WW International, Inc. (NASDAQ:WW) Q4 2022 Earnings Call Transcript

WW International, Inc. (NASDAQ:WW) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Good afternoon, and welcome to the WW International Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger, Vice President of Investor Relations. Please go ahead.

Corey Kinger: Thank you, everyone, for joining us today for WW International’s fourth quarter and full year 2022 conference call. At about 04:05 p.m. Eastern Time today, we issued a press release reporting our fourth quarter and full year 2022 results. The purpose of this call is to provide investors with some further details regarding the Company’s financial results as well as to provide a general update on the Company’s progress. The press release is available on the Company’s corporate website located at corporate.ww.com. Supplemental investor materials are also available on the Company’s corporate website in the Investors section under Presentations and Events. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release.

Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company’s filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Joining today’s call are Sima Sistani, CEO; and Heather Stark, Interim Principal Financial Officer. I will now turn the call over to Sima.

Sima Sistani: Thanks, Corey. Good afternoon, everyone, and thank you for joining us today. Before I get into our results, I want to highlight our plans to enter the clinical weight management space. Weight Watchers is the most trusted provider of proven and sustainable weight loss, grounded in the latest nutritional and behavioral science. We support members across the full weight loss spectrum. Obesity is a complex chronic condition that includes both biological and behavioral components. There’s growing scientific evidence that for some prescription chronic weight management medications can address the biological components of obesity. To support and accelerate our entry into this space, we have entered into a definitive agreement to acquire Weekend Health, doing business as Sequence, a subscription digital health platform offering clinical access to prescription chronic weight management medications.

Sequence is a technology platform that integrates patient and clinician experience, providing eligible members with ongoing access to online clinical care and medication management. We will be pairing Weight Watchers nutrition and behavioral science expertise and community with the Sequence platform to create a comprehensive solution. Importantly, this solution will not be for everyone. We are hard at work enhancing our member experience around coaching, accountability and community with a number of features on our product road map rolling out this year in order to make Weight Watchers even better. At the same time, we will expand our scope to also serve the cohort of people in need of a solution that incorporates prescription medications. I will discuss the details on this acquisition and our clinical strategy more shortly, but first, turning to our 2022 results and recent performance.

We ended 2022 with 3.5 million subscribers, approximately $100,000 higher than our forecast due to sign-ups and cancellation trends outperforming our expectations, improving our starting point and momentum heading into the new year. It has been nearly one year since I joined Weight Watchers and that year has been a time of significant transition, rationalization and bold moves throughout the organization to position the Company for tomorrow. Over the past year, we took several decisive actions to streamline the business, centralize our global teams, establish data informed processes and culture, simplify our program and execute on the ambitious road map focused on community, accountability and coaching, setting the foundation for an improving member experience and returning subscribers to a growth trajectory.

Turning to our peak season performance, the execution of our marketing approach was very different from what you have seen from us previously. With improved global team operations driven by more accurate forecasting, data visibility and in-housing our performance marketing, we were able to drive stronger results. We made the strategic decision to focus on efficient performance marketing prioritizing high-quality sign-ups while spending less. This drove a greater ROI with LTV CAC for these sign-ups being 10% more efficient than at the same time last year. So while sign-ups are down year-over-year, this was an intentional decision we took to better maximize the impact of our dollars throughout the year. Historically, approximately 40% of annual sign-ups occurred during Q1 and the cadence of our marketing spend reflected this approach.

This year, we are intentionally shifting a portion of our annual marketing spend from Q1 into the fall as we look to focus our spend alongside the launch of digital plus community first product experiences. Therefore, we expect marketing expenses to increase year-over-year in the second half of the year, likely putting our full year spend to be roughly flat with 2022. In addition, we are encouraged by improvements we are seeing in our member engagement and satisfaction metrics, which indicate that our actions to improve our product experience and brand are having a positive impact. Three examples: First, activation rate, which had been on a downward trajectory began to uptick in the second half of last year. It caught up with the previous year in November, and in 2023 has been up over 5% year-over-year.

As a reminder, activation rate, a relatively new metric we’ve been tracking internally is defined by a member’s engagement and progress during the first month on the program and is directly tied to success. Our data shows that activated members churn at a rate that is roughly half of a non-activated member. In addition, these members will be more successful on Weight Watchers over the longer term. Second: NPS, a measure of member satisfaction for our app experience is up 7 points year-over-year in Q1 among digital members and up 10 points year-over-year among workshop members. And third, brand affinity is up 4 points this January versus 2022 with more surveyed members agreeing that Weight Watchers is the plan for them. At the same time, we are in the midst of an evolving landscape in how the medical community and many consumers view weight loss.

