Continuity, Support & Response: A Quarter In Review

At the beginning of April, we shared our new 2020 playbook. Now, in line with our commitment to increased transparency, we’re providing an update on our progress, including a Q1 lookback.

Latest News: People, Core Operations, Owners, Partners, and Customers

It is clear that in our industry, now is not the time for growth. We looked at what was happening with a careful and conservative lens and made some tough choices that required equally tough conversations. This resulted in:

  • A substantial reduction in workforce through layoffs and furloughs. We had to say goodbye to some 200 employees, truly wonderful people across our teams and markets.
  • Pausing new initiatives and product expansions.
  • A reassessment and realignment of our portfolio. We are talking to all of our owners and may switch to management or revenue sharing deals with some. With others, we will be exiting a large amount of property (~1M feet globally), including a number of smaller properties that do not meet our forward-looking requirements for density and health & safety.

We’ve engaged with several governments on our Spaces for Cities initiative. While it hasn’t been relevant for hospital beds, we are soon to be in the phase of mass testing and screening, which we believe will present relevant use cases.

As for our customers, continuing to serve them as best we can is paramount. We are keeping ourselves available to help customers and our owner partners with commercial and operational support. We are also communicating a great deal with all of our customers, who number almost 400 around the world. These are large companies with complex operations.

  • In early/mid March, we saw the first wave of spaces shutting down. Now, we have customers that are ready to return mid-May. Our suspicion is that from mid-May to mid-June we should see a lot of geographies returning to normal. Because we have taken a more conservative view, it could go better than we expected.
  • In terms of supporting our customers’ business continuity, we are having frank discussions with every customer about where they stand. We’ve had detailed conversations about what we can do to help them get through this (abatements, deferrals, etc.). Also, as we return to work, our customers may want less density, more space, more service.

What We’re Observing at the Macro Level

We’ve heard larger brokerages expect their business to be down by 50%, which is a surprisingly high number to project in just a few weeks. For context, in 2008-2009 they were down 10-20% for the full year. So far, the largest brokerages have said very little related to top-management pay cuts and none of them have yet reduced their workforces.

The larger owners we partner with have told us that the mortgage community has yet to make a move. They expect change, but for commercial mortgage securities there has been none yet and no guidance offered. In terms of the Real Estate Asset Management world — they have not announced earnings or given guidance. Those that we spoke to haven’t given a lot of detail.

For the medium-sized companies in our customer base, the SBA loan program has been disappointing overall — too small and too slow. Our CEO has spoken to about 100 CEOs in venture/tech and other areas, and virtually all expect some reductions in headcount.

A recent report from Gartner said more than 50% of companies are delaying vendor payments at the moment and 84% are trying to renegotiate rent. This doesn’t quite match what we have seen, with only around a third of our customers asking for relief.

The VC mood is extremely cautious. There are some bright spots, but those are the direct-to-consumer online businesses seeing a short-term bump. They may continue to be insulated from long-term economic effects because many of their products happen to hit a high-end income segment.

What Happened at Knotel in Q1?

We started the quarter with $350M in run rate. We finished with $370M in contracted revenue, $10M of which happened in March. We are sure the rest of the year will be different than our original plan, but we are not finished reforecasting.

As far as our performance across geographies, our gross margins were positive in Q4 2019 and grew in Q1 2020. It’s still preliminary but looks like double digit growth. There is, overall, a good gross margin across the business.

Some quick facts: We have ~400 customers, many of which are large companies that spend about $1M/year on average. We don’t have any single customer that accounts for more than a few percentage points of our business. We work with 300 property owners across 17 cities and 10 countries.

Our liquidity is good. We’ve gotten stronger over the last few months and we think it will remain healthy. That’s partly why we took drastic steps to defend it; so that we have the cash to do everything we need to do this year.

We have done lots of business with owners and vendors over the past four years, and plan to continue as such, staying in close contact with them on estimates of what is to come. We are honoring our commitments, which does include difficult conversations on terms and timing, i.e., what we expect vs. what they prefer. Nevertheless, they are important partners to us and we plan to work with them through this crisis and in the future.

Other small data points:

  • At the time of writing, we are only two weeks into April and collections have been better than we anticipated. An average customer has a multi-year contract with us, and we weren’t sure folks would be able to do what they committed to. We thought that across the ecosystem, companies, even very large companies, would be withholding. It’s too early to draw any conclusions from this. May is likely to be tough and maybe June, July, and onward. The economic consequences have only just started. We haven’t faced the full hardship of what is coming and we remain prepared for the worst-case scenario.
  • Our revenue is within 2% of where we started the quarter, on an annualized basis
  • Contract revenue at the end of Q1 is almost unchanged. We work with a number of large companies with long-term contracts who we expect to be back in the office soon.

The Year Ahead

While we changed our original plans for 2020, we still expect to be profitable and cash-flow positive later this year. In the past, a big part of our model was growth, but now we have a different posture. With our portfolio and customers, we are well positioned to achieve our goals.

Our full revenue will likely be double last years. Our internal forecasts are lower, but still quite a bit ahead of last year in terms of total size.

We remain cautious but we are also ready to be surprised by the number of companies coming back and doing business earlier than expected. Many folks are resolute on still moving forward and planning for the next phase. This is the world flex is made for.

The Nitty Gritty on Our Markets

  • We recently signed enterprise customers in London, France, Tokyo, Toronto, and others.
  • We are moving away from traditional leases with owners; this is not an environment where signing a lease is a good idea for anyone.
  • Many customers have urgent needs and we are responding. In Europe, for example, our inbound requests have increased substantially in recent weeks.
  • Some countries are handling things differently and policy makes a difference. In the Netherlands and France, companies are especially resilient.
  • We have a backlog of customers ready to move in and get started; we expect substantial growth in our revenue.
  • We just had our second and third customer deals in Japan, which hasn’t slowed down as much as other geographies, mostly due to national policy. These are important, multiyear contracts.
  • In New York, we closed a surprising deal that took just nine days start to finish, a $1M account annually.

In short, it’s not all bad news out there. We are pleased to support companies that are resilient and continuing to do business.

Our Product Evolution and Workspace Changes

As it stands, we are not completely clear on how our product will evolve. The New York Times, Reuters, and others muse that working from home will change everything. However, there are many things to consider and we are still clarifying our view. We are talking to our customers to deepen our own perspective.

One unquestionably important consideration in workspace design will be antiviral measures, as well as a focus on density considerations, temperature screening, and contact tracking.

This pandemic has required the world to do mass work from home, and to rely more on video and online tools. However, we already knew that the “workplace” had become a hybrid environment and that the utilization of office had fallen over the past few years.

Most of our customers are eager to be back in their workspaces. We expect that while the percentage of team members on-site and workspace density will likely change, the total utilization may end up being similar. They may even need more space, it’s too soon to tell.

While we are still in the early stages, we are thinking through how to support our customers as they come back and reorient. One thing we are working on is a product that will help our customers with contact tracing — we hope to roll it out in Q3.

Geometry is also a crucial part of our business, for helping folks strategize, tailor, and adapt the space they have.

All told, our “product” will be different, but from what our audience is telling us, there will be an office — that much is clear. We think flex will be a firm product and the evidence for that is coming in the next few quarters. Stay tuned.