our business and searching for areas of opportunity.

Second and speaking directly with our members and partners understanding better how they use our services, where we excel and where opportunities for improvement continue to exist.

And finally in developing a thorough understanding of our recent operating and financial results.

Before I review, our performance for the quarter I'd like to share some perspectives on what I think I've learned over the last two months.

Two things seem to be exceptionally clear.

One the future of work is complex and to even the most educated market observers and certainly none of US on this call know exactly how this is going to play out in the medium term.

This complexity and uncertainty in our directly to our benefit.

And fewer companies from mature large cap businesses to startups.

We're willing to enter into long term leases for geographically fixed spaces. When they have relatively poor visibility on how that space may be used or valued by their employees.

It also seems clear to us that how employees perceive this space. They work in has become an important part of the overall value proposition in a way that it never really has before.

<unk> is just not enough.

In our experience members and employees get differentiated significant value from their workspace when they feel welcomed.

Energized like part of a network or community.

These factors are critical to determining the difference between square feet or desks and a truly effective workplace.

So.

As always we offer employers flexibility in time and space and geography as their needs change and we offer their employees something unique and valuable.

I recall, one conversation with one of our larger members during an introductory meeting back in June .

This was a large cap global media company, who uses our services and those of some of our franchisees and perhaps a dozen locations around the world.

And they told me directly we always use as we work the brand means something we can count on consistent quality of service in each of your locations and there is something different about the energy you get when you walk into a we work relative to another co working space.

As we all know market conditions in commercial office continue to be difficult.

In the U S. In the second quarter, we just hit 30 year low occupancy rates.

<unk> continues to be negatively impacted by high interest rates relatively high inflation.

Slower than anticipated return to office trends and venture capital formation that a multi year low.

Each of these factors is impacting our members and potential members and their ability to grow with us.

That said looking through the current market volatility we continue to believe in the quality of our hospitality services the strength of our brand and the inexorable growth in share of co working and flexible space relative to traditional office.

Turning to second quarter performance.

The commercial office environment has become more challenging since the start of the year.

And although we don't compete directly with traditional leased office, we certainly aren't immune to multi decade high vacancy rates and weak pricing in.

In that market.

Specific factors affecting membership demand include the unprecedented amount of sublease space available, including from our own landlords.

Increased competition from other flexible space providers, a dearth of available funding for venture in early stage growth companies and relatively high interest rates and inflation.

Although we reported revenue for the second quarter inside guidance, we were just over 20 million wide of the low end of guidance for adjusted EBITDA.

And Levered free cash flow was significantly below plan.

Occupancy increased two percentage points year over year, but declined one percentage point sequentially as member churn increased beyond the rate of new desk sales.

Regionally occupancy in the U S and Canada continue to lag the rest of our consolidated global portfolio by over 1000 basis points.

Well because return to office continues to lag here in the U S.

And because we are materially oversupplied and a few key markets.

Second quarter revenues increased $29 million or 4% year over year.

The slight despite slightly lower sequential occupancy driven by growth in shop, and termination fees and all access revenues.

We continued to reduce our location operating costs by $11 million year over year by exiting unprofitable buildings and reducing head count.

These savings were partially offset by inflation that drove up the cost of utilities and consumables.

Our pre opening expenses decreased by $30 million year over year, as we focus our growth toward a more asset light strategy.

And SG&A expenses decreased $39 million in the second quarter as we continue to find ways to operate more efficiently.

One of the ways, we're operating more efficiently and simultaneously delivering more value to our members is throw a growing technology partnership with the Rd.

As you May recall, we worked with the already to successfully launch we worked workplace last year.

This application allows enterprises and their employees to plan their in office schedules efficiently and improve the ROI on our members' investments with us.

In addition in the coming months, we intend to roll out a single we work out with a consistent digital footprint on both the web and mobile devices that combines all of our current workspace solutions into one streamlined application whether spaces of service all access our workplace.