The science is evolving. More people are now recognizing obesity as a chronic condition understanding its causes, including behavior and biology and therefore, an increased openness to clinical interventions to help. Weight Watchers is at a pivotal point where we can build new capabilities that expand our market reinforced by our foundational strengths. In addition to our ongoing focus on digital and community enablement, our highest priority in 2023 is to deliver clinical interventions pairing the coaching accountability and community that we know delivers effective weight loss with the option for new pharma pathways that can improve outcomes for some consumers living with obesity. To be clear, clinical intervention and medications are not for everyone, we will absolutely continue to deliver the proven weight management program we are famous for.

But for those who medically qualify meaning they have a BMI of 27 or greater and have been diagnosed with one weight-related ailment or have a BMI of 30 or greater and choose these medications, we will be creating a new offering, specifically for their unique needs. In short, Weight Watchers will be the science-backed trusted solution of choice for everyone. The last 18 months has been marked by rapid growing consumer interest in these chronic weight management medications. Research is finding a new generation of medications as more effective. However, among people living with obesity, only 2% are treated with anti-obesity medications. The number of people using such medications, particularly GLP-1s was relatively low in 2022 due to their newness, limited availability, injectable formulation and often significant financial expense.

Now that supply chain challenges are being resolved and more insurance plans are covering these medications, access is expected to increase. The FDA indicates that chronic weight management medication should only be prescribed as an adjunct to behavioral lifestyle changes. However, there has been a lack of holistic care to partner with these medications. They are not magic pills. Like anything, there are side effects and challenges to navigate and manage while taking these medications. A behavioral program paired with clinical intervention is critical to help people on medications develop and maintain healthy habits from prioritizing nutrient-dense food, managing against muscle loss to understanding that these medications may be a lifelong commitment, these are the areas where Weight Watchers can provide the guidance and support to ensure members weight loss journeys are done in a healthy, sustainable way.

Startup culture is often known for the mantra, move fast and break things. When it comes to something as emotional as weight loss and as critical as health, that approach can be highly irresponsible, Weight Watchers does not participate in fads or quick fix trends that we do not view as healthy or sustainable, even when they are highly popular. But we view the use of certain prescription weight management medications under the guidance of a medical professional very differently. If someone has a condition that one of these GLP-1s can medically treat, they deserve to fully understand what these medications are, how they work and how best to leverage them on an ongoing basis. These pharma enabled pathways are considered important scientific breakthroughs and when administered responsibly alongside lifestyle changes, can provide people with effective and sustainable weight management as well as significant improvement in our obesity-related medical conditions.

As noted before, we entered into an agreement to acquire Weekend Health, or Sequence, a subscription telehealth provider offering access to prescription chronic weight management medications. I’m excited for Weight Watchers to enter the clinical space. Consumers trust our brands because of our science and our community. We can bring that differentiation to this emerging space. It seems that every day there is a new headline about GLP-1 spanning major networks, newspapers, all over social media, it’s everywhere and so is misinformation. It is our responsibility to lead the conversation from a point of science and to support those interested in exploring if clinical interventions are right for them. There is significant opportunity to improve consumer outcomes with better education, access, care management, community and integration of a complementary lifestyle program.

In addition, as we integrate and build out this vertical, we will be learning and likely tailoring our nutrition program for this distinct member journey. Members on medications, particularly GLP-1s will have different needs than members that are not. We want to ensure we have the best programs and experiences for both. As science advances, Weight Watchers does two. This is a market in which we are well positioned to lead as it builds off our core program strength and competitive moat, six in particular come to mind. One, unmatched expertise in food science and behavior change, having the number one doctor-recommended program, a diabetes tailored plan, an Expert Advisory Board and our own science team, we have the expertise and the credentials to meet consumer needs and continue to push the science forward as we have with our 140 published scientific peer-reviewed studies and including over 35 randomized clinical trials over more than four decades.

Two, brand trust, with 60 years of experience and ranking as the U.S. News and World Report, number one Best Diet Weight loss the last 13 years in a row, we have earned the trust of our members. Three, Community, with millions of members and a high level of member engagement, we have a network like no other. Four, omni-channel presence with a digital-first product mindset complemented by IRL premium experiences in our studios and studio apps. Five, while start-ups look to stand up B2B relationships, Weight Watchers Health Solutions is already partnered with over 500 employers and payers, including clients such as the City of New York and the Cleveland Clinic. And six, scale. With LTV CAC efficiencies and marketing to ongoing partnerships, we are uniquely in a position to grow this market profitably.

