Earnings Call Transcript - WW Q2 2022

Corey Kinger, Investor Relations

Thank you for everyone for joining us today for WW International's Second Quarter 2022 Conference Call. At about 4:00 p.m. Eastern Time today, we issued a press release reporting our second quarter 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 investor 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 Amy O'Keefe, CFO. I will now turn the call over to Sima.

Sima Sistani, CEO

Thanks Corey. Good afternoon, everyone, and thank you for joining us today. When I last spoke with you in May, I had been at Weight Watchers for only seven weeks. I shared my assessment of the business, immediate priorities, and thoughts on where we're headed. I've spent the last 90 days diagnosing performance, building out our product roadmap, and executing on some initiatives necessary to simplify the business and refocus our efforts on value drivers, namely helping people who want to lose weight to do just that. It's a scientific fact that excess weight is associated with increased health risks. Losing even modest amounts of weight significantly improves health. We know the need for weight loss solutions is higher than ever. According to the World Health Organization, obesity is preventable, and yet more than 1.9 billion adults worldwide are overweight. We have seen recent successful launches of effective obesity drugs. However, high prices focus them on a minority of cases and do not address the mass market needs. Our consumer insights tell us that people not only need to lose weight, but want to lose weight in a healthy, sustainable way. Their motivation and goal isn't about fitting into skinny jeans, it's about health. I came into Weight Watchers with a clear-eyed vision that building a digital community around a shared interest in health and weight loss is the key to member success and subscriber growth. After three more months at the company, I'm even more confident that it is the right path forward. Weight Watchers of the past was a true phenomenon, a movement even. The pride and excitement for being a member was not just for our science-backed, number one, doctor-recommended weight loss program, which it is, but rather because of the positive, empathetic community and coaching that brought the program to life. The move to digital has been successful, with 80% of the members now accessing Weight Watchers via a mobile-first experience. But not enough attention has been paid to bringing what we do best in our workshops to the digital experience. That's what our product team is focused on delivering and where I am committed to fixing. It will take time to evolve, but I anticipate many wins along the way. We are acting with urgency to simplify the business, drive throughput, and ensure accountability. In the second quarter, we executed on a number of initiatives with the goal of stabilizing current sign-up trends and returning to sign-up growth in 2023. This year will be a transition year, but one of critical actions that will lay the groundwork for the years ahead. A quick rundown of what we executed so far: We commenced a restructuring to simplify and flatten the organization in order to minimize redundant workflows and improve decision-making. These actions were primarily focused on reducing layers of executive leadership, with VP and above positions decreasing by about 30%. We have realigned the reporting structure of our international leadership teams. We are now operating with a broader regional view consolidating key functions instead of managing at the country level. We believe these structural changes will allow for more effective management of resources as we operate as one global team. We are optimizing our workshops business, driving increased attendance year-over-year while managing our cost structure and expanding gross margin. In the U.S., we closed 24 fixed locations in the quarter, bringing our footprint to approximately 406 fixed locations and 700 third-party locations. At the same time, we are investing in our coaches, who are the heart of our in-person experience. Effective May 1st, all U.S. member-facing employees received a wage increase, a move that has boosted morale and demonstrated our commitment to workshops. We completed the sunset of our Digital 360 product, starting immediately after our May earnings call when we announced our decision. I'm pleased to say the process has gone smoothly, helping us retain these members consistent with our expectations. Turning to our Consumer Products and e-commerce business. As previewed, we have begun rationalizing our SKU count in North America. At the end of Q1, we had 358 active SKUs, with 20% contributing approximately 80% of the consumer product revenues. By the end of Q2, our active SKU count was 113. We are also refocusing our efforts to grow our high-margin licensing business. We've made two very recent updates: First, we've decided that Kurbo, our coaching program for kids and families, acquired in 2018, no longer fits into our go-forward plan. Therefore, we will sunset the program effective August 19. This decision was not made lightly. The thesis for the acquisition was that Weight Watchers could help Kurbo scale, but the synergies in reality were not there. Kids and families have unique