WW International, Inc. (NASDAQ:WW) Q1 2024 Earnings Call Transcript

WW International, Inc. (NASDAQ:WW) Q1 2024 Earnings Call Transcript May 2, 2024

WW International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Weight Watchers International’s First Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Corey Kinger, Investor Relations. Please go ahead.

Corey Kinger: Thank you, everyone, for joining us today for WW International’s first quarter 2024 conference call. At about 4:00 P.M. Eastern Time today, we issued a press release reporting our first quarter 2024 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, CFO. I will now turn the call over to Sima.

Sima Sistani: Thanks, Corey. Good afternoon, everyone and thank you for joining us today. I’m proud to announce that Weight Watchers is off to a strong start. First, we delivered on our Q1 commitments with both top and bottom line results. Second, we are succeeding in our expansion into clinical services as reflected by clinical subscribers of 91,000 at the end of the first quarter, ahead of our prior guidance of 85,000 subscribers. Our clinical business has undergone tremendous growth over the past year, now having nearly four times the subscribers since we announced the acquisition of Sequence in March 2023. And we have grown this business in an environment of supply constraints for very in-demand GLP-1 medications. Third, the improvements made to our core programs are yielding a tangible improvement in engagement and retention.

For example, our activation rate, a metric defined by a member’s food and weight tracking engagement and weight loss progress during their first 30 days on the program, continues to trend positively with Q1 up approximately 6% year-over-year and hitting its highest level since 2020. As a reminder, activation rate matters, because activated members’ attrition rate is roughly half of a non-activated member, and they are more successful on Weight Watchers over the long-term. We are seeing improved user retention, particularly among newer cohorts, with the average subscriber now on the plan for slightly higher than 11 months. And fourth, our focus on cost discipline is paying off. We delivered another record-adjusted gross margin quarter, an impressive 68%.

So in short, we are executing on our plan by focusing on returning the company to profitable growth while transforming our business model for the future. And we remain confident in the full year guidance. While recent sign-up performance has been soft, much of this is due to an intentional shift in spend, for an upcoming marketing campaign introducing our weight health approach. The coaching, accountability, and community found in Weight Watchers, is key to our longevity and member satisfaction and success. But at the same time, we must evolve for the future, building out and enabling new offerings and features to serve a broader population with more solutions. The future is in members having our foundational behavior change offering as a basis, and the ability to add on and move between membership types depending on the level of support needed.

And when it comes to support, we have a distinct advantage with our 4 million members Weight Watcher community. As discussed in our last earnings call in February, we are focused on expanding care, expanding access, and expanding payment options. Together, the initiatives in project expansion will give us critical opportunities to further catalyze our growth, make our offerings more accessible to more people, transform our business model, and deliver on our mission as the global leader in weight health. Turning to the three pillars of project expansion. First, expanding care. We are focused on expanding and enhancing the care options that members can access based on their specific weight health needs. Our trusted behavioral program, is the foundation and we have a number of digital product improvements rolling out in 2024, to enhance the experience to members, including new features to simplify food decisions, greater in-app gamification, and new community spaces.

Second, expanding access. As we think about the future and growing recognition, of the critical importance of weight health, and our leadership in it, we plan on making Weight Watchers a covered benefit, both for our core behavioral program and our clinic offering. Over time, this will take us from a D2C model to increasingly a B2B2C business. Recent business wins and substantially increased volume of new business conversations, make us confident in our strategy. Our brand, our science, our consumer-centric experience, and full spectrum approach are all key differentiators that resonate, with payers and employers alike. We are in active discussions with large national carriers and we are also in talks with large existing customers. While this motion has a long lead time, the expansion it represents for access to Weight Watchers is huge and we believe this channel to be a critical driver of growth and momentum in the years ahead.

And third, expanding payment options. Our goal is to allow our members to use their insurance whenever possible, taking the cost burden off the consumer. This provides greater opportunity for a larger pool of members to access incremental services, and thereby drive greater ARPU. Over the next few months, we will be making insurance-covered registered dietitians consultations available, to eligible Weight Watchers members in the U.S. We believe the capability to directly process insurance claims for Weight Watchers services, will also have a positive impact to sign-ups and retention over time. In short, we are enthusiastic about project expansion and its potential to transform the Weight Watchers business model, and make our offerings more accessible to more people.