In short, while the clinical market provides an innovative solution for those who can benefit from biologically based treatments when combined with the lifestyle solution, it is an important opportunity to help more people and drive additional scale. But I want to stress that while the acquisition of Sequence is expected to have near-term benefits following closing, it will take time to integrate and scale up this offering. That said, we strongly believe the multiyear growth opportunity is significant. We know weight loss isn’t one size fits all, and we remain committed to bringing scalable science-based solutions to all weight management pathways whether medications are part of an individual’s journey or not. Our current program will continue to remain the recommended pathway for millions.

But for others who decide to use them and qualify, we will offer Weight Watchers expertise alongside prescription medications and full-service care. As we approach Weight Watchers 60th anniversary, I am energized by the permanence of our brand, but I don’t take for granted that in order to maintain our leadership, we need to be fearless, introspective and embrace change. I will now turn the call over to Heather for a financial update and we’ll then come back to provide more color on the upcoming milestones on our product road map.

Heather Stark: Thanks, Sima. Before reviewing our results and outlook, I would like to cover the details of our planned acquisition of Sequence. Since its launch in late 2021, the Company has quickly grown into a $25 million annual revenue run rate business, serving 24,000 members across the U.S. by effectively scaling its technology platform through word of mouth. WW will acquire the Company in a transaction valued at $132 million, inclusive of a minimum of $26 million of Sequence’s cash assets on the balance sheet. The effective purchase price is $106 million net of the cash assets. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close during the second quarter of 2023.

Upon closing, WW will pay the owners $65 million in cash, which will require $39 million from us, net of Sequence’s cash assets, and $35 million will be paid in approximately 8 million newly issued shares of common stock of WW. Subsequent cash payments of $16 million each will then be paid on both the first and second anniversaries of the closing. The acquisition is expected to be accretive to WW earnings per share by the fourth quarter of 2023. Now turning to our 2022 full year results, we finished 2022 with 3.5 million subscribers, ahead of our guidance by approximately 100,000 subscribers with both sign-ups and cancels outperforming our forecast in the fourth quarter. In line with our guidance, full year revenue of $1.04 billion was down 14% or down 11% on a constant currency basis.

Adjusted gross margin of 60.5% for the full year was down approximately 70 basis points from the prior year, primarily related to the mix of subscription revenue, 30 basis points of that decline was due to unfavorable foreign exchange. Marketing expenses of $245 million were down 6% year-over-year, reflecting lower spend on TV advertising in our international markets, lower nonworking spend and a benefit from foreign exchange. Adjusted G&A of $231 million was down $33 million or 12% versus prior year, reflecting savings from our restructuring actions, overall expense discipline as well as a benefit from foreign exchange. Adjusted operating income was $153 million for full year 2022, in line with our guidance and down $63 million versus the prior year, primarily due to revenue pressure and foreign exchange headwind.

Restructuring charges totaled $39.7 million for the full year, which includes $13.6 million related to our 2023 restructuring plan. In 2022, we recorded noncash impairment charges totaling $396.7 million. The 57.6 million franchise rights acquired and goodwill impairment charge in Q4 was largely driven by an increase in the Company’s weighted average cost of capital, reflecting market factors, including higher interest rates and the trading values of the Company’s equity and debt. GAAP net loss per share was $3.58, which incorporates the negative impact of $4.38 of items impacting comparability, including noncash intangible impairment, net restructuring charges and net tax-related items. Last month, we announced a restructuring for 2023, further streamlining and centralizing our organizational structure, rationalizing certain non-strategic business lines and continuing the rebalancing of our real estate portfolio.

First, with respect to centralizing our structure, while we completed a restructuring last year, as we went through our planning process for 2023, it became clear that we hadn’t gone far enough. The leadership team resolved last year to better align resources and systems with our strategic priorities and centralize our global management of certain functions. The 2023 actions will take this further by centralizing teams and scope across countries, creating a truly global team helping us manage resources more effectively and execute more efficiently and consistently. These changes will be reflected in our business segments. Starting in Q1 2023, our new reporting segments will be North America and International. In short, our Continental Europe, U.K. and the Australia, New Zealand and Brazil operations from our other segments will be consolidated into the new international segment.

