Ww International, Inc. Q1 FY2023 Earnings Call

Good day, and welcome to the WW International Incorporated First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

Thank you, everyone, for joining us today for WW International's first quarter 2023 conference call. At about 04:05 p.m. Eastern Time today, we issued a press release reporting our first quarter 2023 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.

Thanks, Corey. Good afternoon, everyone. Thank you for being with us today. 2023 is proving to be a critical and transformative year for Weight Watchers, where our key initiatives and decisive actions will influence our product experience, operating model, financial trajectory, and the member lives we positively impact. As we celebrate our 60th anniversary, I’ve been reflecting on our incredible history and looking back at photos of our founder, Jean Nidetch, and crowds of members at past gatherings. She initiated a movement 60 years ago, driven by a strong sense of community, which has been the cornerstone of our longevity. The personal connections in our workshops have defined Weight Watchers. The shift to digital allowed us to broaden our subscriber base and maintain the company throughout the pandemic, with 80% of our members now engaging with Weight Watchers through a mobile-first experience. Our digital platform has immense potential to unify people in innovative ways, expand our outreach, and offer members immediate support and inspiration, while also enhancing in-person experiences and improving connections between members and coaches. Weight Watchers is recognized for delivering a program that works, with millions of members, 60 years of experience, and has been ranked as US News and World Report's number one best diet for weight loss for 13 consecutive years. We have built trust in a market where new entrants frequently emerge and disappear. We are transforming our strong foundation into top-tier experiences for the future by creating new science-backed pathways, including clinical options. On to our first-quarter results: we concluded the quarter with just over 4 million subscribers, slightly above our March guidance of nearing 4 million, with signs surpassing our expectations. This marks nearly 500,000 new subscribers, up from the 3.5 million subscribers we had at the end of last year—a quarter-over-quarter increase of 100,000 net additions compared to the same period last year. Notably, this was achieved with $19 million less in marketing spending. To emphasize, we gained more subscribers with 18% less marketing expenditure than in the same quarter last year. This illustrates that our new marketing strategy and enhanced programs are effective, driving efficient acquisition. This strong growth in subscribers resulted in higher-than-expected revenues, and when paired with better cost management, led to adjusted operating income that exceeded our guidance. We are effectively using data throughout our operations, from digital engagement and activation to product management and financial forecasting. This data-driven approach is refining our operations, making the organization more agile, and enhancing the predictability of our results. Our activation rate, reflecting a member's engagement and progress in their first month, has improved by 4% to 8% year-over-year in 2023. It’s important to note that members who are activated have a churn rate about half that of non-activated members and enjoy greater success with Weight Watchers long-term. Thus, increasing this metric is a key focus for our organization. Sustaining this year-over-year growth in the activation rate confirms that the product modifications and program changes we’ve implemented are effective. In addition, our engagement rate, which is evaluated across our entire member base, has turned positive and is trending up by 6% to 7% year-over-year, indicating that our product upgrades are resonating with members. As mentioned, our current digital product roadmap centers on fostering community and facilitating food decisions, as indicated by both activation rates and subsequent subscriber retention and success. A major feature, Member Chat, has recently been launched in beta, and we anticipate learning from it and expanding its availability in the coming months. We believe Chat will be crucial in enriching our digital community, allowing members to forge relationships with one another, their coaches, workshop groups, and even their existing networks, if they choose to involve them in their journey. On top of this, new streamlined features in our app will be launched in 2023, including a 'What to Eat' tab to aid members with their eating decisions and a dedicated section for tracking progress and trends, helping members visualize the connections between core behaviors, such as food intake, activity, and weight tracking in relation to their weight management goals. Additionally, to enhance our coach experience, we plan to create a new platform for our coaches to engage more effectively with members both in person and digitally. Weight Watchers’ enduring brand strength has been sustained through ongoing innovation, cementing our status as the global leader in sustainable, science-backed weight management. As the world adapts to new insights regarding overweight and obesity, we will maintain our leadership by honoring our heritage while evolving alongside new interventions, concentrating on the critical goal of fostering meaningful connections through shared weight management journeys. With that in mind, we are introducing a new term: Weight Health. Just as Heart Health and Mental Health have reframed discussions around their respective chronic conditions, reducing stigma and enhancing accessibility and standards of care, we believe Weight Health will be the future of our industry. We are committed to leading this change, combating stigma and misunderstanding surrounding obesity and weight management, and making evidence-based solutions more attainable for those in need. Weight Health is defined as the extent to which an individual’s weight affects their metabolic health and overall well-being, influenced by genetic, biological, hormonal, environmental, and