WW International, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Thank you for your patience. Good day, and welcome to the WW International Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Corey Kinger, Vice President, Investor Relations. Please go ahead.

[Corey Kinger:]

Thank you to everyone for joining us today for WW International's second quarter 2020 conference call. At about 4 o’clock p.m. Eastern Time today, we issued a press release reporting our second quarter 2020 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 & 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 Mindy Grossman, President and CEO; and Nick Hotchkin, CFO, Operating Officer, North America and President, Emerging Markets. I will now turn the call over to Mindy.

[Mindy Grossman:]

Thanks, Corey. Good afternoon, everyone. Thank you for joining our call today. I hope that all of you, along with your family, your friends are safe and healthy. We began our strategic shift to a purpose-driven and deeply impactful technology experience company long before March of 2020. However, there is no doubt that our digital transformation has accelerated with the onset of COVID-19. Our digital-first strategy is both obvious and evident in our strong second quarter results. As we indicated in our mid-June update, digital member trends have had strong momentum and with their favorable margins are the key drivers of our future growth and profitability. Although 2020 has certainly been a year of unique and unprecedented challenges for us all, it has also served to reinforce our belief in our strategy, the resilience of our business model, and the relevance of our global brand as well as the significant opportunity we have for WW to positively impact people's lives. The recent trends in our business demonstrate that consumers are looking for a science-based, affordable and proven wellness and weight loss program that is both digitally-enabled and provides a real human connection. Our second quarter results underscore the relevance and importance of our value proposition in today's environment as the trusted leader in weight loss and wellness. I am proud and thankful for our talented, dedicated and passionate employees, who put WW members first in everything they do and who have been instrumental both in navigating the here and now and also positioning WW for the years ahead. We ended Q2 with 5 million subscribers, up 9% year-over-year and a record level for the end of Q2 and practically unchanged from our typical seasonal peak at the end of Q1. This growth is due to strong marketing execution in terms of delivering our message and value proposition to audiences in a way that is both clear and relevant to their needs and across all channels, digital, social, PR and, of course, TV. Due to the resonance of our marketing, we extended our U.S. spring TV campaign into the summer, running both through June and July with good results. Our brand message and value proposition were then further amplified by the 4-week virtual experience with Oprah, which resonated with audiences around the world. Member recruitment trends for digital gained momentum globally over the course of the quarter, bringing digital subscribers to 3.9 million, up an impressive 23% year-over-year. Given the dynamic growth of our digital subscribers in Q2, now about 80% of our members are digital-only and about 20% are studio plus digital. With this shift, we are also seeing a demographic change with 51% of members joining in Q2 being below the age of 45. In the second quarter, on a constant currency basis, digital revenues were up 50%. This strength was offset by the declines in studio fees and product sales due to studio closures as a result of COVID. In total, revenues were $334 million, down 9% on constant currency. Notably, adjusted gross margin was 60% in Q2, up nearly 200 basis points year-over-year due to the benefit of an increased mix of digital subscribers combined with effective cost management as we reduce our studio footprint. This the highest adjusted gross margin we have seen in the past eight years. Adjusted operating income margin was 28%, flat year-over-year. This strong operating and financial performance demonstrates the resilience of our business model and provides a solid foundation as we continue to manage through the current environment and position WW for the long term. On our last earnings call, I highlighted many of the digital features and enhancements we have launched to better serve members and deliver a robust experience. I'm happy to say that these new innovations have resulted in an increase in overall app engagement trends, which as you know, are a key driver of retention and ultimately member success. For example, new features, such as our water tracker have been enthusiastically received with over 2 million WW members tracking hydration, and we recently enhanced our sleep tracker to sync with connected devices making it easier for members to monitor their progress and improve their sleep habits. In addition, the integration of FitOn, a video fitness platform, not only bolsters our portfolio fitness content, but provides members with workouts they could do at home, all while seamlessly syncing home, all while seamlessly syncing to FitPoints. Since its recent launch, our members completed over 0.5 million FitOn workouts and spent over 7.5 million minutes working out. For added gamification, we recently launched a FitOn fans connect challenge, a 3-week partnership with FitOn trainers that encourage members to try different type of FitOn workouts. This grew the FitOn fans group engagement exponentially. We will continue rolling FitOn out globally over the balance of the year. As we accelerate our digital transformation, we are increasing our focus on producing original created content for our members that incorporates our unique expertise in behavior change science and community building to drive engagement, accountability and results. Our four-week Oprah's Your Life in Focus