The North American segment will continue to include the U.S. and Canada and will now also include franchise revenues. Second, in terms of nonstrategic business lines, we’ve previously discussed our decisions to rationalize our consumer product SKUs in North America and to discontinue our Consumer Products business in our international markets, a process which is expected to be completed in the first half of 2023. On additional review, we have decided to further rationalize the consumer products business in North America, focusing only on our best-selling products, which will significantly reduce the infrastructure and expenses required to operate this business. We anticipate having less than 50 active SKUs by the end of the year versus the 358 we had a year ago.

While this will negatively impact 2023 revenues, it is expected to have a neutral impact on operating income. We expect Consumer Products and other to contribute $70 million to $75 million in revenues during 2023. Third, for our real estate and workshops. We are focused on reducing our fixed overhead and making our studio footprint more flexible. In the U.S., we will be rebalancing our workshop footprint, significantly reducing our fixed lease studio count. We will retain approximately 100 fixed locations, shifting workshop delivery to flexible third-party or studio app locations, bringing that total to approximately 725. Overall, in-person workshops will continue to be widely accessible through a mix of studios, studio apps and our extensive calendar of virtual workshops.

We estimate that charges related to the 2023 restructuring plan will range between $39 million to $46 million in the aggregate, consisting of approximately $15 million to $18 million in organizational restructuring charges of which $13.6 million has been recorded in the fourth quarter of 2022 at the time of management’s resolution and approximately $24 million to $28 million in real estate restructuring, consisting of lease terminations and other related costs, the majority of which will be recorded in the first six months of fiscal 2023. The restructuring will reduce our fixed cost base and lead to adjusted gross margin sequential improvement as we move through the year. However, G&A savings are being largely offset by increased compensation expense reflecting key investments in talent, critical hires as well as merit and cost of living increases.

As discussed, total sign-ups so far in 2023 remained down year-over-year, but the sign-ups we are acquiring are worth more to us. We expect them to pay us more and stay for longer, meaning we are operating with a greatly improved LTV to CAC efficiency. This improved efficiency is largely being driven by our success with our long-term commitment plan offers. These offers reduced the average rate per paid week but lock in subscribers for longer duration. So far in Q1, approximately 80% of global sign-ups choose a six-month or longer plan, up from about 70% a year ago. And most notably, 41% of sign-ups are for a nine-month or longer plan, up from 12% a year ago. In addition, we have improved our price realization versus last year on those plans and notable achievements.

Looking to Q1, we expect to end Q1 2023 with subscribers approaching 4 million. Q1 revenue is expected to be approximately $235 million. Adjusted gross margin is expected to be down roughly 500 basis points year-over-year in Q1 due to subscription mix, deleverage in the workshop business and an increase in the number of sign-ups choosing longer-tenured plans. Restructuring charges entirely in cost of revenues are expected to be approximately $20 million in the quarter. For marketing, we anticipate Q1 expense of approximately $90 million, down approximately $18 million as we better maximize the impact of our spend and redeploy into the back half. Q1 G&A expense is expected to be approximately $55 million, down in the mid-teens versus last year.

Therefore, we expect an adjusted operating loss in the range of $10 million to $15 million in Q1. As mentioned, we expect performance trends to improve through the year as we benefit from our data-informed approach to member acquisition, increased operating efficiency from our streamlined operations and as we deliver on an enhanced member experience following upcoming launches to our product road map. However, we will not be providing full year guidance today. We hope to resume our practice of providing annual guidance following the completion of our acquisition of Sequence and when we can provide a deeper line of sight on our expectations for the integrated offering. Turning to our capital structure. We ended 2022 with approximately $178 million of cash plus an undrawn revolver.

With our cash position plus our revolving credit facility, we have more than sufficient liquidity for our working capital needs including in-year cash outlays related to our restructuring actions, servicing our debt and the cash payment for the purchase of Sequence. At year-end, our net debt to adjusted EBITDA leverage ratio was 6x up from 5.2x at the end of Q3. We expect our trailing 12 months leverage ratio to further increase during 2023. At this time, full year interest expense is expected to be approximately $95 million. Note that we have a $500 million hedged to protect us against rising interest rates on our variable rate term loan of $945 million and our $500 million in notes are fixed rate. Therefore, 31% of our total debt is floating.

CapEx, which is primarily due to capitalized software and depreciation and amortization are both expected to be in the $45 million range for the full year 2023. In summary, we are focused on improving our execution and delivering upon our key milestones. Our efforts to streamline and centralize are reading through into an improved cost basis for our business, and we are confident that 2023 is the year we implement the key capabilities for the future and turn the Company back to a growth trajectory. I will now turn the call back to Sima.

