Earnings Transcript for WE - Q3 Fiscal Year 2021

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the WeWork Third Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chandler Salisbury, VP of Investor Relations, you may begin your conference call.

Chandler Salisbury: Good morning and welcome to our third quarter 2021 earnings call. I am Chandler Salisbury, VP of Investor Relations and Corporate Development. With me today is Sandeep Mathrani, our CEO; and Ben Dunham, our CFO. During today’s presentation, we’ll refer to our earnings release and supplemental presentations, which have been filed with the SEC and can be accessed at investors.wework.com. Today’s presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. We’ll also discuss certain non-GAAP financial measures, which we believe are meaningful in evaluating the Company’s performance. Additional disclosures regarding these non-GAAP measures, including a GAAP to non-GAAP reconciliation are included in our quarterly report and supplemental presentation. With that, let me turn it over to Sandeep.

Sandeep Mathrani: Thank you, Chandler. And thank you all for joining us today for our very first earnings call as a public company. As I look back on the journey to this point, I recognize that it would not have been possible without the support of our core constituents, our members, employees, shareholders, landlords, and service providers. As I’ve said before, but can’t say enough, I’m a firm believer in the words of Peter Drucker that “culture eats strategy for breakfast”. We’ve spend the past two years focusing on our core values and incorporating that into our Company DNA. Our core values are

Ben Dunham: Thanks, Sandeep. Today, I’ll discuss our third quarter results and provide an update of our liquidity position, following the closing of the business combination with BowX. On a global basis, we ended the third quarter with 932,000 workstations across 764 locations and 546,000 physical memberships. Our consolidated operations accounted for 766,000 workstations across 631 locations and 432,000 physical memberships. Consolidated physical occupancy rate was 56%, up from 50% in the second quarter. As a reminder, our consolidated operations include all locations, except for those in China, India, and Israel. All Access memberships accounted for an additional 32,000 memberships as of the end of the third quarter. Third quarter revenue of $661 million, increased $68 million or 11% quarter-over-quarter. The Since recent trough in April 2021, revenue has increased sequentially throughout the second and third quarter, reaching a high point for the year in September and our fifth straight month of revenue increase. The strengthening desk sales trends that began in the back half of the first quarter have continued through the second and third quarters. As members move in, we have seen an increase in membership and service revenue, a trend that we expect to see continued throughout the remainder of the year. As Sandeep mentioned, new sales pricing has improved throughout the year, and we are starting to see those trends reflected in the income statement as average monthly revenue per physical membership increased quarter-over-quarter. Location operating expenses of $752 million decreased $28 million or 4% sequentially, and $84 million or 10% from the prior year’s quarter, predominantly reflecting the ongoing impact of our portfolio optimization efforts. Excluding stock-based compensation and certain non-recurring expenses, SG&A was $225 million in the third quarter, roughly flat to the second quarter. Aligned with membership reflecting in the first quarter, followed by revenue in the second quarter, adjusted EBITDA showed meaningful improvement in the third quarter. The sequential increase in revenue flowed through to the bottom line and we also benefited from the continued focus on managing cost. Adjusted EBITDA loss was $356 million, which is a $93 million improvement relative to the prior quarter and $136 million improvement relative to the prior year. Our net loss was $844 million in the quarter, an improvement of $79 million sequentially and $155 million relative to the prior quarter. Net loss included $262 million of non-cash or non-recurring expenses, which were primarily depreciation, amortization, and impairment. We reported free cash flow of negative $430 million, which represents an improvement of $219 million sequentially. Operating cash flow was negative $380 million. As all of you know, we recently completed our merger with BowX in the related PIPE and equity investment from -- I’m sorry, equity investment -- Cushman & Wakefield, and are now publicly traded company. The transaction provided the Company with $1.2 billion in proceeds net of transaction cost. Upon completion of the merger, we modified our existing $1.1 billion senior secured note facility to a $550 million facility and repaid $350 million of our secure commercial paper facility. Pro forma for those transactions, we ended the third quarter with $2.3 billion in cash and unfunded cash commitments. This includes approximately $477 million of available cash on hand, $1.2 billion in net proceeds from the completed business combination, $550 million available in our modified senior secured note facility, the repayment of our $350 million secured commercial paper facility and an additional $450 million letter of credit facility capacity. In terms of capital structure moving forward, like any public company, we are constantly evaluating market conditions, our liquidity profile and financing alternatives for opportunities that enhance our capital structure and diversify our investor base. From time to time, we may modify our existing debt or seek additional debt or equity financing. I’ll now turn it back over to Sandeep for some comments before we open up the line for Q&A.