behavioral factors unique to each person. Achieving healthy living aims to prevent and manage chronic diseases resulting from excess body fat, such as Type 2 diabetes, high cholesterol, and cardiovascular disease, ultimately enhancing health, well-being, and quality of life. Weight Watchers will exemplify Weight Health through our foundations of coaching, accountability, and community via evidence-based interventions, leading me to our acquisition of Weekend Health, also known as Sequence. This development has garnered significant attention and created considerable excitement, which we share regarding the opportunity to positively influence many more lives with improved health outcomes. Sequence is a subscription-based digital health platform that provides clinical access to prescription weight management medications, marking our entry into the clinical space. We strongly believe that Sequence presents a substantial multi-year growth opportunity. However, this year, we are carefully balancing the ongoing strong growth of this business while thoughtfully integrating and scaling to ensure we provide a high-quality, differentiated member experience that exceeds expectations, fostering satisfaction that drives retention and efficient acquisition. The discussions about GLP-1s and Weight Watchers' entry into the clinical market have been extensive, and we now have the chance to enhance our position in Weight Health. Encouragingly, our customers are responding positively to this news. In a recent survey, 50% of our core demographic expressed that the acquisition has positively influenced their perception of Weight Watchers, and 80% of those surveyed feel that we are keeping pace with the latest scientific research following this announcement. Simultaneously, we must engage our existing members in this evolution, making clear communication essential. We are committed to educating our members that choosing a clinical pathway is a personal decision and not something we are actively promoting. The Weight Watchers that they know and trust will continue to serve as the gold standard of our offerings. Furthermore, in our survey, 18% of current Weight Watchers members indicated interest in trying weight loss medication, demonstrating their trust in us to bring credibility to this area. This presents an opportunity to better serve these members with an integrated clinical solution, focusing on their top three expectations: access to GLP-1 medication, insurance coordination, and a program tailored for individuals using these medications. We are dedicated to delivering a unique experience that meets these needs and more. First, we ensure access to GLP-1 medication through Sequence by connecting members with clinicians who are experienced in prescribing chronic weight management medications, allowing the clinician to ascertain the suitability of a GLP-1 or another medication. If prescribed, Sequence offers a straightforward process for prescription fulfillment and managing dosing over time. Second, concerning insurance coordination, a major issue with GLP-1s is their limited coverage by medical insurance, making them prohibitively expensive for many. While not universally covered, they are increasingly included in certain health plans for qualified individuals who have actively engaged in behavior change programs. The insurance pre-authorization process is typically manual, slow, error-prone, and a common hassle for patients and healthcare providers. Sequence has digitized much of this process, enhancing accuracy and expediting insurance approvals. Third, we plan to develop a lifestyle program encompassing nutrition, fitness, and coaching specifically designed for individuals on these medications. As we integrate and expand this vertical, we will create a behavior change program for this unique member experience. I believe this will be a significant differentiator, especially for our lapsing members who are familiar with and trust Weight Watchers but are also seeking a clinical solution. A behavioral program paired with clinical intervention is crucial and is recommended by the FDA to help those on medications build and sustain healthy habits. From emphasizing nutrient-rich foods to managing muscle preservation, Weight Watchers can guide members in ensuring their weight loss efforts are healthy and sustainable. Finally, we believe a well-structured community experience will be valuable for those using these medications. Although community is not the primary motivator for members to enroll in clinical solutions, insights from individuals using weight management medications indicate they would appreciate a community to learn from and share experiences with. As we’ve observed in our primary program, people come for weight loss but remain for the community, and we are eager to cultivate a vibrant community experience for all our members. We plan to integrate Weight Watchers’ expertise in nutrition and behavioral science along with the Sequence platform to develop a comprehensive solution. More details will be shared as our plans evolve in the coming quarters. I am encouraged by our early results in 2023, which bolster my confidence that the initiatives we have in progress are effective. We remain dedicated to improving our sign-up trends and aim to return to year-over-year growth in sign-ups for the second half of the year, enhancing member activation to drive retention, maintaining stringent cost management throughout the organization, and executing on a focused list of goals that includes our entry into clinical interventions for weight management. Before we move to our financial update, I am happy to announce that Heather Stark has been appointed as Chief Financial Officer of Weight Watchers. Since taking on the interim role in December, Heather has proven to be an incredible partner to me and the entire leadership team. Her experience, including 12 years at Weight Watchers in operational finance and navigating organizational change, has been invaluable. I look forward to continuing our collaboration in her new role. I'll now hand the call over to Heather and then return to discuss our strategic priorities for 2023.