There is a lot to look forward to in 2024. In addition to returning our business to adjusted operating income growth, I am confident our actions are making the company stronger, and better positioned to capture the opportunities ahead. I will now turn the call over to Heather to discuss our financial results and 2024 outlook.

Heather Stark: Thanks, Sima. Turning to our first quarter 2024 results, note that all year-over-year financial comparisons are on a constant currency basis. We ended Q1, with 4 million subscribers. This included 91,000 clinical subscribers and we continue to be encouraged by growth in the business. Revenue totaled $207 million. Subscription revenues of $204 million declined 4% year-over-year driven by a higher mix of subscribers within initial lower-priced commitment periods, mixed shift from workshops to digital subscriptions, and lower sign-ups for our Weight Watchers behavioral offerings versus the prior year first quarter. With the sign-up trend reflecting the lower level of spend dedicated to the core program versus Q1, 2023.

This was partially offset by $19 million in clinical revenue. Adjusted growth margin of 67.9%, was another record high and up from 57.1% in the prior year, primarily driven by our actions to reduce our fixed cost base and subscriber mix shift. In addition, the prior year quarter gross margin was negatively impacted, by subscription and consumer product promotional bundles. Marketing expenses of $90 million were up 2% year-over-year, reflecting higher online advertising spend, including for our new clinical offering that was not in the year-ago period, partially offset, by lower spend of TV advertising and non-working spend. Adjusted G&A of $56 million was up 7% versus prior year, primarily due to the inclusion of expenses for our clinical business.

Adjusted operating loss was $6 million. Restructuring charges totaled $6 million in the quarter, related to prior year plans. We recorded non-cash impairment charges in the quarter for franchise rights acquired balances, totaling approximately $258 million. These impairments were primarily driven by an increase in the company’s weighted average cost of capital, reflecting market factors. Income tax expense was $55 million, which reflected the impact of an unusually high negative annual effective tax rate, driven by the valuation allowance and small pre-tax loss, reflected in the company’s full year fiscal 2024 guidance. GAAP EPS was a loss of $4.39, which incorporates the net negative impact of items impacting comparability, including the valuation allowance, non-cash impairment charges, and net restructuring charges.

Shifting to our outlook. We believe we are on the right track to start 2024. As Sima mentioned, we’re seeing encouraging retention and LTV data, and are enthusiastic about our product roadmap and marketing plans for the rest of the year. At the same time, we’re operating more efficiently from a cost perspective. We continue to leverage longer term commitment offerings in order to maximize total LTV and revenue. We’re beginning to see retention expansion with recent product improvements, and we continue to anticipate stable subscription LTV year-over-year in 2024. While we still expect behavioral ARPU, measured as revenue per paid week, to be down in the mid-single-digits in 2024, we’ve seen green shoots with LTV starting to improve in Q2, versus the prior two quarters.

To expand behavioral subscriber ARPU over time, it is essential to execute on the strategic initiatives Sima highlighted, including expanding care through the addition of new premium add-on services. We’re maintaining our expectation to end the year, with total Weight Watcher subscribers in the range of 3.8 million to 4 million. Within our total subscriber guidance, we expect behavioral subscribers to end the year at least flat with 2023, despite a steep nearly 20% decline in workshop subscribers. Clinical subscribers are expected to end the year in the range of 140,000 to 160,000, so more than doubling from the end of 2023. We continue to expect full year total Weight Watchers revenue, to be $830 million to $860 million. Within this, we continue to expect clinical revenue to be between $100 million and $110 million.

This reflects a modest increase in subscriber revenue year-over-year. Other revenue, which is primarily our high margin licensing business, is expected to contribute up to $10 million in 2024. Adjusted gross margin is expected to be approximately 66% for the full year, up from adjusted gross margin of 62% in 2023, reflecting a mixed shift and continued read-through of fixed cost actions. We continue to expect full year marketing spend, to be roughly flat with 2023, and adjusted G&A expense to be between $210 million and $220 million for the year, which is slightly lower than 2023, due to our restructuring efforts and cost discipline and reflecting strategic investment to expand our clinical offering and our B2B business. Additionally, 2024 includes one additional quarter of clinical expenses, compared to 2023.