[Nick Hotchkin:]

Thanks, Mindy. I look forward to continuing to drive our strategy and partnership with you and our global teams in my new role as Chief Operating Officer, and I look forward to welcoming Amy to WW as our new Chief Financial Officer. The past two years at WW have been the most rewarding of my career. To see how far the company has come has been incredible, and I believe that future opportunities are even greater. As discussed on our last earnings call and provided in our business update announcement on June 15, starting in the middle of April, digital recruitment trends returned to growth on a weekly basis compared to the prior year period. This weekly growth trend accelerated over the course of the quarter and in June surpassed the weekly recruitment growth rates we saw in the first quarter, prior to the escalation of COVID-19 in mid-March. This resumed strength in digital sign-ups has offset the continued decline in studio due to COVID-19 studio closures. And in Q2, roughly 90% of member sign-ups chose our digital offering. Overall, member retention remains above 10 months. These solid recruitment and retention trends drove our Q2 end subscriber level to an all-time high of five million. Q2 revenue was $334 million, down 9% year-over-year on a constant currency basis due to the further mix shift towards higher margin, lower-priced digital subscriptions. The increased mix of digital subscriptions and the speed of our actions to rightsize the cost structure for the current environment drove an exceptionally strong adjusted gross margin of 60%, which is adjusted to exclude restructuring charges. As we move to a more digitally-enabled business model, over time, our high-margin model will be increasingly evident and is a key attribute of our operating and financial flexibility. In fact, of our $195 million in gross profit dollars in Q2, 75% were generated by digital subscriptions. Adjusted operating income margin was strong at 28%. Our GAAP EPS was $0.20. In addition to our higher tax rate in the quarter, a Q2 2020 EPS was negatively impacted by a total of $0.47 in onetime charges, including a $0.12 per share impact from our organizational restructuring, and a $0.35 per share impact from stock option expense associated with the extension of our partnership with Oprah Winfrey through 2025. Excluding these onetime items, EPS would have been $0.67 compared to $0.78 in the prior year second quarter. As discussed on our last call, our operating and financial objectives for 2020 are

[Mindy Grossman:]

Thanks, Nick. Before I discuss our priorities and upcoming milestones for the remainder of 2020, I would first want to address Black Lives Matter and the critical need for diversity and inclusion at WW and in our society. We have made it a priority to cultivate a wellness community of diversity and inclusion. And while we are proud of the progress we have made over the past few years with our Board, our leadership team and our member base, we are greatly accelerating our efforts and are taking further actions that are both measurable and sustainable. To highlight just a few of the actions we have taken. We have donated $1 million and are matching employee donations to several non-profit organizations dedicated to positively influencing black lives. We will be spotlighting black-owned businesses in the WW Shop. We have appointed a Head of Inclusive Leadership. We have pledged to the CEO Action for Diversity & Inclusion initiative. We are creating new career and professional development programs for our black employees, as well as creating company-wide educational programs aimed at eradicating bias and racism, and we are requiring best practices in hiring to ensure diversity at all points along with WW ecosystem. When we released our Impact Manifesto in early 2018, we made our purpose very clear. We inspire healthy habits for real life, for people, families, communities, the world, for everyone. To be the brand that truly democratizes wellness for all, so it is up to all of us as individuals, as an organization and as fellow humans to advocate for our employees, our members and our communities. And this is not an isolated objective, but one that will be ingrained across every priority and initiative at WW. We are focused on technology-driven innovation, data-driven personalization at every step of the member journey, powering community and creating meaningful experiences at every touch point. That aligns to each of our 2020 priorities. First, we will continue to build our wellness ecosystem, deepening our app experience and adding further gamification. We’re focused on our 2021 winter launch and delivering a new and compelling programmatic innovation as we anniversary myWW. Our plans are exciting and will further our efforts around personalization, motivation and weight loss success. We intend to be recognized as the world’s trusted partner in total wellness and behavior change, spanning nutrition, activity, mindset, motivation, hydration and sleep. Offering leading digital features and tools to help our members improve their overall health and wellness. I’ve spoken before of our next two priorities

[Operator:]

[Operator Instructions] Our first question will come from Steph Wissink with Jefferies. Please go ahead.