Thanks, Sima. I'm honored to be taking on the Chief Financial Officer role at Weight Watchers. It's rare to work at a company that positively impacts the lives of millions in such a personal and important way. I look forward to continuing to work with Sima and the rest of our leadership team and being part of the next stage of this company's transformation. Turning to our first quarter results. We ended Q1 with four million subscribers, with both sign-ups and cancellations slightly outperforming our forecast in the quarter. As Sima mentioned, this is a quarter-over-quarter increase of nearly 500,000 subscribers, which is a step-up of approximately 100,000 more than the step-up of nearly 400,000 in the year-ago first quarter. Revenue totaled $242 million, which is slightly above our forecast, but down 19% year-over-year or 17% on a constant currency basis versus the prior year period, primarily due to the lower subscriber levels entering the year, as well as the planned scale down of our consumer products business. Adjusted gross margin of 57.1% for the quarter was down 335 basis points from the prior year, with overdrive on cost savings, resulting in a beat versus our guidance. The year-over-year decline was primarily due to a revenue mix shift from our higher margin digital business, deleverage, as well as the accounting for subscription and consumer product promotional bundles in the quarter. Marketing expenses of $88 million were down 18% year-over-year, reflecting lower spend on TV advertising and lower non-working spends as we optimize our performance marketing approach and drive member acquisition with strong LTV to CAC, subscription lifetime value to customer acquisition cost efficiency. Adjusted G&A of $56 million was down 12% versus the prior year, reflecting savings from our restructuring actions and overall expense discipline, partially offset by $3 million in costs related to the Sequence acquisition. We had an adjusted operating loss of $6 million in the first quarter, beating our expectations. Restructuring charges totaled $23 million in the quarter. As previously announced, in 2023, we are further streamlining and centralizing our organizational structure, rationalizing certain non-strategic business lines and continuing the rebalancing of our real estate portfolio. Income tax expense in Q1 2023 was $68 million, which reflected the impact of an unusually high negative annual effective tax rate driven by a valuation allowance and small pre-tax loss reflected in the company's full year fiscal 2023 guidance. GAAP net loss per share was $1.68, which incorporates the negative impact of $1.54 of items impacting comparability, including net restructuring charges and the valuation allowance. Turning to Sequence. As we discussed at the time of our announcement in early March, since Sequence’s launch in late 2021, the company has quickly grown to serve thousands of members across the US by effectively scaling its technology platform through word of mouth. We closed the acquisition on April 10, so it will be reflected in our results starting next quarter's earnings report. At closing, Sequence had approximately 27,000 members. At this time, new members to Sequence initially pay a $49 consultation fee. Should they qualify and accept treatment, they subscribe for $99 per month thereafter. Only after they begin the $99 monthly plan are they counted as a subscriber. Gross margins per Sequence are north of 40%, which is a bit better than those in our workshops business. On an annualized operating income basis, the business is modestly profitable at current revenue levels, but has significant upside opportunity upon achieving greater scale. After transaction expenses are behind us, the acquisition is expected to be accretive to WW's earnings per share by the fourth quarter. While Sequence is expected to continue its growth trajectory in 2023, it will take time to integrate and truly scale up this offering. That said, we strongly believe the multiyear growth opportunity is significant. We expect performance trends in our principal Weight Watchers business 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. In addition, the Sequence acquisition will be reflected in our results starting in Q2. We plan to redeploy our Q1 year-over-year marketing savings primarily into Q3, where we can better maximize our LTV to CAC efficiency, essentially driving more sign-ups for every dollar spent. We are confident that shifting the timing of this investment will help drive sign-ups year-over-year in Q3. For the full year, we expect to end the year with Weight Watchers subscribers, excluding Sequence subscribers, roughly flat to year-end 2022. Including Sequence for clinical subscribers, total subscribers are expected