Therefore, we expect adjusted operating income to be between $100 million and $110 million and adjusted EBITDA to be between $155 million and $165 million. For the full year, expect income tax expense to be up to $5 million, impacted by the valuation allowance and impairment mentioned earlier. Excluding the impact of the valuation allowance and impairment, we continue to expect an income tax benefit of up to $10 million. We expect cash taxes to be between $20 million and $30 million for the year. As a reminder, given the small pre-tax loss reflected in the company’s full year fiscal 2024 guidance, any updates to the expected pre-tax loss, or income tax expense can result in significant impacts in quarterly income tax results. Turning to our capital structure and cash flows, we end at Q1 with approximately $67 million of cash plus an undrawn revolver.

As a reminder, our first half of the year cash needs, are much higher than the second, due to increased marketing, compensation timing, and the Sequence acquisition anniversary payment, with cash then expected to build through the balance of the year. With our cash position plus our revolving credit facility, we believe we have sufficient liquidity for our working capital needs, including in-year cash outlays, related to our restructuring actions and servicing our debt. Cash from operations in 2024 is expected to increase modestly year-over-year. As a reminder, 2023 included approximately $45 million of cash payments for restructuring, and we expect 2024 to include approximately $20 million of restructuring payments associated with the 2023 restructuring plan.

Full year interest expense is expected to be between $105 million and $110 million, with the year-over-year increase largely driven by the expiration of our $500 million hedge at the start of Q2, 2024. Given current market conditions, we have decided not to add new hedges at this time. CapEx, which is primarily due to capitalized software, is still expected to be in the $20 million to $25 million range. Depreciation and amortization is expected to be in the $40 million range. At Q1, our net debt to adjusted EBITDAs leverage ratio was 9.4 times. With our 2024 outlook, we expect our trailing 12-month leverage ratio to further increase in the coming quarters, due to lower EBITDAs levels before showing year-over-year improvement at year end 2024.

As a reminder, we have very attractive debt terms, with no maturities until 2028 and 2029, and we are comfortable with our liquidity profile, which gives us ample time to deliver on our transformation strategy. We will continue to opportunistically evaluate options, to reduce our leverage ratio on terms we believe are strategically beneficial. In summary, we are operating more efficiently, and are strategically positioning Weight Watchers for the future. We believe by scaling clinic, and executing on our expansion initiatives, we will drive another year of operating income growth in 2025 with momentum and revenue returning to the business. I’ll now turn the call back to Sima.

Sima Sistani: Thanks, Heather. 2024 and 2025 are critical years, and execution is of paramount importance. We’ve made significant progress, with the integration of Sequence and learned a lot during the winter season on key product and brand opportunities. We’ve been moving rapidly to incorporate those learnings into our product roadmap and marketing plans. At the same time, we believe Weight Watchers is uniquely positioned to dominate in the B2B and payer space. We expect this area of the business, will contribute more meaningfully from a financial perspective in 2025, and beyond. We have conviction that payers and employers are the, unlock for weight health in the medium to long-term, and we need to start winning share in this market today.

Before we wrap up, I would like to welcome Donna Boyer, our new Chief Product Officer to Weight Watchers. Most recently, Donna was the Chief Product Officer at Teladoc Health, where she led the strategic shift from a single product to a multi-product portfolio organization. Prior to Teladoc, Donna held product leadership positions at Stitch Fix and Airbnb. Our execution can only be as strong as a team executing, and I am confident that Donna is the right product leader to ensure a cohesive one membership value proposition across core, IRL, B2B, and clinic. Thanks for joining us. We are now happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jack Wallace with Guggenheim. Please go ahead.

Jack Wallace: Thanks for taking my question, and congrats on a really nice start to the year. I just wanted to ask you a little bit about what you’re seeing in terms of market conditions as we enter into the second quarter, particularly with advertising, inventory pricing, as well as competitive behavior. You particularly enlightened just how expensive advertising was in the first quarter, and what appeared to be some really aggressive competitive behavior? Thank you.

Sima Sistani: Hi, Jack. Thank you. Yes, we have seen the cost of media going up. And in general, I think that’s why we have a great performance marketing function that accounts for those types of movements. And we have seen some softness in the base business in April, but we’re not overly concerned about that. That was an intentional shift in money out of April and into May. So that we can align to more of our marketing milestones, which in general obviously improve the funnel and make the dollar spent more efficient. So, we’re really confident in our full year outlook and excited also, of course, about our clinical subscription business and how it’s scaling.