We will provide our members with a better online experience and further reduce operating expenses and shorten the time to market for other innovative offerings, we have in the pipeline.

Okay.

During the second quarter, our Levered free cash flow loss improved from Q1, but was still higher than the company anticipated early this year.

As of June 30, we had $680 million of liquidity.

In light of our current business trends, we recently drew down $175 million of the $475 million of our committed delayed draw first lien notes.

Notably we added this quarter important disclosure to our 10-Q regarding our ability to continue is it going concern.

This evaluation is a technical accounting determination that importantly does not consider the potential mitigating effect of our range of operating plans. We're currently evaluating.

Including targeted investments to reduce member churn drive new desk sales and increase occupancy.

Further reduce rent and tenancy expenses and.

And continue to drive internal operating efficiency and control SG&A expenses.

When evaluating our plans to further improve profitability and liquidity, we believe intense focus needs to be applied to our rent and tenancy expenses.

Since the fourth quarter of 2019, we've exited or amended 590 leases whichever has resulted in an estimated reduction of $12 $7 billion in fixed lease payments.

Despite this dramatic progress cash rent and tenancy continues to be our primary challenge and obstacle profitability and free cash flow.

Cash rent and tenancy in the second quarter was equal to 74% of revenue and over two thirds of our total operating expenses.

Along with the rest of our team I'm laser focused on addressing this issue, which is critical to our current success and future profitable growth.

Given the challenging market environment. It can be easy to forget that we continue to occupy a unique and important position in the markets we serve.

Our value proposition includes our global scale and design and quality of our spaces are best in class hospitality services and our ability to deliver a full suite of complementary services more than just space to enterprises of any size.

For example, in the second quarter, one of the world's largest technology organizations, just entered into new and renewed contracts with us for 17 locations in 15 different markets for Vancouver to New York to London.

Separately, our small cap growth company, just took occupancy at our seven Ruta Madrid location in Paris, adding 150, all access passes and 450 workplace licenses to their purchase of space as a service.

Before closing I'd like to note the appointment of four new independent directors to our board.

On behalf of the board I would like to welcome Paul Aronson, Paul Clegg, Levek, Elizabeth Lipoma, and Henry Miller to the board and sincerely. Thank Dan Hurwitz, Vivek <unk> entities and very neat glory for their many years of dedicated service.

Last week I spent.

Half My day with our community team in Chicago at 167, North Green Street.

From my seat at the front desk I witnessed firsthand how my colleagues support our members provide solutions and create a truly extraordinary environment.

I am honored to lead this team.

The community staff in Chicago, and the rest of our 3700 employees around the world to navigate our company in this dynamic environment.

With that we'll go through a few of the questions that have already been surplus Kevin. Thank.

Thank you David.

Our Q&A session. We have received a number of questions from the investment community and will provide responses to select the questions now.

First.

David can you please provide us with an update for that.

Reverse stock split that was proposed.

The last annual shareholders' meeting.

Sure.

The reverse stock split proposal approved by our shareholders at the last annual shareholder meeting is on the agenda for our next board meeting.

Once the board makes a decision will provide an update to the market.

Just as a reminder, we have until mid October to effectuate, a reverse stock split.

Second question.

As softbank going to pushed back the maturity of the credit facilities that expire in 2025 to 2020.

Oh sure. So Softbank did in fact extend their credit support for each of these facilities to 2027 already as a part of our debt restructuring and back.

We expect to be extension process for the underlying credit facilities.

Get underway later this year or early next year.

Finally.

What's the occupancy trend by major region.

Sure. Thank you Kevin.

Year over year occupancy was up slightly sequentially flat to down slightly.

U S C outgrow the U S and Canada as we say remained sluggish at about 67% down from 69% EMEA is at around 78% and the Pacific region is flat at around 83%.

Thank you.

This does conclude our second quarter earnings conference call.

You all for joining and please feel free to contact us with any additional questions.

Good day Goodbye.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

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