to approach 3.6 million. The last time we ended the year with flat or higher subscribers year-over-year was 2020, so this will be a notable achievement and a testament to the work our teams are delivering in our product experience and acquisition channels. As a reminder, Q1 is traditionally our annual peak and end-of-period subscribers sloping to a Q4 trough with an average decline of 14% over the past five years. Our outlook of ending the year with 3.6 million subscribers represents a Q1 to Q4 decline of only 10%, significantly improved from a decline of 22% in 2022. Full year revenue is expected to be in the range of $910 million to $930 million, reflecting reducing year-over-year declines in subscription revenue as we move through the year. Approximately 40% of our subscribers are currently in the long-term treatment period of their membership, which ranges anywhere from one to 12 months depending on the joining offer. These offers reduce the average rate per paid week but lock in subscribers for a longer duration, resulting in higher LTV. In Q1, approximately 80% of global sign-ups chose a six-month or longer plan, up from about 70% a year ago. Most notably, 41% of total sign-ups are for a nine-month or longer plan, up from only 12% a year ago. We now expect Consumer Products and other to contribute approximately $65 million in revenues during 2023, which is lower than our previous estimates, as we simplify our business and focus our consumer product offerings on our best-selling SKUs. Revenues from Sequence are currently expected to contribute $45 million from Q2 to Q4 in aggregate. Adjusted gross margin is expected to be in the range of 61% to 62% for the full year, as we continue to reduce our fixed cost base. Our workshop restructuring is expected to reduce our cost structure by approximately $40 million on an annualized basis, with approximately $25 million of in-year savings, excluding reinvestments in the organization. We expect full-year marketing spend to be flat with 2022 at approximately $245 million. G&A expense is also expected to be approximately $245 million for the year. This includes approximately $15 million in Sequence G&A plus $6 million in transaction costs, including the $3 million we recorded in Q1. Therefore, we expect adjusted operating income in the range of $80 million to $85 million for the full year 2023. We estimate that the remaining charges related to the 2023 restructuring plan will be up to $10 million. For the full year, excluding the impact of restructuring, we expect income tax expense to be approximately $15 million to $20 million, largely driven by the full-year impact of valuation allowances discussed earlier. Given the seasonal nature of our principal business, our Q1 income tax expense is expected to largely reverse in the remaining quarters of fiscal 2023 when we expect to earn pre-tax income. Thus, excluding the impact of the valuation allowance and restructuring, we would expect an income tax benefit of up to $5 million for the full year. Given the small pre-tax loss reflected in the company's full-year fiscal 2023 guidance, any updates to the expected pre-tax loss or income tax expense can result in significant impacts on quarterly income tax results. Turning to our capital structure and cash flows. We ended Q1 with approximately $141 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 approximately $40 million in cash for the purchase of Sequence in Q2, and reflecting our assumption that cash from operations will be a modest use of cash for the year. At quarter end, our net debt to adjusted EBITDA leverage ratio was 6.7 times, up from six times at the end of 2022. We expect our trailing 12-month leverage ratio to further increase in 2023 due to lower EBITDA levels through most of the year. At this time, full-year interest expense is expected to be approximately $95 million. Note that we have a $500 million hedge through Q1 2024 to protect against rising interest rates on our variable rate term loan of $945 million, and our $500 million notes are fixed-rate, so only 31% of our total debt is floating, and we are currently exploring options for forward starting swaps. CapEx, which is primarily due to capitalized software as well as depreciation and amortization, is expected to be in the $45 million range for the full year 2023. In summary, we are stabilizing the business, improving our execution, and looking forward to upcoming key milestones on our product roadmap and our entry into the clinical space. With our lower cost base and increased agility in our organization, we have greater flexibility in our operating model, positioning us well to improve our profitability profile following a return to growth. I'll now turn the call back to Sima.

