Fundamentally Different – WE vs. IWG Plc + A Head Start on Earnings
The woes of 2019 IPOs: What we can learn from WE by knowing IWG
Over the past few months, there’s been a steady hum across our favorite news platforms on the ups and downs, and the all-theway downs of The We Company (WE). In the month of September alone, Matt Levine of MoneyStuff discussed the IPO topic in fourteen of his daily e-newsletters, nine of which featured The We Company in the main headline. More buzz followed in the coming weeks when Adam Neumann stepped down as CEO, and the company announced its retraction of a very creative S-1 and an indefinite delay to the IPO.
The dramatic story of WE doesn’t come as much surprise, as the poor stock performances of companies – like Uber (UBER), Lyft (LYFT), Slack (WORK), and Smile Direct Club (SDC) – have made investors wary of unprofitable unicorns. But behind The We Company’s allure of fruit water, upscale coffee and unlimited beer taps, are hard numbers that investors can analyze to get a true sense of how the business operates. With The We Company adding to the 2019 roster of disappointing, over-hyped IPOs, we decided this would be a good opportunity to understand why. So, we turned our focus on what we know best: fundamentals.
At Canalyst, we remain neutral on positions, yet we believe that clean data plus a solid understanding of comps are at the core of good investing. To shine some light on what happened to The We Company, we pulled up our pre-IPO model (available on our portal following the S-1 filing) and looked at how the company stacks up against its more mature and profitable European competitor, International Workplace Group, (IWG plc).
The Summary tab of a Canalyst model provides a quick overview of any company’s operational data, margins, and cash flow, among many other stats. In the below examples, we see that IWG had 602,500 available workstations at the end of H1-2019 with an occupancy rate of 69.4%. The We Company had 604,000 workstations at the end of Q2-2019 with an occupancy rate of 87.3%. In those same periods, IWG was able to generate £3,751 per available workstation while The We Company generated $483 USD – a difference of roughly $4,000 USD per workstation.
A few rows below, we see that The We Company has consistently negative EBITDA margins (ranging from -50% to -70%), with the cash flow summary revealing that they have issued debt and equity to sustain their negative cash flow from operations. In contrast, IWG has historically posted positive EBITDA margins (ranging from 15-17%) with positive cash flow from operations. The divestiture line also highlights the sale of IWG’s Japanese operations to TKP Corp, which sent its shares up by about 20%.
Similar to other unprofitable unicorns that actually went public this year, The We Company has managed multi-digit revenue growth during its last two fiscal years. This growth, however, has been made possible through significant capital expenditures. While IWG, which is more geographically diverse, has a total of five segments, three of which — Americas, Asian Pacific and EMEA (Europe, Middle East, and Africa) — are, posting positive annual growth since FY2013. Its UK segment is currently struggling with back-to-back years of negative revenue growth and its lowest annual gross profit margin since FY2010.
Although the recent departure of Adam Neumann as CEO may have decreased concerns surrounding The We Company’s governance, a quick look at its balance sheet shows the lease obligations it faces, and it also highlights the significant risk in its business model during recessionary times no matter who is in charge. The co-working companies take on long-term leases while their client base is seeking flexibility and short commitments, making it a risky business overall. IWG has proven capable when dealing with this inherent risk through its geographical diversity, leaving it less susceptible to regional economic downturns, and with a more manageable number of lease obligations.
We don’t take views at Canalyst, but with the recent cuts in The We Company’s rumored valuation and withdrawn IPO for 2019, it seems as though the market has.
The Canalyst Updater: Saves a full day of work or more during earnings
Earlier this year, we introduced you to our Toolkit 2.0, a suite of sophisticated tools designed to maximize your time during earnings.
The most notable of those tools – Canalyst’s Updater – has gained popularity over the past months, with many of our clients integrating the function into their workflow to save time. With just a few clicks, the Updater seamlessly incorporates the latest earnings information of any given company into a customized working model, drastically cutting down time spent on data searches and entry during the earnings season crunch weeks.
Since the launch of the Toolkit version 2.0 in June, the Updater benefits have clearly caught on with our clients. In the past three months, we have seen an impressive 50% MoM increase in usage.
So what’s so great about the Updater and why should you be using it? Last newsletter, we highlighted the Updater’s ease of use, supported customizations, and ability to transform earnings season. This time, let’s hear from a Canalyst client who is an early adopter and vocal proponent of this time-saving tool.
Here’s our Updater interview with an Equity Research Analyst covering the Information Technology sector at a $10B+ asset manager:
Canalyst: What was your process like before Canalyst? What technologies were you using?
Equity Research Analyst: I used mostly Excel plus work from sellside analysts who had knowledge on just the groupings of companies they covered. The challenge there was that every model came back looking different – build-up to revenue was different, everything. Plus, they had subscriptions to third-party data that I couldn’t get a hold of or verify. I wondered, “Where did the data come from? Did they make it up?”. When I finally received requested information from them, it required spending a few hours on each model, going through 15+ tabs, just to pull out what I needed.
Canalyst: How has using Canalyst given you a competitive edge?
Equity Research Analyst: The great thing about Canalyst is everything arrives in the same structure, so you don’t need to revisit or relearn how data is presented. I like that Canalyst data also comes from the filing and/or press release, which is the single source of truth.
Canalyst: What does earnings season look like to you now that you’ve incorporated the Updater into your workflow?
Equity Research Analyst: Learning about the Updater feature for adding quarterly data into a model was massive! Especially during the frantic time of earnings, the season has now evolved for me since using Canalyst. I used to miss stuff when I’d have to update myself. Many times, the Canalyst data is readily available before the earnings call and that’s a huge advantage to me. Before jumping on a call, I open my model, take a look through the drivers, expectations, etc., and I’m quickly prepped. I get to tackle my other responsibilities with the time I saved.
Canalyst in the Community
On September 12, Canalyst attended the annual Up the Down Market Dinner in Vancouver, bringing together big players in the financial industry to participate in a simulated stock market game to test investment savviness for a great cause. The event was hosted by the Down Syndrome Resource Foundation and has become one of our favorite Canalyst team outings.
We’re Attending UVIC 2019
On November 8, Canalyst will be sponsoring the University of Virginia’s Investing Conference. Hosted by the Darden School’s Richard A. Mayo Center for Asset Management, this annual event gathers industry leaders and top academics for insights on “the future of alpha” for various asset classes and investment strategies. Canalyst is excited to attend and provide our models to students for the stock pitch competition.
Canalyst, Head of Equities
Prior to founding Canalyst, James had 10 years’ experience in equity research and portfolio management. He started his career in equity research with Fidelity Canada’s investment team, covering sectors including Utilities, Forestry, Technology, and Energy from 2006 to 2010. After Fidelity, he took a role as Portfolio Manager at a Boston-based $1B long/short fund, rounding out his experience across most other sectors in the process.
James holds a Bachelor of Commerce from the University of British Columbia and is a recipient of a Leslie Wong Fellowship from UBC’s Portfolio Management Foundation, and is a CFA Charterholder.