WeWork Inc. Class A

Good morning and welcome to WeWork's Q2 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question over the phone, you'll need to press star followed by the number one on your telephone keypad. To reach an operator at any time, please press star zero. I would now like to turn the call over to Kevin Berry, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Julianne, and good morning, and welcome everyone to our second quarter 2022 earnings call. With me this morning is Sandeep Mathrani, our chairman and CEO, and Andre Fernandez, our chief financial officer. During today's presentation, we will refer to our earnings release and supplemental presentation, which have been filed with the SEC and can be accessed at investors.wework.com. Today's presentation includes forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. We will 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 earnings press release and supplemental presentation, and will also be included in our quarterly report. With that, it's my pleasure to introduce Sandy.

Thanks, Kevin. Before we get to the results, I'd like to welcome some key members of the team. First is Kevin Berry, who will lead investor relations going forward. I've had the pleasure of working with Kevin in the past, and I know he will be a great partner to the investor and analyst community. I also want to formally introduce Andre Fernandez, our Chief Financial Officer. Since May, he has hit the ground running and has brought a fresh and valuable perspective. We have a great team here, and I want to welcome Kevin and Andre to the first WeWork earnings call. Now to our results. where I'm pleased to report our second quarter reflects continued positive momentum across the business. Revenue in the second quarter using our budgeted foreign exchange rates was $841 million, above our guidance of $800 to $825 million. At actual foreign exchange rates, revenue was $815 million, an increase of 7% quarter over quarter and 37% year over year. The system-wide revenue was $938 million, an increase of 7% quarter over quarter and 41% year over year. Adjusted EBITDA was negative $134 million in the second quarter, a $78 million improvement from the first quarter, and a $315 million improvement relative to Q2 2021 and within our guidance of negative $125 to $175 million. Our results continue to demonstrate the durability of our operating model and the versatility of our product. With WeWork's ecosystem of flexible offerings that are designed to be symbiotic, we continue to see companies lean towards WeWork's products to continually adapt to their workplace requirements. An interesting analogy is between retail and e-commerce in the early 2000s and what is happening today with the transformational shift in commercial office and flex. In 2000, e-commerce represented 1% of retail sales in the U.S. and grew to 21% in 2020. Today, our footprint represents approximately half a percent of the commercial office space in the U.S. However, our sales in Q2 were equivalent to 9% of traditional leasing. In the pre-pandemic world, Flex was considered part of an office strategy. Today, much like e-commerce, Flex represents its own channel of distribution. In the same way that brick and mortar was disrupted by the speed and convenience of e-commerce, Flex is capturing office-based demand with direct-to-consumer solutions. Approximately 69% of new membership sales this quarter took occupancy within one month, and 86% took occupancy within two months, which is a little faster than in previous quarters. This trend continues to underscore the value proposition of our business and what gives us confidence as the global economic landscape continues to evolve. We learned over the last two years that the speed, convenience, and flexibility of WeWork is what companies look for and rely on during times of uncertainty. As the world has adjusted to the global plant dynamic, we have been steadily selling desks and growing our member base for well over a year because companies have needed a way to quickly adapt to a new and unknown environment. Now, in the face of inflation and recessionary pressures, not only does that need still exist, but on top of that, companies need a solution that can help reduce costs and future-proof workplace strategies. We have seen that various economic disruptors impact every industry differently, but ultimately, the outcome is an increased demand for flexibility as employers seek increased collaboration and connectivity. A quick example can be illustrated through a multi-pronged deal we executed in Q2 with a leading cloud system security platform. Having grown their employee base three-fold in a year while expanding their business globally, the company's priority was mitigating risk while also meeting the needs of their rapidly growing workforce. By leveraging commute analysis and utilization reports, we developed a dynamic solution that blends dedicated spaces across six locations in the US and Europe with 1,500 all-access passes. The result is a cost-effective approach that supports the company's productivity, culture, and connectivity across the markets. Across our three products, the speed and scale at which we are able to tailor offerings to the diverse needs of business today illustrates Flex's position as a separate channel of distribution in the office industry. With that, I'll now turn to our operating results. Spaces of Service, our core product, the second quarter continued the positive momentum from the first quarter. We ended the quarter with 917,000 workstations across 777 locations and 658,000 physical memberships, above Q1 2020 and the highest to date. This far exceeds pre-pandemic levels of membership. System-wide new desk sales were 93,000 and renewals were 111,000 for a total of 205,000 or 12.3 million square feet. One more time, I want to iterate. It's 12.3 million square feet. Our consolidated operations accounted for 749,000 workstations across 641 locations and 528,000 physical memberships as of quarter