[Steph Wissink:]

Thank you. Good afternoon, everyone. Maybe a two-part question for you. One is really just to clarify. You talked about a premium experience targeting millennials in the back half of the year. Is that similar to or aligned with the virtual coaching model? Or is that something separate that's more targeted towards that specific demographic?

[Mindy Grossman:]

No. That is separate. So it is a whole new vertical of membership that we will be launching. Now we are going to continue some virtual workshops for our workshop members, but this is a completely different vertical. We are bringing in a new cohort of coaches. It's very content-driven and community-driven. And we're very excited. We'll be in between from a pricing perspective, our digital and our workshop membership, but I really think it is going to accomplish two things. It will attract new audience, new diverse audience, but it's also an opportunity to up sell from digital for those people who want more accountability, more engagement and community.

[Steph Wissink:]

That’s great. And then just one follow-up for you, Nick. This is more just a numeric question, but you mentioned that the July business has continued to demonstrate some nice acceleration. So it almost looks like your business is defying some of the historic seasonal patterns. Can you talk a little bit about, as you think through the back half of the year, how we should think about the normal seasonality of that waterfall effect versus what you're able to actually offset, and maybe gain some ground relative to that historic trend?

[Nick Hotchkin:]

Okay. I've been pleased with the rebound, and we're growing nicely in July also, which is important as we approach our fall campaign. Look, having Q2 end of subscribers be at 5 million, an all-time high for Q2 end, effectively equaling the Q1 number also 5 million, was a very important achievement for us. And so to your point on seasonality. Look, last year's seasonality was pretty exceptional historically, a peak to trough decline during the year of 8% from Q1 to year-end. But certainly, our performance in Q2, and the speed of the digital growth of subscribers up 23%, it was a very encouraging quarter.

[Steph Wissink:]

Okay. Thank you.

[Operator:]

Our next question will come from Lauren Cassel with Morgan. Please go ahead.

[Lauren Cassel:]

Great. Thanks so much. My first question was just on the real estate. The color you gave was helpful. But I guess, how should we think about what the right number of branded studio locations is long term? And then ultimately, what sort of savings do you think we could see there? I think in 2019, you spent a little over $50 million on rent. Is it $20 million or $30 million there sort of ballpark, what could we see in 2021? And then my second question is just around marketing spend in the back half of the year, you noted a return to TV in all markets in the fall. I guess how should we think about marketing spend in the third and fourth quarters?

[Nick Hotchkin:]

Yes. Look, in terms of the real estate footprint, you see that it's very flexible, so we can nimbly adapt to any environment. You see us running the play of concentrating our business in those WW branded studios where we can control the health and safety environment. So that's why we've concentrated on those 650 WW branded studios today, and we'll only open those third-party studio ads selectively. In terms of the savings from that, we're well on track to deliver $100 million cost savings plan versus our plans coming into the year. I've said before that about 1/3 of that is cost of sales, which would cover rent [indiscernible] marketing and about 1/3 G&A. And so the rent savings are incorporated with those cost of sales savings, which frankly should be the more permanent part of the $100 million cost savings plan. In terms of marketing, you saw we underspent marketing this year in terms of dollars spent versus last year. Frankly, I think we punched over our weight in terms of the efficacy and the wonderful marketing efforts that the team put forward. We deliberately slowed down marketing in Q2 because of the uncertainty of COVID. Going forward, with the momentum we have, you can expect us to continue to spend at levels that the momentum of the business deserves.

[Lauren Cassel:]

Okay. And just quick one clarification. Is there an opportunity to see more rent savings in 2021? Or do you think the vast majority of that is going to happen in 2020?

[Nick Hotchkin:]

We will nimbly manage the business. And you've heard me say we've got a flexible real estate footprint with 189 lease renewals in 2021. So but we're committed to – with this smaller real estate footprint, very committed to creating a fantastic face-to-face studio and retail experience. I think we have a great opportunity to do that. In addition to, as Mindy said, for those areas that aren't served by a face-to-face studio continuing to offer virtual workshops to our members.

[Lauren Cassel:]

Okay. Thank you so much.

[Operator:]

Our next question will come from Vikram Kesavabhotla with Guggenheim Securities. Please go ahead.