needs that I don't believe we are best suited to provide. Second, we evaluated the effectiveness of our in-app rewards program and have decided to phase out WellnessWins. Our team gained a lot of ground in the quarter because we are committed to instilling a company culture of action, data-informed decision-making, and evergreen innovation. We're leveraging our data to identify and encourage the behaviors that correlate with member success. For example, we identified that getting a user to a three-person video chat in their first 24 hours was critical to retention. At Weight Watchers, we are honing in on identifying our 'aha moments' that go deeper than sign-ups for months of retention. By driving the behaviors and connections that lead to member success, it will help us create a network effect that delivers efficient acquisition, improved engagement, and longer retention. It’s now clear that our 2022 program innovation, PersonalPoints, could have and should have performed better, negatively impacting our sign-up performance. We have been digging deeper to diagnose why PersonalPoints did not resonate with consumers and lagged behind our recent innovations. While elements of PersonalPoints move the science forward, such as delivering a program for members living with diabetes, the challenge is that we added complexity to the experience when consumers were asking for simplicity. We launched PersonalPoints saying that no two people are alike, and thus, no two plans are alike. However, I believe Weight Watchers' superpower has always been its ability to unite people into a community, and our data supports this view. Our members long for simplicity and connection, like easily finding other members like them, sharing recommendations and recipes, and feeling part of a supportive group. The weight loss journey can be lonely, and the easier we make it for people to comprehend and connect, the better off they will be. We are currently evaluating and testing ways to update our program, combining validated elements with data and behavior science to deliver an improved, simple, effective, and engaging program experience. We remain focused on creating a new app experience. Our tech and product teams are executing on the roadmap with a pipeline around our three pillars of coaching, accountability, and community. Since I joined, we've already shipped feature improvements like predictive food tracking, optimized onboarding, weight tracker improvements, and upcoming nutrition label scanning improvements. While individually, these updates may seem small, they represent how we're modernizing the app and increasing our development velocity, delivering quick wins. A single UI update in the purchase funnel led to double-digit growth in our workshop take rate. While executing on the product roadmap, we are also taking actions to stabilize sign-up trends in the latter half of the year, including investment in a fall marketing campaign, especially as we see increased efficiencies in social media and search. So I am pleased to announce that Amanda Tolleson will join Weight Watchers as our Chief Marketing Officer on August 15th. Amanda is analytical, product-minded, and has nearly 20 years of experience with growth, omnichannel, and subscription businesses. Looking ahead, there are several initiatives essential for Weight Watchers as part of our competitive advantage. One is our workshops; the in-person member experience is a critical differentiator. In June, we launched an omnichannel recruitment campaign that helped drive the highest week of workshop sign-ups since January, resulting in improved trends in June versus May. Community activations, such as Motivational Mondays and Walking Weeks, tested well, delivering high satisfaction scores among participating members. We will continue iterating to identify what drives the best engagement and recruitment potential for workshops. Another focus area, as discussed in our Q1 call, is serving members living with diabetes. The percentage of our U.S. members self-reported as living with diabetes is around half of what we estimate, indicating significant under-penetration in our highest need segment. The first step to serving this population involved adding the capability to create a food plan specifically for their needs, which we delivered through our latest program. The efficacy of our program was validated by positive results from our clinical trial, demonstrating significant effects like reduction in HbA1c, average body weight loss, and improvements in overall well-being. Furthermore, we are complementing our diabetes program with content and product features tailored for people living with diabetes. Last month, we added the ability to track blood glucose in the Weight Watchers app. Additionally, we have entered a strategic partnership with Abbott to create a seamless experience for our members. This integrated product experience is expected to be available to U.S. members in 2023. We are partnering with the world's number one CGM with our number one doctor-recommended weight loss program to help people living with diabetes reach their weight and health goals while enjoying their foods and consulting healthcare providers. I will now turn the call over to Amy to discuss Q2 performance and our outlook.