end. 5% quarter-over-quarter and 37% year-over-year. Occupancy climbed to 70% and 72% when including committed memberships. Consolidated new desk sales were 73,000 and renewals were 87,000 for a total of 160,000 or 9.6 million square feet. At the market level, we were due to 2022 gross sales in Manhattan were equivalent to 18% of the traditional market for office leasing on a square foot basis. WeWork's portfolio of 5 million square feet accounts for approximately 1% of total office stock. WeWork's activity represented 20% of Boston's leasing, 15% of Miami's leasing, and 9% of the leasing in San Francisco, despite representing 2% or less of the total office stock in each of the three markets. WeWork's gross sales equated to 34% of London's traditional office leasing. London is a market that is leading the shift to flex. 45% of Dublin's leasing, 13% of Paris' leasing, and 6% of Berlin's leasing, despite representing approximately 1% or less of total office stock in each market. The average commitment term for our small to medium businesses was 14 months, and the average commitment term for our enterprise clients was 25 months. WeWork reported average revenue per physical member, or ARPM, of 481. ARPM using the budget's foreign exchange rates was 497, an increase of 3% quarter over quarter, or near a projection of 500 by year end. To provide some color on where we are pushing pricing in markets where we are over 70% occupancy, We generally focus on rate, and those where we are below 70% occupancy, we generally focus on growing occupancy. In our international region, where occupancy reached 80% this quarter, pricing for the contract signed in the quarter was approximately 4% higher than the existing membership base. For the USC, pricing for contract signed in the quarter also increased 4%. As these new higher-priced contracts embrace the previous contracts, We expect our reported ARPUM and budget FX to continue growing. Moving on to WeWork Access, which includes our monthly subscription and on-demand pay-as-you-go product, memberships grew 13% to 62,000 in the second quarter, which represents an additional 7 percentage points of occupancy. Revenue was $45 million, up 25% from Q1. Improvements in all-access ARPM and membership growth yield an annual rate of about $180 to $119 million of revenue. From enabling companies to experiment with new ways of working to providing cost-effective solutions amidst market volatility, all-access has become an essential tool for business to deliver flexibility and foster collaboration. Whether leveraged as a standalone solution or as a complement to dedicated space, the rapid adoption of our all-access product underscores the holistic nature of our offerings. For example, one of the leading outdoor gear and apparel retailers acquired all-access passes to complement their dedicated spaces at our Kelly Springfield building in Seattle. Despite being a remote-first company, they wanted to provide employees with the flexibility to come into the office as needed. However, to ensure employees have enough space to collaborate at scale, the company acquired 2,600 all access passes to deliver optionality to employees while minimizing fixed costs. Xerox, an accounting software provider, moved to fully remote work at the start of the pandemic. However, the company's distributed workforce expressed interest in workspace hubs set up across different cities in order for sales teams to come together. host events, and meet with customers. We provided hundreds of Xerox employees with access to our global network of locations within one week of the contracting sign. With access to the proprietary utilization data from all access, Xerox armed with insights to make informed decisions as the company evolved its workplace strategy moving forward. And lastly, two weeks ago, we officially debuted our space management software, WeWork Workplace, in the U.S. and the U.K. We see WeWork Workplace as a national extension of our core business, positioning the company as a true end-to-end solution. Going beyond providing physical space products, WeWork can now enable companies to enhance the way they use and manage space through this software offering. At a time when companies are searching for the best ways to bring employees back with purpose and intentionality, WeWork Workplace is designed to help navigate a new world of work by marrying space, asset, and people management capabilities into one universal platform. In a market that's highly fragmented, WeWork Workplace is the only product that can combine all space types, privately leased or owned. WeWork space and WeWork affiliated spaces within one single experience. Employees can seamlessly view their office space options, book desks, see which colleagues are coming in, and coordinate space for their teams. On the back end, companies can future-proof their real estate strategies with access to utilization data and insights on employee preferences. To date, the company has signed 11 companies to the platform, providing them with 7,400 licenses to manage its spaces in WeWork's portfolio and in non-WeWork locations. The pipeline includes over 100 companies comprising more than 35,000 licenses. WeWork comes to the workplace management space with an established global customer base of 7,000 unique medium to large and enterprise member organizations comprising approximately 360,000 memberships already in our sales channel. Many of these organizations are already leveraging Flex to power hybrid work strategies and see the accretive value of a universal platform for managing their workforce. As we have stated before, WeWork Workplace is a venture with Yari, a leading provider of software in the world. For an update on our asset-light go-forward strategy, I'd like to point out that 37% of our portfolio is held in either joint ventures or franchise agreements. We continue to pursue asset-light opportunities, focusing primarily on our non-core markets, such as Southeast Asia. With that, I'll now hand it over to Andre.

