WeWork will soon join the drove of multibillion-dollar tech companies going public.
Following its initial public offering filing, the workspace-sharing company released first-quarter financial results. Its revenue more than doubled year-over-year to $728 million, while losses shrank by $10 million to $264 million.
The financials also showed the company is still adopting a unique metric it created: community-adjusted EBITDA.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) exclude these expenses and can help investors get a clearer sense of how a company is doing. But critics pointed out that WeWork’s version appeared to strip out some operating costs that should normally be included.
The company defines its metric as “equal to membership and services revenue, less adjusted rent, tenancy costs, and adjusted building and operating expenses.”
Onlookers have been skeptical since the company first unveiled this line item over a year ago, and have even drawn parallels to the frenzied days of the dotcom bubble.
“For those with long memories this is surely be [sic] reminiscent of that series of spurious valuation metric such as price/eyeballs ratios that we saw at the peak of the 2000 tech bubble,” said Albert Edwards, the co-head of global strategy at Societe Generale, in a client note.
Edwards was referring to a metric— market capitalization per pair of eyeballs — that some internet companies adopted in the late 1990s to help investors gauge their value in lieu of actual profits.
Such metrics live on. About ten years after the dotcom bubble burst, Groupon introduced a custom financial metric that was so harshly scrutinized by regulators that the company deleted it in amended IPO filings. So-called adjusted consolidated segment operating income, or ACSOI, subtracted marketing expenses.
In 2010, ACSOI reflected a gain of $60.6 million. But using the more normal operating-income formula, Groupon reported an operating loss of $420.3 million.
WeWork is another beneficiary of this type of novel accounting. The company recorded a net loss last year of nearly $2 billion. But based on community-adjusted EBITDA, you arrive at a profit of $467 million.
Neither WeWork nor Groupon invented jargon that does not conform with so-called generally accepted accounting principles, or GAAP. Tech companies widely report non-GAAP earnings that account for their unique circumstances. But these numbers are often rosier — and placed higher up in earnings press releases — than GAAP numbers.
Uber is yet another company that’s put out custom financials. And, the ridesharing company provides a cautionary tale in more ways than one.
Its IPO filing included a few unique metrics including core platform adjusted net revenue. For the curious, this is Uber’s way of capturing revenues from rides and food deliveries while excluding driver incentives and a few other costs.
Jargon aside, Uber’s public debut broke new ground — but not in the way it would have wanted: The cumulative loss of $655 million was the largest-ever dollar loss on a company’s first day of trading in the US.
Clearly, Uber and other formerly private unicorns still have a ways to go to convince shareholders that they can grow into their lofty valuations.
“Public investors take a shorter-term, reactionary approach to investing, so expensive, unprofitable companies haven’t fared well traditionally,” Michael Arone, the chief investment strategist for State Street Global Advisors’ US SPDR business, said in a recent note to clients.
In the three years after their public debuts, companies with profits beat the market by 7.9%, while unprofitable companies lagged the market by 9.7%, data compiled by University of Florida finance Professor Jay Ritter show.
As WeWork makes its way onto the public markets, its debut will prove to be another test of investors’ patience for profits — including the novel ways companies measure it.
“Public and private investors are very different — and the speculation and scrutiny which goes into earnings announcements and forward guidance is going to be a learning curve for both executives and investors,” Arone said.
He continued: “If underperformance of these blockbuster listings becomes the straw that breaks the unicorns’ backs, the bull market could feel the pain.”