Amy O'Keefe, CFO

Thanks, Sima. The actions we have taken to right-size our cost structure enabled us to extend our adjusted operating margin year-over-year despite revenue pressure in the second quarter. Adjusted operating income was in line with our expectations, while top line demand trends were softer than we expected, particularly for digital subscriptions and e-commerce. Combined with an FX headwind, revenue was down 13% in Q2 versus the prior year. For Q2 2022, we finished with 4.3 million subscribers, down 12% from the prior year and about 100,000 below our expectations, primarily due to worsening sign-up trends in our digital business during the quarter. The sunset of D360 was largely completed in the quarter, and the impact of conversion was consistent with our expectations. The majority of these members transitioned to workshops. Note, these numbers aligned to D360 pricing, impacting year-over-year comparisons, particularly for workshops. At Q2 end, 127,000 of D360 former subscribers were included in the end-of-period workshop subscribers count of 828,000. Excluding the impact of these transitioned D360 members, end-of-period workshop subscribers would have been down 6%, and end-of-period digital subscribers would have been down 13% year-over-year. Revenue of $270 million was down 13%, including approximately 350 basis points of FX headwind. This decline is greater than anticipated due to further pressure on digital sign-ups and e-commerce, with e-commerce sales down 25% in the quarter. We are actively rationalizing our SKU counts, leading to a modest revenue impact. However, this resulted in improved gross margin as we exited unprofitable SKUs. Adjusted gross margin of 61.9% is up approximately 60 basis points from the prior year, primarily due to operating leverage from optimizing our studio footprint and a reduction in labor costs. Marketing spend of $52 million was down 9% year-over-year and lower than planned. As Sima mentioned earlier, we plan to increase our marketing budget in the fall campaign to stabilize sign-up trends in the back half, ahead of the 2023 winter season. Adjusted G&A of $57 million was down $12 million or 18% compared to the prior year, boosted by some FX benefits. We started realizing savings from Q2 restructuring actions, incurring a restructuring charge of around $19 million, with an additional $8 million expected in the back half of the year, increasing our full-year estimate to $27 million. Now, we expect annual savings to exceed $35 million, up from our previous estimate of $30 million. Shifting to our outlook for 2022, we expect continued revenue pressure in the latter half due to lower end-of-period subscribers at the end of Q2 and a steeper sequential decline of subscribers from Q1 to Q4 than typically seen. We're managing the business with the assumption that demand trends will persist in the back half while our product and marketing teams develop plans to address these trends. As we start with 4.3 million subscribers at the end of Q2, about 100,000 lower than forecasted, we expect to end the year with 3.5 million to 3.7 million subscribers. Revenue for the full year is now expected to decline in the low to mid-double digits. At the midpoint of our expected ending subscriber range for 2022, the lower 2023 opening subscriber base translates into a revenue headwind of approximately $70 million in 2023, before considering any lifts from member sign-up growth. In summary, we performed within earnings expectations for the quarter despite the challenging macro landscape. For the rest of the year, we are focused on stabilizing subscriber trends while managing costs appropriately and ensuring a scalable cost structure is in place for operating margin expansion.

Sima Sistani, CEO

Thanks, Amy. 2022 is a year of transition for Weight Watchers. I am confident we are making all the right decisions to return the company to profitable growth. We now have a narrowed set of priorities in a streamlined organization, a lower cost structure, and data-informed rigor for faster decision-making and greater ownership. Weight Watchers has been the gold standard in effectiveness through its experience at the intersection of science and community. We are proud of our heritage and our mission to help people manage their weight by providing a sustainable, science-backed program grounded in nearly 60 years of experience and 130 peer-reviewed studies. We have the science and coaching expertise. We just need to bring our DNA into our digital experience so members feel connected, inspired, and supported. When we do that, I am confident the business will return to growth. Thank you for joining us today. We are now happy to take your questions.

Corey Kinger, Investor Relations

Our first question today will come from Spencer Hanus with Wolfe Research. Please go ahead.

Spencer Hanus, Analyst

Great. Thank you for the question. My first one just on digital subscriber trends. Have you seen an improvement in trend in the current quarter? You talked about investing in marketing in the back half to stabilize subscriber trends. Why not deploy those dollars in the 2023 diet season when you have a stronger track record of generating strong returns on that spend?

Sima Sistani, CEO

Hey Spencer, thanks for the question. We’ve spent a lot of time diagnosing subscriber trends. The cultural landscape is difficult post-COVID, as people are shifting behaviors. It's our responsibility to ensure that we are relevant in a changing dynamic. The need for weight loss is higher than ever before, and our penetration is relatively small. Weight Watchers is proven to be two times more effective for weight loss than doing it yourself, and we've not emphasized this enough as we shifted from a clear weight loss message. We believe a couple of factors contributed to our performance. We were down $15 million in marketing in the first half, with $5 million in the second quarter as we pulled back on marketing in Europe due to the macro environment. That’s why we're redeploying that spend to the second half. PersonalPoints could have performed better both from a program and a marketing perspective. We know NPS and engagement were lower, and Q2 recruitment relates back to word of mouth from Q1. Lastly, simplifying our messaging didn't break through to improve the trajectory of sign-ups. The cultural landscape has shifted, and we need to make the necessary adjustments to turn the tide. We're confident we are on this path to growth by focusing on product simplicity, critical product pillars, and delivering a marketing message that resonates. We're now focused on the fall to build a narrative we can continue into winter, and I see data on A/B tests that already point in the right direction.