Thanks, Sandeep. Before I review our financials, I just want to thank Sandeep for his kind words at the top of the call. I couldn't be more excited about the potential of the business and look forward to meeting all of you in our investor community in the coming months. Now, moving on to a summary of our second quarter financials. First, total revenue was $815 million, up 37% year over year, driven by increases in physical memberships and all access memberships. FX fluctuations, primarily in the Euro and pound sterling, unfavorably impacted revenue by approximately $26 million compared to our original budgeted FX rates. As Sandeep mentioned, excluding that impact, total revenue would have been $841 million and above our guidance range. Total company revenue is approaching pre-pandemic levels and, as you can see in our supplemental presentation, on a significantly lower overall cost base. Building margin in the second quarter, a measure of gross profit at the building level, was $86 million, up sequentially from $34 million in the first quarter and compared with a loss of $192 million last year. We've been able to reduce our location operating expenses through a combination of rigorous cost reduction efforts and exiting unprofitable locations while also growing revenue. Maintaining this operating leverage will be an important driver of our future profitability. Next, our adjusted EBITDA loss in the second quarter was $134 million, a $78 million sequential improvement from Q1 and over $300 million better than last year due to higher revenue and careful management of our expenses, including our SG&A, which declined 17% year over year. The FX impact on our adjusted EBITDA compared with our budgeted FX rates was immaterial, and our adjusted EBITDA was at the higher end of the guidance range. Our net loss was $635 million in the second quarter. Now, it's important to note that this included approximately $391 million of non-cash items. This was primarily driven by unrealized FX losses on our intercompany loans, as well as a partial write-off of deferred financing costs in connection with amending our LC facility in May and depreciation and amortization. These items were below the line and non-cash. And a reconciliation of our net loss to adjusted EBITDA can be found in the earnings release. Now a quick word about how we think about foreign exchange as we are a global business. As you see in the quarter, FX had an unfavorable impact on revenue and a negligible impact on adjusted EBITDA. However, as the business becomes increasingly profitable at the gross margin level, we will have greater non-US dollar earnings that will be subject to FX movements. Beginning this quarter, in an effort to highlight the impact of foreign exchange on our operating results, you will see in our 10Q to be filed that we will report our results in both an actual currency as well as constant currency. Additionally, as we approach profitability, we're closely analyzing our non-U.S. cash flows, primarily in euros and pound sterling, with an eye towards potentially hedging a portion of our projected net cash flows going into 2023. Below the EBITDA line, our FX exposures relate primarily to our intercompany loans as we fund our non-U.S. subsidiaries in their functional currencies, which both minimizes trapped cash overseas and enables us to repatriate our cash easily as our subs become profitable. While these exposures are below the line and non-cash, we'll also evaluate hedging opportunities going into next year while preserving our flexibility. Moving on now to liquidity and cash flow. Our free cash flow for the second quarter was negative $298 million, a $114 million sequential improvement from the first quarter, driven by improved operating performance, lower cash restructuring, and select asset sales, partially offset by higher CapEx. On liquidity, we ended the quarter with cash, commitments, and access to liquidity of nearly $1.7 billion, including $625 million of available cash, $550 million of unissued senior secured notes, and at least $500 million of secured debt covenant capacity. We continue to expect our liquidity at year-end 2022 on that same basis to be approximately $1.4 billion. And finally, we are affirming our annual revenue guidance of $3.4 to $3.5 billion, and our adjusted EBITDA guidance of negative $400 to $475 million, both excluding the impact of FX on our budgeted FX rates, as we've said previously. As we look forward, we believe we are well positioned to meet our targets given our revenue visibility and continued focus on rationalizing our cost structure. In terms of our revenue outlook for the remainder of the year, approximately 95% of our third quarter plan revenue and approximately 80% of our fourth quarter plan revenue is committed. With that, operator, please open the line to questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Vikram Malhotra from Mizuho, please go ahead. Your line is open.

