Business_news WeWork wants investors to think of it as a tech company. These 5 slides illustrate how its numbers tell a different story.

Business_news

WeWork CEO Adam Neumann is pitching his company and his company as a tech firm.

Kelly Sullivan/Getty Images

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  • WeWork pitched itself as a tech firm in the initial public offering documents it released Wednesday.
  • Investors tend to pay a premium for tech companies.
  • But WeWork’s revenues, expenses, cash flow, and assets show that it’s not really a tech firm.
  • Instead, they show it’s clearly a real-estate company.
  • Read more WeWork stories here.

WeWork would like potential investors to think of it as a tech firm.

But its numbers tell a different story. No matter if you look at WeWork’s revenue and expenses, its assets, or just its cash flow, it looks far more like a real-estate company than a typical tech firm.

The distinction is more than just semantic. The company’s valuation in the public markets will be in large part determined by how investors classify it. They tend to be willing to pay a much steeper premium for tech companies than for real-estate firms.

WeWork, or rather the We Company, its corporate parent, certainly pitched itself as a tech firm in the initial public offering paperwork that it released on Wednesday. The document mentions “technology” 93 times, many of them in connection with its business offerings or investments.

Read this: WeWork files for IPO, revealing spiraling losses of $1.6 billion

“We offer a space-as-a-service model that we operationalize by using a global-local playbook powered by technology,” We Company said in the part of its IPO filing where it describes its business.

To date, its venture and other investors have bought that line, valuing WeWork like a tech company. With a $47 billion valuation in the private markets, it’s worth more than 15 times its annualized sales for this year, a relatively steep valuation considering it has consistently posted losses.

But public investors may have a different take. That’s because, as its IPO paperwork makes clear, it’s not really in the technology business, no matter how many times it tries to wrap itself in that mantle.

Here’s what its financial numbers show:

Business_news Nearly all of WeWork’s revenue comes from renting office space.

WeWork is primarily in the business of renting office space and desks.

WeWork

Last year, the We Company posted $1.8 billion in sales. Of that, $1.7 billion, or 93%, came from memberships and services.

Memberships are basically leases, and they represent the fees WeWork’s customers pay to rent space from it. Services are essentially additional fees that get tacked on to customers’ rent, for when they use more than their allotment of particular items or for additional products they request related to their office space.

In other words, the We Company’s revenue largely resembles that of a landlord.

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Business_news Its business has very low gross margins.

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Investors are likely to pay special attention to its top-level costs.

Associated Press

Technology companies, particularly those that focus on software or online services, have nice gross margins because their fixed, direct costs of offering their services are usually fairly low. That means they tend to have a lot of money left over to spend on sales and marketing and research and development — or to deliver to investors in the form of profits and dividends.

Take Google parent Alphabet. Its gross profit margin — the portion of its revenue left over after accounting for its direct costs of offering its products and services — was 56% of its sales last year.

Unlike Alphabet, the We Company doesn’t have a “cost of revenue” line on its income statements. But it has something that can serve as a proxy, something it calls its “location operating expenses.” Those expenses include the costs it incurs to operate and maintain the spaces it rents to its members and related costs such as insurance on those spaces. It also includes the costs of the services it offers to its tenants, including telephone connections and internet access.

Last year, such costs gobbled up 84% of We’s total revenue. In other words, its gross margins — the portion of its revenue it had left over after such costs — were only 16%.

WeWork’s gross margins improved in the first half of this year, rising to nearly 20% of sales. But that’s still a far cry from those of the typical tech company.

Business_news Research and development isn’t a primary expense, but one of many.

Unlike tech companies, WeWork doesn’t seem to spend much on R&D.

Reuters/Stringer

One of the typical hallmarks of tech companies is that they spend a lot of money on research and development as they try to improve on their existing products and invent new ones. Microsoft, for example, spent more than 13% of its revenue on research last year and Facebook spent a whopping 18%.

Unlike those companies, the We Company doesn’t specifically break out how much money it spends on research and development. Instead, it lumps such expenses into a line item it calls “growth and new market development” costs.

A substantial and growing portion of We’s revenue is going toward such expenses. It spent $477 million, or 26% of its sales, on growth and new market development last year. That was more than quadruple the amount it spent in 2017, when such expenses accounted for only 12% of its sales.

If all that money was going toward research and development, WeWork would have a good case to make that it is indeed a tech firm. But R&D represents only a portion of such costs, and in its IPO filing, WeWork indicated that they account for only a small portion of them.

Here’s how WeWorks describes what’s included in its growth and new market development line (emphasis ours). Note how many items it mentions before it gets to technology R&D:

Growth and new market development expenses are expensed as incurred and consist primarily of non-capitalized design, development, warehousing, logistics and real estate costs, expenses incurred researching and pursuing new markets, solutions and services, and other expenses related to the Company’s growth and global expansion. These costs include non-capitalized personnel and related expenses for our development, design, product, research, real estate, talent acquisition, mergers and acquisitions, legal, and technology research and development teams and related professional fees and other expenses incurred such as recruiting fees, employee relocation costs, due diligence, integration costs, transaction costs, contingent consideration fair value adjustments relating to acquisitions, and other asset impairments and write-offs.

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More:

WeWork
We Company
Adam Neumann
Commercial Real Estate

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