Sandeep Mathrani: Thanks, Ben. Needless to say, we’re very pleased with all that we’ve accomplished in the third quarter and especially proud of executing on our plan. We continue to make progress towards our goal of being profitable in 2022. Adjusted EBITDA has improved substantially, $93 million in the third quarter. We’ve also delivered meaningful improvement in operating cash flow. Finally, we have always said that this recovery will be a matter of [Technical Difficulty]. We continue to see month-over-month increases in our membership base and occupancy levels. Preliminary occupancy in October was 59%, up from 56% at the end of September. If you add in signed but not occupied members, you get to 61% occupancy. The number of markets we’ve been with 70% occupancy is also very encouraging and is an indicator of the broad-based momentum we’re experiencing globally. 22% of the 21 of our markets had occupancy of more than 70% at the end of the third quarter, this increased to 30% or 28 markets in October. In sum, sales and pricing momentum is strong. Occupancy continues to increase. And we remain disciplined with respect to our cost structure. All these factors give us confidence that we’ll become adjusted EBITDA profitable in the first half of 2022. With that, operator, please open up the line to questions.

Operator: [Operator Instructions] And your first question comes from the line of Karru Martinson from Jefferies. Your line is open.

Karru Martinson: Good morning. As folks return to work here as September was a big a month and then obviously the pushbacks with Delta variant to October and beyond, what are you hearing from your corporate clients in terms of the pace of signups and actually utilization of that office space?

Sandeep Mathrani: So again, look, in our business, in Europe footfall is back to 40% to 50%, again, and at pre-pandemic levels, they were at 60%. So, it’s a decline of 10%. In New York, it’s about 30% to 40%. Like I said, pre-pandemic was 50%. So, I’d say about two-thirds of the way there from a football perspective in our assets. And as you know -- I mean, there’s been a delay off the start, again, everyone that sort of looked at January stuff from the large enterprise basis. However, the SMB client base is essentially back to pre-pandemic levels.

Karru Martinson: Okay. And then, in terms of the guidance, EBITDA breakeven or positive in the first half of ‘22, kind of felt that earlier guidance had been that we have that break even kind of around the end of the first quarter. Is this a change or an extension of that time horizon?

Sandeep Mathrani: Actually what we’ve sort of maintained is we would have profitability in 2022. We feel right now that we will get to the occupancy levels to drive profitability by Q1 of 2021. And there’s usually a 90-day lag or so between occupancy levels and revenue recognition. So, it should be down in the first half of 2022.

Karru Martinson: Okay. And just lastly, in terms of the commentary that you -- when you’re looking at marketing conditions as a public company, I mean, what is the ideal structure that you guys would like to put in here from a longer term perspective?

Sandeep Mathrani: Could you explain your question a little bit further?

Karru Martinson: So, when you stated that you’re regularly evaluating market conditions to enhance the capital structure, diversify the investor base, so when you’re looking at the structure that you have today, what would you like to change about it that could -- would put it into a better structure for a public company now with the market cap that you have and the time horizon that you’re looking at?

Sandeep Mathrani: So, predominantly, the way we look at it is effectively we’ve got about $2.9 billion of debt coming to you in 2025, $2.2 billion is the SoftBank and about $700 million is public bonds. And so, when we look at what we would like is, we would like to see that debt number go down over a period of time that we have three years, but debt number could go down. And we would like to see whether there is a way to change the holders on that. And so, predominantly, can we pay down some of the SoftBank debt earlier, rather than later, so. But we again feel having a $2.9 billion of debt, which is obviously less than one time revenue, we sit in a pretty good position.

Operator: And your next question comes from the line of Rajiv Savardekar from Credit Suisse. Your line is open.

Unidentified Analyst: Hey guys, it’s actually [indiscernible] from credit Suisse. Just following up on Karru’s questions with regard to liquidity and the capital [Technical Difficulty]

Operator: I apologize. It looks like his line did disconnect. And we do not have any further questions at this time. So, I’m going to have to turn the call back over to Mr. Sandeep for any closing remarks.

Sandeep Mathrani: In closing, I wanted to express how pleased I am with our performance and all we’ve accomplished in 2022. This would not have been possible without the tremendous work of our employees and the support of our global community. I would like to point out that we’ve been thinking a lot about what inflation means to WeWork. Since inflation is generally good for real estate, rates generally go up and therefore our current rental rates that we have with our landlord seems to be at or below market. We provide a turnkey solution and therefore there is no cost included to put to client in there. So the supply chain issues, increased construction costs should in the short, say over the next 12 to 18 months be highly advantageous as people come back to work. Thank you everyone for joining the call today. We appreciate the ongoing support. And if you have any follow-ups, please do not hesitate to reach out to Chandler Salisbury. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.