Thanks so much for taking the questions and congratulations, Kevin, on your first call. I look forward to meeting both of you. Just building on your comments on revenue visibility, but also perhaps marrying that with this potential slowdown or recession we're seeing, can you comment on two things? One, just What scenarios are you planning for assuming the economy turns further from here in terms of a downside risk? And are you still of the view that by year end you can break even on EBITDA? Hi, Vikram. How are you? Let me just answer the question. Obviously, you know, we've been in a turnaround mode for about two and a half years. And we know the levers to pull on the expense side of the equation. The expense side of the equation, again, we know how to control operating costs. We've been working towards streamlining our SG&A. We're already at a $750 million run rate, and as we've said in previous calls, we see room there as well, and we're going to continue down that path to streamline our organization. We do see ability to trim down You know, day one capital, as you saw in the first half, we spent $28 million budget for, you know, day one capex was $100 million. So we can be mindful of day one capex. We can be mindful of day two capex. And the last lever, you know, is, as we said on the previous call, about $350 to $400 million of rent and tenancy have guarantees of less than 12 months. and it gives us an opportunity to be able to get some assistance in rent reductions should be needed. So there are four levers that we can pull. Again, these are the same four levers we've pulled for the last two and a half years, and we've demonstrated that over the last two and a half years, we've got $2.1 billion of costs. So on the expense side, we will continue to be mindful in the light of a foreseeable recession. On the revenue side, again, we basically, as Andre said, we have 95% of our revenue committed for Q3 and 80% for Q4. We're very mindful of occupancy, and so we will be very focused on maintaining our occupancy and our revenue numbers. What is important, as you know, is that the terms being signed today for the SMB business is 14 months and the enterprise business is 25 months, which is a far cry from where this business was pre-pandemic. And as I remind you, in 2017, 90% of our business was month-to-month. So we have transformed ourselves to a business that's more akin to an apartment business, which at least terms are longer than 12 months, which minimizes that risk of churn in the fourth quarter. We're aware of the risks that are ahead of us and very mindful of it. Okay, great. Maybe just next one. Can you dig into some of the markets, both in terms of the occupancy swings as well as pricing power relative between, say, Europe and the U.S.? Europe, you obviously have higher occupancy. But, you know, Miami, for example, you know, the committed occupancy is lower than physical. And there were some big swings in other markets. So maybe just give us more color what's going on by market and relative pricing power. Well, I think it's in my comments, you know, both Europe is now reached 80 percent and pricing is above pre-pandemic levels. And it is 4 percent higher than the previous quarter. So pricing power continues. But we're also focused, you know, at 80 percent to drive occupancy there. to 85%, 90%. And so we're mindful of the space we have in the European market. So prime space is going to obviously go up, but now we're also left with what we call spaces that are not prime. But we do see when markets are above 80%, you have pricing power, and it's been very healthy in the European markets. And you look at the U.S., even though the U.S. is just approaching 70% occupancy, we've still got some pricing power here. Rents went up 4% even last quarter. But again, in the U.S., depending on which market you're in, we're cognizant of occupancy versus pricing power. Now, if you look at the market as Miami, as you mentioned, what we are doing is you may have seen that the committed occupancy is 94%. versus 97%, but what we are doing is churning out pandemic-level rates to get members paying higher rates. So it's natural. You'll see that across the world. We're doing that in Israel. Occupancy in Israel was in the mid-90s. It's probably 93%. Revenues have gone up in Israel because obviously we're taking out the pandemic-level members and putting in new members to pay market rents. When you climb about 90% occupancy, you could see variability because obviously we're driving pricing and we're cognizant of balancing revenue and pricing and occupancy. And if you look at some of the other markets, I think San Francisco we did quite well. And the only other large market that I see any variability is Boston. And really that's really a function of actually the way we calculate occupancy is when a member is within 60 days of their churn date and there's no renewal, we take the churn as if it occurred. So it actually, at the end of the quarter, the person is actually sitting in the space, but we are aware that they're leaving. In that one case, which caused that variability, it's two flows with an enterprise client And coincidentally, those are the same two floors that are being recaptured at no cost to us by the landlord. So in reality, it's in the numerator. It's not in the numerator, but the space is in the denominator. Next quarter, it will be off the numerator and off the denominator. There will be no change. So we see momentum, as you can see, quite strong. when you look at the leasing activity. I might even add that July, you know, again, which was completed a few days ago, our leasing activity was very, very strong. You know, it's been at the same level of strength as we see in the first month of the quarter. Now, you know, in the pipeline, we see to be quite strong, as I mentioned in the past, to achieve our targets. we need a pipeline of about 1.4 to 1.5 times the required occupancy. And heading into August, we have that pipeline. Okay, great. And then just last one, given where the stock is today and where you are in the cash position, you've maintained your guide for adjusted EBITDA. Is it fair to say with the cash position, assuming things are not going to fall off a cliff, you do not need to raise additional capital this year? And maybe just highlight if, you know, if you do, then what sources are you contemplating?

