Ww International, Inc. Q4 FY2022 Earnings Call

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.

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.

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 roadmap 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 roadmap 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 have 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 too. 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 startups 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 roadmap.

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 non-working 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 non-cash 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 non-strategic 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 remain 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 roadmap. 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 6 times, up from 5.2 times 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 hedge 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.

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 meal 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.

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

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 close this acquisition? How are you going to go after that opportunity? And who in your membership base will be targeted for that?

Hi, Alex, thank you for your question. We're very excited about offering our members a clinical intervention. As I mentioned, these medications are not suitable for everyone, and there has been considerable media attention surrounding them. This highlights the importance of guiding the conversation responsibly. Chronic weight management medications present a significant opportunity to tackle the biological aspects of those dealing with obesity. Ultimately, the decision lies between the clinician and the patient. Our platform is subscription-based for weight management, and what's particularly interesting is that it provides a seamless user experience for both patients and clinicians. It is genuinely a technology-driven platform; we've streamlined the complex aspects related to insurance authorization through technology, allowing us to scale in a way that sets us apart from other companies in the industry and enhances access for those who qualify medically.

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?

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.

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

My first question pertains to the recent changes in marketing strategy. I understand this may be challenging to quantify, but you shifted your marketing focus to later in the year, which seems to have affected subscriber growth in early 2023. Can you estimate how much this shift has impacted subscriber growth so far this year? Additionally, you mentioned in your prepared remarks that Weight Watchers typically sees most of its growth and sign-ups in the early part of the year, and you're trying to spread that more evenly throughout the year. Will the marketing message remain consistent, or are you targeting a different type of subscriber as you ramp up marketing later in the year?

Thank you for your question, Brian. As we mentioned, we have been concentrating on enhancing our LTV CAC efficiencies, and we saw an 11% improvement in January compared to January 2022. We made a deliberate choice to allocate spending to the second half of the year to achieve more efficient expenditures and align with key product launches. Even though our media spending was down 24% year-over-year in January, we exceeded our internal expectations. We anticipate utilizing our budget in the second half at more efficient rates to increase the total sign-ups for the year. From a marketing perspective, our strategies are really resonating, showing significant progress in both performance marketing and brand messaging. You may have noticed a shift towards a more entertainment-focused approach rather than relying on influencers or celebrities, which resulted in a four-point rise in brand affinity. We are observing strong indicators that we are successfully modernizing our brand and enhancing its appeal, while our target audience remains unchanged.

This is Heather. I would just add to that. We are modeling marketing for the full year to be flat year-over-year. So, with the shift in spend, we are expecting overall efficiency of spend improvement and an alignment to the spend to our product roadmap and as well with the acquisition of Sequence and closing in the second quarter.

And I just do want to add to around the product launches and the new features we expect to come. I keep saying a big point of improving our product is the product needs to do the marketing for us. Weight loss is a very word-of-mouth experience. And so, we expect people to come for the weight loss. We want them to stay for the connection, the community and the success, ultimately driving NPS. And as we noted, the NPS on digital was 7 points higher on workshops, and it was 10 points higher. So, those are all indicators that we're headed in the right direction to increase the organic acquisition funnels as well as paid.

That's very helpful. And if I can just ask one unrelated follow-up. Regarding the acquisition, I apologize if I'm not thinking about it correctly, but it's the first time that Weight Watchers has made an acquisition like this. Given the unique situation in the health space, should we consider this a one-time event, or is Weight Watchers now looking for more acquisition opportunities to expand the product offering?

This represents a significant change in our industry, and we believed it was essential to address it with a comprehensive solution. We conducted a build-versus-buy analysis and ultimately recognized that as the spectrum of services evolves to include clinical pathways for weight loss management, we needed to offer this alongside our behavior change program. This puts us in a unique position to deliver a complete solution, which no one else can match. When prescriptions for these medications are issued, it is medically recommended to accompany them with a lifestyle behavior change program. As you know, we are the top doctor-recommended behavior change program. The combination of these two elements leads to better outcomes for consumers. I believe this will be a pioneering solution and an additional offering to what we already provide through our core and premium programs.

The next question is from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Yes. So, I'm just wondering on the drug side of things here, there have been weight loss drugs available over the years at different points in time, new drugs coming in. What is it that's really different now that makes you really want to merge this aspect with your existing business? Like what is it that's different? Is it the insurance aspect? Or can you give a little more color on that?

Happy to, Linda, thank you. We strongly believe that the recent advancements in prescription chronic weight management medications represent a significant innovation in our field today. We are at a crucial point where we can build new capabilities to expand our market, supported by our foundational strengths. Specifically regarding GLP-1s, due to their newness, limited availability, and high costs, they have not been widely adopted yet. We expect to facilitate access through our preauthorization insurance engine, viewing this as a genuine opportunity to be a holistic care partner, helping our members manage the side effects and challenges associated with these medications. Additionally, it's worth noting that interest in the weight loss space has shifted over the past decade. While the interest in Weight Watchers previously tracked alongside weight loss, over the past 18 months, there has been a notable increase in popularity and interest in these medications. As supply chain challenges are resolved and more insurance plans begin to cover these medications, we anticipate increased access, presenting us with an opportunity to expand our market presence and continue being a science-backed leader and provider of choice across all approaches, whether clinical, lifestyle, or functional.

