Stopping the Red Ink Tops WeWork’s To-Do List

As WeWork heads toward an initial public offering, the office-space company faces a fundamental problem: Its losses are growing as fast as its revenue.

WeWork’s parent company, We Co., whose main business is renting and remodeling offices to sublease to other companies, revealed in its IPO filing on Wednesday operating losses that ballooned 102% to $1.37 billion for the first six months of the year compared with a year earlier.

Large losses are hardly anomalous among recent IPOs. Ride-hailing firm Uber Technologies Inc. UBER -2.77%  posted a $1.8 billion operating loss for the last six months of 2018 leading up to its May IPO. But Uber had still trimmed its losses by 23% from a year earlier.

We’s losses, however, are doubling at the same pace as its revenue, which suggests the nine-year-old company isn’t wringing out enough cost savings as it gets bigger. The lack of scaling is a potentially troubling sign for a company that has commanded a valuation more akin to a tech company than a real-estate firm. 

“If [the losses] keep going up, it’s a problem,” said Alex Castelli, managing partner of emerging markets at financial-advisory firm CohnReznick. “At the end of the day they need to move toward profitability.”

Much of We’s costs go toward leasing and renovating office space and outfitting it with furniture. As it grows, the company expects to gain economies of scale—a phrase We mentions nine times in its IPO filing, and something one of its executives has long promised.

While software companies can cut the cost of adding and retaining new users as they grow, We, which has a lot of physical assets, doesn’t enjoy this type of scale. With each new office, We has certain fixed costs, such as putting in desks and building conference rooms.

With growth, We has brought down the cost of building out and designing new workspaces by streamlining its construction and design operations, leading to some savings. The amount it spends per new desk has come down by half from 2014. The company also says it is trying to find more landlords willing to join with WeWork and pay for renovations in exchange for some revenue or profits from the space. That would lower lease costs.