[Vikram Kesavabhotla:]

Yes, thank you for taking the question. I was wondering if you can give us some color on the characteristics of the subscribers that have joined in recent months, particularly around the age and the mix of first-time users versus returning? And if there's anything to call out with respect to just the overall behavior and engagement levels of those cohorts relative to what you typically see on the platform?

[Mindy Grossman:]

Yes. What we have seen with this acceleration of our digital membership is definitely diversifying our audience. So as I mentioned, about 51% of the members joining are under 45, and there's a pretty broad swath there. So that, we are definitely seeing. We've also been very focused in our marketing around diversity, influencers, et cetera. So that's also helped in that regard. Now what we are seeing is there isn't dramatic differential between what people are doing based on the cohort. But what we're excited about is we are seeing cohort. But what we're excited about is we are seeing greater engagement year-on-year overall across all of our verticals. And that's really because of the across all of our verticals. And that's really because of the work that we've done personalization, across nutrition, fitness. FitOn is a personalized video fitness for you and it now syncs up with all our FitPoints, and what we are seeing across and we are also seeing – we launched Connect Groups a while ago. So what we are seeing is people are finding their own cohorts that they want to interface with. So whether that's young mom, college students, black women, men, et cetera, we have a lot more opportunity for integrated. And that is why our retention is where it is.

[Vikram Kesavabhotla:]

Okay, great. And then maybe just as a follow-up to that. Can you talk about how the pricing strategy has evolved here throughout the first half of the year? And when you think about the launches that you have later this year and what you're seeing in the market right now, just what your approach towards promotional activity is in the second half of 2020? Any color there would be great. Thank you.

[Nick Hotchkin:]

Yes. Look, pricing and promotions strategy has been pretty constant year-over-year. When you look in detail at our numbers, you'll see a few things, pretty stable price realization on the digital side. For example, in February, we took $1 price for – on new member sign-ups, and that's a factor there. And look, on the studio side, in addition to the impact of offering longer-term plans, which makes so much economic sense with us. Because it makes sense for us to give a discount to get the longer retention. As you can imagine, in the COVID environment, we've been implementing various member saves strategies. But overall, our promotion and pricing strategy is intact and working well for us. The thing I like best in the quarter was the great results that we're getting from the two-week free trial in the Apple store, and it really shows how the team is innovating and trying new things. A great way to attract new members to the brand and the conversion from free trial to paid has been impressive.

[Vikram Kesavabhotla:]

Great. Thank you.

[Operator:]

Our next question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead.

[Edward Yruma:]

Hey, good evening. And thanks for taking my questions. I guess, first, what has retention been like on those customers that had entered through the studio product and maybe haven't been able to engage in that physical experience? Second, I guess, on the studio side, when you have reopened, I guess, in some markets, any commentary and behavior? And then just one other quick one. When someone does a digital through App Store, I'm assuming that there's a significant take from Apple, does that change the economics of the product? Thank you.

[Nick Hotchkin:]

Look, on the retention side, we're thrilled that retention is over 10 months. And as Mindy said, that's driven by the engagement strategy. On the studio side, it's helped immensely that we introduced these virtual workshops and our members find them convenient and are using them and joining them. In terms of the App Store, yes, for those digital subscriptions, where we pay Apple a commission on those. Our pricing strategy in the App Store comprehends that. So the incremental margins on those sign-ups are terrific for us. I'm sorry; I might have missed the middle part of the question.

[Edward Yruma:]

No. Actually, you – oh, on the reopening studios, when you have seen markets where you've been able to reopen any significant commentary on performance there?

[Mindy Grossman:]

Yes. It's been really interesting because we really were not 100% sure what the reaction was going to be once we were opening. We put into place a scheduling tool, because, obviously, we can't have as many people there at one-time. So we've had to had more meetings with less people. And so people reserve and sign-up and just in the first couple of days, we were sold out. So people really – the ones that really feel that their community and their coach are important, have come back and have engaged just in smaller groups. But to Nick's point, we've been very focused on the studios that we are branded, own and operated. And albeit, we will have a smaller footprint, that still covers a significant percentage of our members. And our real focus is how do we make them more and more a destination.

[Edward Yruma:]

Great. Thanks so much, guys.

[Operator:]

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

[Brian Nagel:]

Hi. Good evening.

[Mindy Grossman:]

Hi.

