No, it is not correct for quite a few reasons. Foremost, there should be a verb after they. Second, work (in the sense of 'to function') is a DO-verb not an IS-verb, so is should be does or should | would (work). Finally, what is incorrect with work.
work how ...
do what ...
Possible correct phrases:
It doesn't work how they say it does.
It doesn't work as they say (it does).
It doesn't work how they said it would.
It isn't working as they said it would.
It doesn't work as they said it would.
You could substitute should for would.
There are other ways as well, using DO:
It doesn't do what they say (it does).
It doesn't do what they say it should.
The phrases in parentheses can be omitted.