Yeah, I think you're right. We don't need to raise additional capital in that the existing sources of liquidity that we have should be more than sufficient for the next year. So if you recall in my prepared remarks, I said that liquidity, which is 1.7 billion today, is expected to be 1.4 billion by the end of the year. That implies about a $300 million use of cash in the second half of the year. You see here we've got over $600 million of cash sitting on the balance sheet. So that would imply around $300 million just sitting on the balance sheet at the end of the year. So just funding the second half operations just purely from cash from hand. And then looking forward, we got into next year. Hopefully, again, we'll be EBITDA positive by that time. Now, the next milestone for us will be to get to cash flow positive, which we're hoping will be sometime in the second half of next year. Obviously, we'll refine that in our year-end guidance. We believe, again, between the cash on hand, between the undrawn 550 line, we have a senior secured line with SoftBank, as well as we put the $500 million of available capacity under a senior capacity under a bond indenture. Now granted, we would actually have to go out and issue that, but we think between those three sources is more than sufficient to carry us for the next year.

And Victor, I'll just add, I'll just re-emphasize, you know, again, you have to take into account that 95% of the revenue is committed for Q3 and 80% for Q4. So even if you do some back of the envelope math, okay, you know, and for whatever reason the world falls apart, We're talking about $50 to $100 million delta in revenue. As Andre said, we have $300 million of cash by year-end, and so even if it's a $50 to $100 million loss, you're still ending the year with $200 million of cash by year-end, plus the $550 million of SoftBank money. So you've got $750 million before we even have to think about going to the market. So there's enough liquidity. to carry us through all the way to the end of 2023, quite honestly. Great. Thank you so much.

Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead. Your line is open.

Good morning. And Andre, I look forward to meeting you. And Kevin, I can't believe that you want to come back to the public limelight, so welcome back. Thank you, Alex. Thanks, Alex. So just continuing on Vikram's line of questioning, can we just go, because it's a question that a lot of folks ask about your capital needs. And I just want to make sure that everyone's on the same page and that the guidance hasn't changed. I think before you said, previously you'd said you guys expect to be adjusted EBITDA positive by the end of this year, I guess beginning of next. And by middle of next year, you would be cash flow positive. So I just want to make sure, is that still correct? Or, Andre, in your comments, have those metrics or guideposts been pushed back?

None of the guideposts have been pushed back. I think Andre just said, and I did say in my last call at the end of Q2, beginning of Q3, we would be cash flow positive when I was asked the question. He just said the same exact thing. He said second half, but that's the same exact thing. None of the guideposts have changed. Okay.

And then as far as, you know, if you did tap additional capital, I mean, let's say the 550 that you drew from SoftBank, that's additional interest expense, which would then theoretically delay the cash flow positiveness, right? Or is your view that, you know, the amount of interest relative to the funding, to the quote unquote funding gap that you would need that money for would not be material enough to really push back materially the cash flow positiveness?

Yeah, I think it's the latter. I think we've assumed that were we to draw on that line, we would have additional interest expense in 2023, and that's factored into when we believe we'll be cash flow positive.

And if you just do the math, right, I mean, again, I'm just doing it out of my head, right? So if you drew the entire 550, which I'm not going to do, but let's just say you did that, you're talking about $35, $40 million of interest for the year, so it's not material.

Okay. Then next, I think you said through asset sales, but Can you just walk through the increase in cash balance, especially, as you said, there was some CapEx that you did in the quarter. So can you just walk through the increase in cash balance on hand second quarter versus, you know, which I think grew about $100 million from what it was first quarter?