Spencer Hanus, Analyst

That's helpful. With the decelerating subscriber trends, do you think there's an opportunity to further pull costs out of the business, whether it's on operating costs or on advertising and optimizing that spend?

Amy O'Keefe, CFO

Hey Spencer, it's Amy. I think we got ahead of that cost curve, and I've been pretty pleased. We mentioned on the call that we increased our estimate for the restructuring charge to $27 million. We took $19 million in Q2. We've updated our estimate of annualized savings, now projecting over $35 million. We got ahead of the restructuring actions as we identified cost synergies.

Spencer Hanus, Analyst

Okay. Fair enough. Thank you.

Corey Kinger, Investor Relations

And our next question will come from Stephanie Wissink with Jefferies. Please go ahead.

Unidentified Analyst, Analyst

Hey everyone. It's Chris for Steph. You talked about a focus on stabilizing subscribers in the back half of the year, but then, you followed that with expectations for steeper declines in the back half more so than is typical. Could you help reconcile that commentary? Secondly, what kind of approach do you take to stabilizing subscribers specifically? We noticed some deeper discounts on some longer sign-ups. Is that part of this strategy, and should we expect lower revenue per subscriber in the back half of the year?

Amy O'Keefe, CFO

Hey Chris, it's Amy. On the sequential decline, previously, we guided that end-of-period subscribers would decline by about 16%. This was higher than historical trends, which averaged about 12%. However, in Q2, we saw even worse performance on digital sign-ups than expected, as we aren't filling the bucket of sign-ups as fast. It's really a sign-up trend issue, not a cancellation issue. This is why we're focused on stabilizing trends to get back to sign-up growth in 2023.

Sima Sistani, CEO

On the discounting and promotional pricing, nothing has changed. We are always testing and learning from different pricing and promotion strategies.

Unidentified Analyst, Analyst

Has the discounted costs resulted in any learnings thus far in terms of pricing for new subscribers?

Amy O'Keefe, CFO

From a discounting perspective, our behavior hasn't changed very much. On a year-over-year basis in digital, we are actually up 2%. We've been implementing base price increases to offset some of the discounting impact. Net-net, we are a little ahead. We continue to see urgency and discounting in the marketplace effective for sign-ups without losing rate, while expanding margin quarter by quarter.

Sima Sistani, CEO

The average discount price for one-to-six months is roughly the same as our competitors. Ultimately, we need to compete on value rather than price, and that will take time as we deliver our new product roadmap.

Unidentified Analyst, Analyst

You talked about a weaker spring campaign and moving into a fall campaign. Should we expect changes in your marketing approach compared to what's been done historically?

Sima Sistani, CEO

We’ve realized we did not benefit from moving away from a clear weight loss message. In the fall, we will lead with this unapologetically. The narrative we build in the fall is critical for the winter. We will also be testing and learning along the way. I’m excited because we’re rooted in science, and we fulfill the necessary criteria for effective weight loss interventions. It's time to emphasize our strengths.

Corey Kinger, Investor Relations

Our next question will come from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Alex Fuhrman, Analyst

I wanted to ask about the membership shortfall that you experienced in Q2. If I'm understanding correctly, that was mostly from reducing new members entering the program. That seems like a big shortfall of 100,000 just in May and June, particularly since those months typically see lower recruiting. Have you seen any changes to existing member retention? Any drop-off in membership that wouldn't be expected in a normal membership curve?

Amy O'Keefe, CFO

Yes, most of the issues are primarily from digital. We had the transition of subscribers from D360 to Workshops during the quarter. These former D360 subscribers contributed to the total workshop subscriber number of 828,000 but also affected the results for digital. We saw digital performance decline more than expected. We didn’t factor in all the moving pieces, like pulling back marketing spending in Europe due to macro headwinds, which led to 100,000 fewer sign-ups than projected.

Sima Sistani, CEO

We did mention PersonalPoints performed poorly for us. Engagement metrics revealed that although it was scientifically effective, it was too complicated for our consumers. Low activation affected our Q2 enrollment. However, we are working on addressing this and improving engagement.

Corey Kinger, Investor Relations

And our next question will come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda Bolton-Weiser, Analyst

Sima, you mentioned the importance of in-person workshop experiences, humbly indicating those can't be easily replicated digitally. Today, it sounds like you're shifting that idea, suggesting we need to bring the workshop experiences to digital. Can you clarify your thinking? Also, you hinted at a one product, one price model, providing all subscribers access to a workshop-type experience. What are your thoughts on that?