Can you provide more details about new member sign-ups? Are they improving, specifically showing less decline year-over-year or month-by-month? How does year-to-date in the first quarter compare to the fourth quarter? What can you share to assure us that the trend is positive?

Yes, the trend is improving. I want to emphasize that we intentionally reduced our media spending. As we observed, the trend has improved over the second and third quarters and continues to strengthen into the fourth quarter, reaching a peak. We're optimistic about this progress and plan to provide more updates in the next call.

I would add to that as well. We do expect to spend into Q3 at a more efficient LTV to CAC ratio, and we do expect to see a return to improved trends in the second half.

The next question is from Michael Lasser with UBS. Please go ahead.

On the strategic rationale behind the acquisition, to what degree do you think your difficulty in signing up new members is because of the pharmacological solutions that are making weight loss different today than it's been in the past. And so, this is an effect that trying to hedge an existential risk that Weight Watchers might be facing over time. And as part of that, how do you manage the cultural challenge of integrating these two businesses because for so long, Weight Watchers' message and culture has all been about the behavioral modification rather than a fix like a pill to take.

I don't believe that AOMs have significantly impacted our business so far. The number of people using these medications, especially GLP-1s, was relatively low in 2022 due to limited availability, the injectable formulation, and substantial costs. This represents an opportunity we see for the future. There is a lack of comprehensive care to accompany these medications, but our lifestyle programs, behavior change initiatives, and nutritional guidance allow us to support our members in prioritizing nutrient-dense foods, managing muscle loss, and recognizing that these medications may require a lifelong commitment. Weight Watchers can offer assistance to ensure that members' weight loss journeys are healthy and sustainable. This aligns with our messaging as we've always been a science-backed solution. As science advances, we must adapt, just as we updated our food algorithm to consider saturated vs. unsaturated fats and fiber-rich foods. This evolution helps us understand that those struggling with obesity may face biological and genetic factors, and willpower alone may not suffice. It's a real opportunity to lead the conversation around managing the dietary challenges linked to these drugs. Members who are medically eligible deserve to be informed about their options, how these medications work, and if they opt for a clinical intervention, it should be handled responsibly throughout their membership.

My follow-up question is on the leverage situation. Do you have any covenants or other conditions that need to be met over the next few quarters in order to trip any contractual obligations that you have with your debt.

So, we came into 2023 with $178 million on our balance sheet, access to our revolver. And even with this acquisition, we have ample liquidity to meet our operating needs and to service our debt. And the debt itself is very favorable and with very limited covenants, but we don't expect any issue with.

The next question is from Jason English with Goldman Sachs. Please go ahead.

A couple of questions. First, the first quarter revenue guidance of $235 million, what is the Q1 end-of-period subscriber count that, that revenue figure is based on?

We expect 4 million end-of-period subscribers at the end of Q1.

Thank you. I apologize if you mentioned that number earlier. You talked about several restructuring initiatives during the call. Can you clarify, and I'm sorry for losing track of some details. I'm sure I can retrieve more from the transcript, but what is the total cash outlay for restructuring? Additionally, you went over some specifics regarding the deal. What is the cash outlay for the acquisition this year as well?

So, I'll speak first to the acquisition question, Jason. The total cash outlay in the current year is $39 million in cash.

And then the restructuring cash outlays for this year?

It's approximately $36 million in the current year.

And I loved all the stats you dropped on the brand health engagement, et cetera. But frankly, I would be very disappointed if you weren't seeing material improvement for survivor bias alone. Presumably, it's the more loyal, more engaged, how satisfy customers who are not leaving your franchise. So have you been able to go through and tease out that noise from the survivor bias? And if so, what is it telling you?

So actually, activation rate, Jason, is a measure of a new member in the first 30 days. So, I don't think that there is survivor bias in that. And we've noted that is up 5% year-over-year.

Yes. But you provided at least three other metrics that were related to surveys of existing members.

That's true. And we split those cohorts by tenure, and it's all very similar. So yes, that is a very reasonable thing to think about and consider and certainly, we look at that. But no, the NPS being up and the brand affinity being up is true across all of our cohorts. In fact, in some cases, in the newer members, we're seeing them to be actually higher because they are coming into our new simplified program and having a really great experience where for some existing members sometimes these changes can be hard.

This concludes our question-and-answer session. I would like to turn the conference back over to Sima Sistani for any closing remarks.

We are extremely excited about the future of Weight Watchers and our ability to positively impact so many millions of people to achieve their weight loss goals in a healthy, sustainable, and scientifically recommended way. Our move into the clinical space will allow us to help even more people with a holistic program no one else can deliver. At the same time, we are going to make very significant improvements across coaching, community, and accountability to take our already excellent offerings to an even higher level. We are already seeing improvements in engagement from these efforts, but even bigger improvements are coming. 2023 will be a year of dramatic improvement in our ability to help members achieve their goals. Thank you for joining us today, looking forward to speaking with many of you, including at the Morgan Stanley Technology Conference on Wednesday. We'll look forward to keeping you updated on initiatives we have underway. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.