Yeah, I think the part you might not be seeing is we actually drew on the 350 Junior LC, which actually increased the cash balance. So if you're looking at just pure cash balance, remember that we had an additional source of liquidity in May from drawing on the LC. I think I mentioned in my prepared remarks that the cash flow was still negative, albeit a big improvement sequentially from Q1 to Q2. The additional, the draw was a big source of just overall cash. So if you just look at the free cash flow improvement, that was, I think I mentioned, from our operating performance. And then we did have, as we do, again, we can't predict the timing of these, But we did have some asset sales in the second quarter. And also, I believe, the buyout of a lease, which actually improved our cash balance. And it's also factored into the overall cash guidance that we're giving for the year.

So the $100 million, I can break it down pretty easily for you. One is obviously the capex for the day one capex is down substantially. As I said, we budgeted $100 million, spent $28 million. Two is we had an interest in Hudson Bay through our VCAP entity. We sold the interest in Hudson Bay for cash of over $50 million. So that was an increase in our cash balance of $50 million. And the last part is that we had an asset in Miami, 830 Brickell, where we had done a sublease and a lease with two institutional investors and we were able to monetize that. So our real estate was monetized and that provided us additional liquidity. I think I mentioned in the last call that there are a couple of other levers. We have an asset in the UK called Devonshire Square where we own 10% of the asset, and we have a firm contract of sale of that asset to an institutional buyer, and that should, again, provide liquidity of $45-ish million, and hopefully that transaction closes in Q3. Okay, just final, Andrej.

If you guys have plenty of cash on hand, why did you draw on the line of credit in the quarter?

I think it was an opportunity, I believe, as there had been done previously to access liquidity from the LC's trend. So I think that was done very opportunistically to draw on liquidity, knowing that we're going to need liquidity in the future. So I think it was a It was opportunistic. It was done, I think, at a very favorable rate and gave us liquidity. It wasn't necessarily a need for liquidity, but there was an opportunity to do that, and we took advantage of it.

Okay. Thank you very much.

If I can add to that, Alex, the way the deal was structured, as you know, the $350 million LC tranche, the interest would be due for the period of time. So since I was going to pay the interest, I might as well have the cash on hand.

Yes. Our next question comes from from Credit Suisse. Please go ahead, your line is open.

Yes, good morning. So quick question around the kind of net desk sales in 2Q, a little bit down from your kind of average desk sales in the past few quarters. And also kind of curious about what's happening with the mix as it seems like on the enterprise side there's kind of less contribution from the enterprise side. Let me answer the second question first.

So if you actually look at what's happening, obviously the enterprise is now 45% and SMB is higher. It is not really a function of enterprise deaths going down. It's a function of enterprise SMB deaths going up. As a matter of fact, if you look at it, you know, quarter over quarter, enterprise deaths actually went up by 6,000 members. If I look at it year over year, it went up almost 25% by about 40,000 deaths. So effectively, you know, the ratio... has gone up because the amount of SMB clients has increased, not because enterprise has gone down. In the last point, if you actually look at it, and if you look at SMB, the SMB business year-over-year went up almost 100,000 deaths versus, like I said, enterprise went up about 40,000 deaths. And the second point I'll make is if you look at our SKU mix, which is the mix of ratio of the amount of desk in each category, on the enterprise side, SKU mix, we're at 80% occupancy. And on the SMB side, in the average occupancy, it's about 65%. So there's more headroom to lease SMB clients. And so you will see that elevated SMB business for the next quarter or two. So that's what's driving it. But both have actually gone up substantially, one by about 40,000 year over year, and the other one about 100,000 year over year. And to answer your question between the desk sales on a consolidated basis, it's pretty flat. We did 166,000 desks in Q1. We did 160,000 desks in Q2. If I look at it system-wide, we did 211,000 in Q1 and $205,000 in Q2. So I look at that to be pretty flat. I was talking more about new desk sales, not just overall. Yeah, because the renewal rates are higher. The retention rate went up to 80%, right? So that's a function of increasing renewal rates, which what we care about is total occupancy, right?

Gotcha. Okay, that's helpful. And then, again, congrats on getting the kind of workplace launched. It sounds like some initial interest is pretty promising there. Could you just walk us through, again, how you expect that product ultimately to contribute to your bottom line over the next, you know, whether it's two, three, five years? How do you kind of think about that business growing going forward?