Thanks, Heather. We have significant opportunities for expanding our reach and returning Weight Watchers to growth. To achieve that, we are focused on a narrow list of priorities in order to best execute on the initiatives that will deliver the greatest impact. Across the organization, we are focused on four key areas: one, reinvigorating our principal business and hitting our end-of-period subscriber targets for the year, which will be achieved through our more efficient acquisition funnel and increased member engagement for both digital and workshop members alike; two, compounding our head start in the clinical space by continuing to drive efficient member acquisition to Sequence, increasing brand awareness, and expanding member retention; three, leveraging our expertise and enhancing our capabilities to be the partner of choice for self-insured employers and health system payers in delivering end-to-end behavioral and clinical weight management solutions, setting a new standard of care in this space; and four, building community experiences, both in real life and in digital that will broaden our reach, increase engagement and satisfaction for both behavioral and clinical pathways. In summary, our team's hard work, innovative thinking, and strong execution are paying off, and I am confident that we are turning the corner and getting Weight Watchers back on a growth trajectory. With a leaner, more agile organization, we are improving our operating model to drive profitable growth. 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 comes from Jason English from Goldman Sachs. Please go ahead.

Good afternoon, folks. Thanks for taking my question and congrats on finding some stability on the core subscriber base B2C. On Sequence, your guidance implies you expect to have about 100,000 subscribers at year-end. A couple of questions. Last time you gave us an update, there were 4,000 on it. Where do we stand today, whether that be people who have already paid the 99, or just people who have come in and entered the program? What gives you confidence that you can build to that 100? And what's the cadence of activation? When should we expect to see you bring the marketing campaign and activate and start promoting this to try to get the on-ramp going?

Hi, Jason, and thanks for your question. This is Heather. Sequence is ramping up through the year. So as we said in the comments, we closed the acquisition with 27,000 active subscribers. We are measuring subscribers at a different pace than a typical Weight Watcher subscriber where you sign up and are considered an active subscriber on day one. So those 27,000 are people who have come in, qualified for treatment, accepted treatment, and moved into the $99 monthly subscription plan. So there's a bit of a lag there between when someone enters the sign-up flow and actually becomes a subscriber, which is a little different, as I said. So in terms of scaling, we're confident that the 2023 expectations that we have will land us in that range of growth, and we recognize that there's a good scalable space in this business and expect to hit the subscriber base that we're targeting.

And Jason, hey, it's Sima. I just wanted to add to that regarding marketing activation. So as you know, Sequence has built up their subscription base primarily on word of mouth. And we're seeing that they are continuing to scale through that channel. And then, on top of that, we have the opportunity to tap into the Weight Watchers lapsed membership base to really cross-promote for those who it's medically appropriate. That being said, we did push our marketing budget to the second half of the year, and we're going to be driving that top of funnel across our businesses as a whole. One of the theses here was that there would be tactical efficiencies, and we believe that will be true. So, we're going to be looking at where we have the most leverage, whether it's through clinical or our behavioral pathway.

Okay. One more question, then I'll pass it on, although I realize I set up front with a three-part question. So you had some interesting comments to make on insurance coverage. I was wondering if you have any sense of numbers you can put around that. Like, what percentage of the population or your current lapsed users would be covered on this program, just carte blanche with no caveats? And then, how does that percentage change when we bring in the caveat of it must be a company that’s some sort of behavioral modification program?

So insurance coverage isn't something that we previously really pulled our members regarding, but we know they typically have to spend an above-average household income. So most do have health insurance through an employer. I think that's a fair assumption. The benefit of Sequence here is that they put the insurance process on tech rails such that it makes navigating the pre-authorization process so much easier, which helps with access. Obviously. On top of that, I think we just have enough of an opportunity to be an indispensable partner to not only members who need help navigating the insurance process, but also employers who are looking to figure out how to provide these critical medications to their population. We're hearing from our B2B population that they're interested in step therapy plans. And so that's an engagement model that we're designing and navigating through. I think more to come on that.

