WeWork plans to unveil its filing for an initial public offering any day, per Bloomberg. The office-space rental company, which also dabbles in adult dorms, early childhood education, elevating the world’s consciousness, and unleashing superpowers, is looking to raise $3.5 billion in the second-biggest IPO of the year (after Uber), with its sights set on a September debut.
“The New York-based company will test public investors’ appetite for cash-burning startups,” says Bloomberg. Indeed, WeWork lost $1.9 billion last year. Uber, however, lost $5 billion in just the second quarter, so it’s all relative.
More than its cash-burning ways, WeWork’s IPO will test investor tolerance for made-up accounting metrics. You might recall “Community Adjusted EBITDA,” the gauge WeWork devised to measure net income before not only interest, taxes, depreciation, and amortization, but also “building- and community-level operating expenses,” a category that includes rent and tenancy expenses, utilities, internet, the salaries of building staff, and the cost of building amenities (which WeWork has described as “our largest category of expenses”).
The fun with financial accounting doesn’t stop there. Here are some other “key financial measures” WeWork highlighted in an April 2018 bond offering document that could make an appearance in its IPO prospectus:
- ARPPM (annual average membership and service revenue per physical member). “[R]epresents our membership and service revenue (other than membership and service revenue generated from the sale of WeLive Memberships and related services) divided by the average of the number of WeWork Memberships as of the first day of each month in the period.” (Note: this is not just creative accounting, but also creative acronym construction.)
- Adjusted EBITDA before Growth Investments. “[A]n additional supplemental measure of our operating performance, which represents our Adjusted EBITDA further adjusted to remove other revenue and expenses (other than revenue that relates to management fee income from advisory services provided to Branded Locations) and what we define as ‘Growth Investments,’ which are sales and marketing expenses, growth and new market development expenses and pre-opening community expenses.”
- Location Contribution. “[R]epresents our membership and service revenue less total lease costs included in community operating expenses, both calculated in accordance with GAAP, excluding the impact of Adjustments for Impact of Straight-lining of Rent included in community operating expenses.”
Creative accounting is known in the business world as non-GAAP accounting: GAAP, or generally accepted accounting principles, being the legal standard for financial reporting. To be frank, companies invent these measures to take numbers they don’t love, but are required to report, and turn them into results that look more attractive in their earnings releases. A review by financial data platform FactSet found that since 2016, 75% of companies in the Dow Jones Industrial Average have reported non-GAAP earnings per share that exceeded their GAAP earnings, on average. (If you can’t outperform your own made-up metrics, what’s the point?)
Companies argue that non-GAAP numbers can be a more useful measure of their business. WeWork, for instance, said in last year’s bond document that “adjusted EBITDA before growth investments” is a useful measure of how the company performs when you ignore the cash it burns on expansion. Sure, we lose money now, WeWork is saying, but consider how much money we’d make if we flip this lever.
WeWork is far from the only company to dabble in these accounting acrobatics. Uber reports adjusted EBITDA, adjusted net revenue, and a series of other metrics derived from that (core platform adjusted net revenue, core platform contribution profit, and so on). Aleris International, a US aluminum company, provides not just adjusted EBITDA but also “further adjusted EBITDA.” The proliferation of non-GAAP measures has caught the eye of the US Securities and Exchange Commission, which has been sending companies a lot of stern letters about the practice.
It will be interesting to see what the SEC permits WeWork to include in its IPO filing. In the meantime, if WeWork or any other money-losing startups are looking for new ways to flatter their financials, Quartz has a handy list of ideas.