Sima Sistani, CEO

Sure. When discussing in-person experiences, I am referencing the community aspect, including coaches facilitating peer-to-peer journeys. Members come for weight loss, but they stay for the belonging and mutual support. The digital realm can feel isolating, especially post-COVID, where members often face emotional challenges. I've spent years focusing on social experiences that emphasize empathy online. We need to bring that magic into digital—that's essential. Regarding simplifying offerings, we are testing different pricing strategies. There are no updates to report yet.

Linda Bolton-Weiser, Analyst

When you referred to a strong program backlog, did you mean new program innovations? There has been a pattern of major launches every other year. Do you plan to maintain that cadence moving forward?

Sima Sistani, CEO

No, I was talking about product backlog, meaning features we will ship to modernize the app experience. While we previously had a gap between major launches, our focus will now be on an evergreen approach. We'll address program issues without waiting two years and will continue to improve.

Corey Kinger, Investor Relations

And our next question will come from Lauren Schenk with Morgan Stanley. Please go ahead.

Nathan Feather, Analyst

You noted pulling back on marketing and gave a weaker macro backdrop. How would you perceive subscriber trajectories if U.S. consumers behaved like EU consumers? Also, about Kurbo, can you explain what didn’t work and the financial impact for this year?

Amy O'Keefe, CFO

Performance in both North America and Europe in the quarter was quite similar. North America was down 11%, while Europe was down 12%. In Europe, we pulled back year-over-year in marketing spend due to macro headwinds. While we still ended up in a similar spot, the pressure in the U.S. was greater. In Q2, we invested about $1 million more in marketing year-over-year in North America. As for Kurbo, that's a small part of our business. While initially, we believed we could help it scale, the reality was different. Kids and families have unique needs, and we’re not best suited to provide a solution.

Sima Sistani, CEO

Correct. We want to reiterate our commitment to growing our environment—this topic is key for me personally. We're committed to driving diabetes care as an important aspect of what we do.

Corey Kinger, Investor Relations

And the next question will come from Sean Dunlop with Morningstar. Please go ahead.

Sean Dunlop, Analyst

Hi, thanks for taking the question. Regarding long-term profitability, can you help us estimate a baseline for G&A? Should we be looking at last year's $269 million, marking up for 3% inflation, considering your $20 million savings and the incremental $15 million for 2023? Is that how we should think about the new base?

Amy O'Keefe, CFO

That's forward-looking. In Q2, our G&A ran at $57 million. There’s some inflation to consider, plus the restructuring benefit we expect to see. G&A should decline year-over-year in 2023 according to today's guidance. Over time, we aim to keep G&A under 20% as we exit the year, with a scalable cost structure positioned for growth again.

Sima Sistani, CEO

Ultimately, the need for weight loss is higher than ever. We’re executing the right strategies—improving program simplicity, focusing on core product pillars and delivering indisputable marketing messages. Our data reflects progress, and I’m confident we’re on the right path to growth.

Corey Kinger, Investor Relations

And our next question will come from Michael Lasser with UBS. Please go ahead.

Michael Lasser, Analyst

Do you believe anything needs to change externally, either from competition or the economy for you to reverse subscriber growth trends?

Sima Sistani, CEO

No, I don't. It's our responsibility to break through whatever environment we're in. I'd say the cultural landscape shifted, and we haven't kept up. We intend to change this paradigm, and we’re making the right moves to change the narrative. Our history should empower us to lead with pride for weight loss solutions.

Michael Lasser, Analyst

Do you think there's a need to reemphasize the Weight Watchers brand name to attract subscribers back to historical levels since the WW moniker may not resonate?

Sima Sistani, CEO

We are embracing the Weight Watchers name. It's crucial to our heritage. WW is our corporate name, but you'll see Weight Watchers featured more prominently.

Corey Kinger, Investor Relations

This concludes our Q&A session. I'll turn the conference back to Sima Sistani for closing remarks.

Sima Sistani, CEO

The need for weight loss is higher than ever. We have to remind people that health is essential, not discretionary. Since 1963, Weight Watchers has been rooted in science. We fulfill all criteria deemed necessary for effective behavioral weight-loss interventions. I've been part of this program since 2014, with a clear vision of where we need to go to catalyze our growth. We're focused on enhancing program simplicity and delivering an undeniable message. I am confident we're making the right moves to grow the business. Thank you all for joining us today, and we look forward to keeping you updated throughout the year.

Corey Kinger, Investor Relations

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.