Yes, makes sense. Exciting stuff. I'll pass it on.

Thank you.

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

Yes. Hi. So based on your comments, it sounds like you're going to start this cross-promotional opportunity by tapping into your former members in the second half of the year. Is there any way to quantify how much of the marketing budget would be put towards that versus the Weight Watchers advertising? Because at this point, they're not integrated, right? So it's still two separate endeavors. So is there any way to quantify the spending you would put towards the Sequence side?

The CAC efficiencies are what we're going to be keeping an eye on. So the opportunity here is going to be really driven by the product and where we have leverage. So where we're seeing efficient LTV to CAC, that's where we will spend. And being able to go to market with a portfolio of options, I think is what really differentiates us and sets us apart. So we're not specifying any specific part of our budget. But what I feel confident about is that we have around $160 million still earmarked for the rest of the year to drive our top of funnel. No other companies in the space are going to be near us in terms of the ability to go out and really speak to a D2C platform such as ours.

Right. And then can you give us some rough estimation as to how long it may take to integrate the two platforms and come up with your integrated marketing message and kind of work that through? Is that like a year from now, or is there any rough time frame for that?

Yes, we're not really ready to talk too much about that at this point, Linda. I want to be more thoughtful given we just closed a couple of weeks ago. We need time to co-create with our new colleagues on how we do this well and how we do this quickly. But as I noted, one of the core objectives here for focus of our company is taking advantage of the head start that we have in the clinical phase. So you can imagine that it is absolutely a priority and top of mind for us. The nice thing is that I will add there is that we just complement very well in terms of the things that we are doing really well and the things that Sequence is doing really well. There is a really good match-up there that I think we look forward to talking and sharing more about in the next few calls.

Yes. That sounds great. And just one final question. I know that historically, there was some partnership that Weight Watchers did with offering the drug Contrave. I don't know the context of that, and I don't know why it was never too successful. Or do you have any history on that and why that wasn't a big deal with that drug offering?

Linda, I'm going to be honest. I don't have too much context there to share with you on that front. But what I can note is that I think we can all agree that these new next-generation medications are unlike anything that has come before it, and the landscape has really shifted.

Yes. Thank you. I really appreciate it.

Thank you.

Our next question comes from Michael Lasser from UBS. Please go ahead.

Hi. This is Henry Carr on behalf of Michael Lasser. Thanks a lot for taking our questions tonight. If and when Sequence helps us find an affordable GLP-1 solution, what's stopping them from taking that to their primary care provider? In other words, why stick around if a solution is found?

Thanks, Henry. The process with these chronic weight loss medications is that it takes a high support share team around it. You need to titrate your dosages along your weight loss journey, which is really different than, for instance, getting an ED medication in the script that you can get and walk away from. So there is a level of support that is needed that is different from other types of medication. The pre-authorization process, you're going to continue to need that throughout the journey as these dosages are changed and titrated. What's fascinating is that we actually saw the highest retention during the time when Mounjaro was couponed the most. People were clearly finding value in the program, not just in insurance.

Thank you. That's really helpful. And just as a follow-up, when and if these drugs come off the FDA short list and they're more accessible, does that erode the value proposition of the Sequence subscription? In other words, if these drugs become cheaper and more accessible in two to three years as generic versions come to market, how would you look to protect the Sequence’s subscriber base?

It's an interesting point that you brought up, and I want to get too into the weeds here as I'm not a scientist. But I can tell you that because these are biologics, there's not the same sort of discounting that occurs with generics. But that being said, we are in the business of the subscription business, not the prescription business. What we are offering is a model that's not just about the medications but also includes fitness, nutrition, and coaching alongside the medication to help build ongoing healthy habits, and there's talk about medications coming in pill form. So, it's still a very nascent market, and there's a lot of evolution to come.

Super helpful. Thank you so much.

Our next question comes from Lauren Schenk from Morgan Stanley. Please go ahead.