Sima Sistani: Thanks, Heather. We are encouraged by trends indicative of a positive trajectory during 2023. This year, our digital product focus is on creating community and enabling food decisions during members’ first month, which we know drives their activation and resultantly subscriber retention. A strong connected community is the glue that keeps members coming back to Weight Watchers. To better enable these connections, member chat functionality is expected to be in beta in early Q2. We believe this will allow members to create relationships they are excited about, members with each other, coaches with members, workshop groups, even people in your existing network, if you wish to bring them along your journey. Chat will lay the foundation for a rich digital community based on an interest craft.

We are also developing new streamlined spaces in our app, including a Want to Eat tab, which will help support members’ eating decisions including guides to comment challenges, improved mill planning, a restaurant finder, recipes and more, and a space dedicated to progress and trends allowing members to better see the connection between core behaviors like food, activity and weight tracking as it relates to their weight management progress. Then behind the scenes, we are making foundational improvements to our search algorithm through database and tracking flows to remove friction from the central accountability mechanism of our program. And to improve our coach experience, we plan to launch a new platform for our coaches that will help them better engage with members in real life as well as digitally.

As I’ve highlighted before, our app is evolving from being a second screen tool to a truly digital-first experience from enhanced community features to device integrations, there are significant opportunities for us to match our premium workshop experience with a premium digital counterpart. In summary, we are focused on improving our sign-up trends and for the second half of the year, returning to year-over-year growth, improving member activation rate, which would drive gains in retention, exercising strong cost discipline throughout the organization and executing on a narrow list of priorities, including our entrance into clinical interventions for weight management, all of which we believe are the critical drivers for returning the Company to a growth trajectory.

Thanks for joining us today, and we are now happy to take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question is from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Alex Fuhrman: Some interesting announcements here, especially about the acquisition of Sequence here, I guess if we could start with that, certainly seems like there’s been a lot more moves from the pharmaceutical industry to get involved in weight management here. How do you envision deciding who in your program, you’re really going to market this approach to? I think, Sima, in your prepared remarks, you mentioned some criteria about who would even be eligible for the clinical approach. But I think the numbers you kind of sketched out are describing something in the neighborhood of half of the adults in America and presumably more than half of your own membership. So can you just give us a sense of as you get into the back half of the year and closed this acquisition? How are you going to go after that opportunity? And who in your membership base will be targeted for that?

Sima Sistani: Hi, Alex, thanks for your question. Yes, I mean, we’re really excited about being able to provide our members with a clinical intervention. And as I noted, these medications, they’re not for everyone, and there’s been a lot of hype in the media, let’s say, and I think that’s even more reason why we need to lead the conversation from a point of responsibility, chronic weight management medications provide a really amazing opportunity to address the biological underpinnings of people who are dealing with a chronic condition around obesity. And in terms of the market, look, at the end of the day, the decision is between the clinician and the patient. This is a subscription-based weight management platform and I think the really interesting aspects about it outside of it being a very seamless UX experience for both the patient and the clinician is that it is truly a a tech platform, meaning they have taken the complex — the complex parts around insurance authorization and they’ve put it on tech rails.

And so that allows us to scale in a way that is unlike other companies in the space and really increase access to those who medically qualify.

Alex Fuhrman: Okay. That’s really interesting. And then just to make sure we’re all on the same page here. I think you mentioned in the prepared remarks, being in a position to return to growth in the second half of the year. Can we interpret that to mean year-over-year revenue growth in the third or fourth quarter? And is that with your business as it stands today? Or is that the expectation of after you acquire Sequence that will help get you to that growth?

Sima Sistani: So that was ahead of the announcement around the acquisition of Sequence. We’ve always that last year was all about stabilizing and this year was the year that we expected to see top line, meaning sign-ups grow in the second half of the year. Now with this acquisition, we have some work to do to understand the impact, but that’s something that we expect to update in the future after closing. So, that is not part of our current position around seeing that activation, NPS, engagement have all been improving and giving us all the indications that we can expect to see sign of growth in the second half of the year.

Operator: The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: So my first question, just with respect to the shift in marketing. So I know this is difficult to answer. But if you look at — so you shifted marketing with now more of a focus later in the year, and that had an impact upon subscriber growth here early in ’23. So, I guess the question I have there is, I mean, do you have any idea like how much of that shift has held back to subscriber growth here early in the year? And then second to that is like you mentioned in your prepared comments, I mean, historically, Weight Watchers experience most of its growth, let the sign-ups in the early part of the year, you’re working to kind of normalize that through the year. But is the marketing message the same? Or would you be going after a different type of subscriber as you push marketing later in the year?