Look, I've challenged the team to do two things, right? You know, we've taken, I'll talk about both of the high margin businesses for a second, all access, As we said, it's about $180 to $190 million range. We have about 62,000 members. And as I said to you previously, you know, we sort of cap out in between 75 and 80,000 members because of capacity. So I've challenged the team to figure out ways to increase capacity so we can take that to 100,000 or so members and we can increase revenue on all access to over $300 million. So we're very bullish on that product. As you know, we just launched Workplace, again, in partnership with Yardi. And we see it to be very promising. It's certainly in the game to start to project what the revenue of that business will be. But what we can say is that the TAM of that business, just in the United States, is about $3.5 billion. depending on what percentage of that business one can capture, it could be a meaningful impact to our bottom line. So again, I don't want to make a projection, but I can say U.S. TAM is $3.5 billion, and I think global TAM approaches $6 billion. So it's a very fragmented industry. There's a tremendous need for it, which is why, having launched it only two weeks ago, we are in discussions with over 100 companies for license fees of over 30,000 license fees. So we see that could be a meaningful impact to our bottom line by 2024. Again, I don't want to project numbers at this time, but in a quarter or two, I'll have a better handle to be able to project.

Okay, that's helpful. On the all-access side, can you just give us a sense of what the ARPUM was there in that business this quarter? I don't think we have that number. I think it's $235.

I'm pretty sure. If you give me a second, I will tell you.

Yep, ARPUM was $235. Okay. And then lastly, from my end, again, understand the impact of FX on the numbers this quarter. But I'm kind of curious, again, apart from hedging, any other things that one can do just to kind of offset FX? Like, again, is it possible to kind of reprice in Europe to kind of offset FX? I mean, I'm just kind of curious about any other things one can do operationally to kind of minimize FX impacts.

Again, you know, again, in our business, I would sort of sit back and say this is gap accounting, right? So gap accounting essentially accounts for revenue throughout the world. If you never bring your money back into America, it really doesn't have a cash flow. So, you know, the better utilization of that capital as we get to, you know, cash flow positive is, of course, our European business is incredibly strong. And, you know, we think growth is, comes from the international business going forward versus the U.S. business, so you're better off investing your capital in-country to minimize the real effect of FX on the company.

Yeah, and I was going to say one thought would be, can I try to get more of my expenses in local currency where I have an offset? But we already have that, so we're already in a position where we've got revenue and expenses, and so we're doing all we can already there.

Gotcha. Yeah. Thank you.

Our next question comes from Peru Martinson from Jefferies. Please go ahead. Your line is open.

Good morning. In terms of the average revenue per desk, you guys have been targeting call it 500 for year-end XFX. You're at 497. Do you still feel that you can get to that 500 number? And when you look at that 95% committed for third quarter, 80% for fourth quarter. Are you at those levels?

I would just sort of sit back and say we're at 497. That's awfully close.

It is awfully close.

But I do think we can get to the 500. We do know where Q3 numbers lie, so it will be even closer.

Okay. And when you look at driving that rate in markets where you have occupancy above 70%, when you look at the U.S., what percentage do you feel of your markets are above that 70% where you can drive rate, and how many of them are still where you're trying to drive occupancy?

Again, the question, we always try to generalize locations, right? So the obvious ones, as you can appreciate, are Raleigh-Durham, Nashville, Austin, Palo Alto, Miami. Those are all the obvious ones where you're driving rates because occupancies are well into the 80s. But again, you've got to be selective. Like in New York, you are driving rates at the better assets, the A-quality assets, And so the better way to look at this data is, you know, for us to slice and dice it based upon quality of building, which we're working on. So it's a little bit of a tale of two cities, right? So the B assets, you know, are leasing up quite quickly, but they're more price driven. And the A assets have pricing power. If I look at San Francisco, you know, Salesforce Tower, I think is now 100% occupied or 96% occupied or awfully close to 100% occupied. And pricing there is over $1,000 in ARPUM. Palo Alto is 98% occupied. ARPUM in Palo Alto was $1,400. So like I said, we need to slice and dice it a bit so we can talk about quality of asset to ARPUM. So even in New York where buildings are You know, 70%, 80% occupied. You know, we are seeing 20%, 30% increases in ARPUM. If I look at 520 Broadway, you know, 20%, 30% increase. 5070 11th Street, you know, over 30% increase. So it all depends on occupancy by building and location. So it's not a general answer that we can provide, but I will say it also depends on location and quality of buildings.

Okay. And then when you look at some of the recent headlines, you know, the FinTech slaying off people, and you look at your customer base, are you seeing any of that translate, realizing it's early stages, but seeing any of that translate into your occupancy, or is it just too soon to see any of that?