Hey. It's Nathan Feather on behalf of Lauren. Exciting to see the step-up in net adds despite the lower marketing year-over-year. I guess can you dig in a bit more on what you believe is working on the marketing side and how you can leverage that learning through the year? And then a second one, can you talk to any early trends in Sequence in the acquisition? It certainly seems to get a lot of media attention. I'm not sure if that translates to finance. Thank you.

So in terms of marketing, if I heard your question correctly, what's working well? In Q1, we spent $20 million less than in the prior year, so 18% less, and year-over-year, our Q1 LTV/CAC improved by about 14%. So we can clearly see this read-through in our performance trends. As Sima and I both referenced in the call, we see the step-up in our active space. If you go from Q4 2022 into Q1 2023 ending subscribers, we saw a step-up of 13% in our end-of-period subs versus 9% in the prior year. We achieved this on $20 million less of marketing spend. So it's reading through in terms of working. As for your second question about early trends in Sequence, you're going to have to repeat your second question, Nathan; we didn't hear it.

Can you just talk to any early trends with Sequence since the acquisition? It certainly seemed to get a lot of attention in the media, but just wondering if that translated to kind of initial sign-ups and interest.

Definitely. We're not speaking specifically to sign-ups or to Sequence in isolation at this point. But we did see a huge step-up in interest in Sequence right at the point of announcing the acquisition, and an actual step change in their subscriber volume from the point of that announcement. So yes, definitely increased interest and increased subscriber interest in activation.

Great. Thank you.

I want to quickly add that it's really less about the amount we are spending and more about how we are purchasing and valuing media while returning to a data-informed culture. We are able to combine this with key brand moments that are generating immediate response and re-establishing our place in consumers' consideration. The initial focus on the acquisition and Weight Watchers addressing the chronic issues related to overweight and obesity has been viewed positively by the market. This not only influences Sequence sign-ups but also our core business. It's encouraging to see and crucial to our ongoing efforts to promote the conversation around Weight Health. While Sequence is still a relatively new brand, it has helped elevate brand awareness. The connection with Weight Watchers, a brand that has earned consumer trust for 60 years, is enhancing credibility for the clinical pathway as well.

Our last question comes from Alex Fuhrman from Craig-Hallum. Please go ahead.

Hey, guys. Thanks very much for taking my question and congratulations on closing the Sequence acquisition. I wanted to ask about advertising and customer acquisition in the telehealth space. I think Weight Watchers, of course, has a great reputation in the category. You have a lot of competitors in the telehealth space there that are advertising GLP-1 very aggressively in a way that I imagine Weight Watchers never really would. But can you talk a little bit about how you're able to kind of get through to customers? Is it mostly about marketing the people in your kind of own ecosystem in terms of members and former members, and curious what you're seeing? I know it's early days, but in terms of customer acquisition costs on the Sequence side of the business?

Thanks, Alex. This is where 60 years of brand equity comes into play. We're talking about our LTV/CAC and the efficiencies we can drive by locking in on a brand that people know and trust. So yes, you're right. We think we can do this more efficiently. There are also synergies in our ability to retarget across our database as well as former members. Ultimately, the same thing that I said before about our core business applies to the telehealth business: the product needs to market itself. This product has incredibly high NPS, both for consumers and the clinicians because remember, both the supply and demand side here are important for a best-in-class experience. What we're seeing is that people are telling other people that Sequence is a great product, that it simplifies the insurance process, that it provides a great all-around experience. When we combine this with the behavior change program that we anticipate bringing to market, we're going to have a real differentiated offering, and I'm very bullish on what that means for our ability to drive customer acquisition.

Okay. Thank you. That's very helpful. I appreciate that.

Thanks.

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

Thanks, Al. I am confident that we are approaching an inflection point in our business, and we will return the company to a growth trajectory in 2023. As I said earlier, our key initiatives and decisive actions are shaping the future of our product experience, operating model, our financial trajectory, and the lives we positively impact. Thank you for joining us today. I'm looking forward to speaking with many of you at upcoming conferences, including the BofA Healthcare Conference and the Goldman Sachs Consumer Staples Conference, and keeping you updated on the initiatives we have underway.

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