[Brian Nagel:]

Thanks for taking my question. So the first question I have, and maybe it's a bit of a follow-up to a couple of the prior questions. But as we look at the sequential trend in subscribing and really remarkable how well Q2 has held up relative to Q1, and we're not seeing that normal seasonal pace. As you look at the data, what gives you – how do you – what gives you the confidence that this is much more reflection of the underlying efforts of WW versus some type of work right now in the COVID landscape?

[Mindy Grossman:]

It's definitely the work that we've done and the power of our trusted brand, why people are really coming to us at this time. If you think of all of the innovations and what we have done over the course of a number of years in really building out this entire ecosystem of support. That's what's made a difference. It's not – we've been able now certainly to accelerate it. And we just launched hydration. We just launched sleep. I mentioned before, we are seeing higher engagement year-on-year. We're seeing and we're monitoring when people join as new members, what is their motivation. And we are unequivocally pleased, because we're trusted, we're about sustainable, livable behavior change, and they know that they will also have the support of community. And that's been pretty constant, and that's why it's been accelerating.

[Brian Nagel:]

Okay. Thanks, Mindy. And then a follow-up, Nick. Well, Nick, first off congratulations on the role. But I do want to ask you, I guess, maybe one final financial question before you hand the reins over. Just as we talk about the – a lot of talk about the ongoing digital transformation of WW, again, clearly a lot of success there. But how should we think about the investments – the ongoing investments needed to continue or maybe potentially complete this transformation?

[Nick Hotchkin:]

Well, look, we've been investing in the digital experience continually. And that's why we've got such a market-leading, award-winning app and digital experience now. So the acceleration of that digital-first strategy is very evident in our Q2 results, but it's not new. And it's that long-term approach that's enabling us now to rapidly become a technology experience company. But going forward, I don't see any change to the key tenets of the business model in terms of a low CapEx, highly cash-generative business model. I think the biggest change to the business model as mix shifts towards a richer mix of digital subscribers, and you see that some in our Q2 results with that 60% gross margin, you'll see us be versus where we were with a higher mix of studio. You'll see us be a lower revenue, but a higher-margin company, and we've definitely got margin expansion opportunities with this strong digital mix and the higher revenue digital product that Mindy has talked about that we're launching this winter.

[Brian Nagel:]

Thank you very much.

[Operator:]

Our final question today will come from Alex Fuhrman with Craig-Hallum. Please go ahead.

[Mindy Grossman:]

Hi, Alex.

[Alex Fuhrman:]

Hi. Thanks for taking my question. Nice to speaker with you all. I wanted to ask Mindy about something that you said in the prepared remarks; I think you said about 51% of the new members that you've signed up over the past few months have been below the age of 45. Can you talk a little bit about how that compares to what you've normally seen over the years. Is that tend to be a number that has fluctuated over the years? Or has that generally been pretty constant? And can you talk a little bit about how much of that might be driven by just the mix shift with digital becoming a bigger part of the business this year? Or have you also seen a change in your incoming customer rate within the digital product?

[Mindy Grossman:]

So I think it's a combination of things. It definitely has accelerated as we have moved towards a more digital experience. And the rate of sign-ups in this quarter on the digital side, being so strong, but we really saw that shift there. That's number one. Number two, I think part of it is we've had a strategy to go after new cohorts and modernize the brand. So I think that definitely is a factor as well. And the biggest opportunity for us is always word of mouth. We're community-based business, in addition to having great marketing; I also think that the digital marketing efforts and social marketing efforts over the past year has been fantastic. So I think it's a combination of all of those things.

[Alex Fuhrman:]

Great. That’s really helpful. Thank you very much.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mindy Grossman, CEO, for any closing remarks.

[Mindy Grossman:]

Well, thank you, everyone. And while 2020 certainly won't be the year any of us had envisioned just five months ago, I'd say the way our global teams quickly adapted to this changing environment, and they were ready to reimagine anything and everything they do, and we're agile and pivoted to deliver the best experience for our members, and that has been both motivating and inspiring. And we continue to be focused on delivering coaching, community, creative content and thought leadership to our members in ways that are personal and authentic. And by providing behavior change in human connection through technology, we can now truly deliver upon our purpose to inspire healthy habits for real life, for people, families, communities, the world, for everyone. So thank you for joining us today, and I look forward to speaking with everyone again soon.

[Operator:]

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