Jack Wallace: Excellent. That’s helpful. And then to that last point, you mentioned in your prepared remarks that there will be an increased focus on, promoting the clinical business. Obviously, we’ve got the special with Oprah later this month. Are there any other points of emphasis you’d like to disclose today in terms of your marketing strategy, around clinical and maybe the percentage of the budget, being dedicated towards the clinical strategy? Thank you.

Sima Sistani: Right. So the overall marketing strategy is a one membership strategy, and I think that that’s what we can uniquely do is, by marketing and speaking to the benefit of weight health and Weight Watchers, a brand that has been around for 60 years, that is the number one doctor-recommended program, most clinically tested program that we are able to make a more efficient acquisition. Also, as we had noted previously, we’re seeing conversion from within our core business to clinic. So it behooves us to take a more aggressive approach in terms of our acquisition strategy towards the core business. And we’re seeing that this is providing a lot of efficiency overall in how we go to market, not to mention our labs database that we’re able to continue to utilize as – when we see opportunities between our performance strategy and our non-paid strategy.

Jack Wallace: That’s helpful. Thank you. I’ll hop back in queue.

Operator: The next question comes from Nathan Feather with Morgan Stanley. Please go ahead.

Nathan Feather: Hi, everyone. Thanks for taking the question. So the end of year behavioral sub guide does imply some acceleration through the year. Is it primarily the marketing campaign that you’re launching to get you confidence in that? And then can you give more detail on that marketing campaign, timing, expected impact on marketing cost, those kinds of stuff? Thank you.

Sima Sistani: Yes, I mean, there’s not a lot that we’re ready to share at this point. Obviously, we’ve announced our event next week with Oprah. But in general, it’s about coming to the market as one membership. And we learned a lot from the winter season that between all of the different ways, we can – that we were confusing the market with a lot of different solutions. And so moving forward, it’s all about one membership, come to Weight Watchers. Our program can increase in its personalization and support, based on the level of care that’s needed. And we’re there for people throughout their various life stages.

Nathan Feather: Great. That’s helpful. And then you beat the clinical sub guide for 1Q. Maintain the full year guide. How should we think about the key puts and takes that could lead that to come in at the high end, or beat the range for the year?

Sima Sistani: Yes, so we – as we mentioned, if you follow that, and even at the bottom end, as a subscriber guidance, we’re really confident in our revenue and adjusted OI. So, we had made some intentional shifts based on what we were seeing in the market, as well as to maximize within that weight health marketing campaign strategy. So yes, we do expect to see some acceleration moving throughout the year.

Nathan Feather: Great. Thank you.

Operator: And the next question comes from Linda Bolton with D.A. Davidson. Please go ahead.

Linda Weiser: Yes. Hi. So, you referred to this intentional strategy of shifting marketing spend, which you talked about on the last call. Given that, was the new member growth weaker than even what you would have expected, or is it kind of in line, given that you had planned this strategy to shift marketing? So how is it relative to your expectations?

Heather Stark: So, and thanks for the question. Looking at the comments we made, we did see lower growth in new subscribers in April, and this is related to the marketing shift that we’re referencing. So, we shifted our marketing spend to line up better with the activities that we’re executing on, specifically starting with the event next week, and then further into the marketing campaign that Sima is referencing.

Linda Weiser: So is that in line with what you would have expected, given the marketing plan?

Heather Stark: So it is not. It’s a different timing than what we expected when we spoke last in February, and we shifted that based on the timing of our May event execution.

Linda Weiser: Okay. And then in terms of the ARPU being down mid-single-digit for the year, you said you saw green shoots of improvement, I guess and it’s in the second quarter, or you said you saw green shoots here. So are you saying there’s a point at, which during the year the ARPU will actually inflect to be flat to up year-over-year or will it be down through each point in the year?

Heather Stark: So yes, so the ARPU that we’ve referenced, that’s the total subscriber base. So if I speak just to a digital subscriber as an example, it’s easier to talk about one at a time. I think this is about the mix of in-commitment versus recur bill membership. We do see green shoots as we reference to this stabilizing. And in fact, in the core business, Q1, ’24’s ARPU was stable to Q4, ’23. And that’s even with proportionately more subscribers and long-term commitment. So, we had about 56% of members in long-term commitment exiting Q4, whereas 59% in long-term commitment exiting Q1. So, we expect to see ARPU expanding over time. And specific to comments that Sima made on the call, we do expect it to further expand as we execute on the plans, to add clinical services for all members in the U.S.