I think it's early to see that. You know, again, I would sort of sit back and say it's a tale of two cities. You know, as I mentioned, I think in the Q1 call, if I didn't mention the Q1 call, I definitely mentioned some investor calls I've had. I said, you know, the smaller SMB, even the medium businesses are actually doubling down on space with us. And the examples I gave on my earnings call, they're consolidating, moving into WeWork locations, optimizing their real estate, And as a matter of fact, on a per head basis, we are less expensive today because of inflation issues that people have in building out new spaces. So we're seeing, at least when it comes to the SMB and the end part of the MLB, the demand has continued to accelerate. It's the large enterprise clients who are evaluating their space needs. Again, I think it's early to tell you know, where they pan out. But we're seeing, you know, a little bit of encouraging signs as flexibility is sort of more the name of the game.

Okay. And just lastly, when we look at CapEx, certainly keeping it rather tight this year, but as we go into 2023, do you see a need to step up CapEx to continue your growth or do you feel that you have the footprint in place right now?

No, as we've guided to 2023, you know, we have, We have about 30,000 desks. We're bringing some online this year, so it's 50,000 total for next year increment, but 30,000 coming online, which were, again, leases that were signed on a pre-pandemic basis. So we've got capital allocated to build out those spaces and bring them online. We don't see the need for additional capital going forward for 23 desks. And again, you know, we can obviously, you know, put a halt on that spending, you know, depending on where the economy heads. So, as a matter of fact, it gives us, you know, what we've accounted for in the numbers we spoke about for free cash flow for the second half of 2023. Obviously, we put a cap on spending earlier because of issues you could obviously accelerate the free cash flow in the business. So we do have levers to pull, but we don't anticipate signing any new deals at scale to have a need for CapEx. And as we said, because of the 50,000 desks that come online in 2023, it guarantees our growth for 23 and for 24. So effectively, anything we're looking at now will be growth for 25.

All right. Thank you very much. Appreciate it.

Our next question comes from Vikram Malhotra from Mizuho. Please go ahead. Your line is open.

Thanks for taking the follow-up. So just, you know, going back to sort of the customer makeup, if I'm not wrong, I think tech is about maybe 40% of your customer base. And related to the question on FinTech, can you just give us a sense, is there a watch list, you know, you're monitoring? How are you, especially on the technology side, given the headlines, And maybe anecdotally, Coinbase, one of your larger tenants, any anecdotes or communication with them on what they might do with their space? So about half our revenues, you know, again, approximately half our revenue comes from enterprise clients, which obviously got good financials in a 25-month term. You know, that's what, you know, with 2,400 enterprise clients, I appreciate we have 27,000 SMB clients, and not a single client is greater than 0.1% of our revenue. So it's very diversified. And if you speak about Coinbase specifically, and I think we said this, and I always forget what I said in an investor meeting or an investor call, but as a matter of fact, in Q1 slash Q2, they actually took $7. you know, collaboration hubs, you know, as we've talked about, servicing the needs of the clients. So, you know, as of today, you know, they've not had any discussion with them about, you know, contracting space. Okay, that's helpful. And then just on the retention, just turn retention, looking at, you know, the quarter, you mentioned, I think, retention went up. I'm forgetting the number, but I think you said 80%. Can you just give us a sense of how is that split up between other differences between enterprise versus SMB? And what are you baking in for the second half in terms of retention? It's really, again, I haven't broken a doubt to be perfectly honest between SMB and enterprise, but 80% seems to be the blended number. So intuitively, it would tell me that enterprises will be a higher retention rate than SMB. Intuitively, again, I don't have that in front of me. I think we baked in 78%. Okay. Okay, great.

Thank you.

Our last question will come from Tayo Okusanya from Credit Suisse. Please go ahead. Your line is open.

Yes, I actually just wanted to go back to a question that Vikram asked just about kind of scenario analysis in a recession. And I think, again, you guys had talked a little bit about how you could kind of clamp down on some OPEX and some CAPEX and things like that. But wondering if there's a way you could actually quantify just, again, how much of that you could actually take out and how quickly they kind of, you know, protect liquidity in kind of an economic downturn?

I would say for the second half of the year, if we had to buckle down, it would be $5,200 million.

Thank you.

We have no further questions.

I'd like to turn the call back over to Sandeep Mithrani for closing remarks.

Thank you all for joining our earnings call this morning. Our progress would not be possible if it was not for the contributions of our employees around the world. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.