WW International, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Welcome to WW International Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

[Corey Kinger:]

Thank you, Kate. And thank you to everyone, for joining us today, for WW International's fourth quarter and full year 2019 conference call. At about 4

[Mindy Grossman:]

Thanks Corey. Good afternoon everyone, and thank you for joining our call today. I am thrilled to say that 2020 is off to a strong start. The global launch of the new myWW program is resonating in every market. The WW Presents

[Nick Hotchkin:]

Thanks, Mindy. We ended the year with a record of 4.2 million subscribers, up 8% from the end of 2018, the subscriber growth in all of our major geographic markets. Recall, digital subscriber recruitment turned positive versus the prior year in Q2. Total global recruitment turned positive in Q3, and I'm pleased to say, that subscriber growth accelerated in Q4 and studio recruitment was also positive in Q4. And this put us in a strong position headed into the 2020 winter season.Q1 is traditionally our annual peak in end of period subscribers, sloping to a Q4 trough, with an average 13% decline over the last five years. To further illustrate our progress, in 2019 our decline was only 8%, the best seasonal slope in our history.Reflecting our momentum, in Q4, we delivered revenue of $333 million, up 1.5% year-over-year on a constant currency basis. For the full year 2019, total revenue was $1.4 billion, down to 5% year-over-year on a constant currency basis.GAAP EPS for the year was $1.72, in line with our guidance and EBITDAS was $352 million in 2019, reflecting our highly cash generative business model. Our tax rate for the year was 20.9%.At yearend, we had $183 million in cash and an undrawn $150 million revolver. During 2019, we voluntarily prepaid $100 million of term loans, and we ended the year with a net debt to EBITDAS leverage ratio of 3.96 times.Turning to 2020. I'd like to spend a few minutes discussing our key assumptions around recruitment, retention, and channels. Recruitment growth year-to-date, is up in the double digits in all our geographic markets. Based on this performance for Q1, we expect end of period subscriber growth in the mid-teens year-over-year. Our 2020 revenue forecast anticipates year-over-year subscriber growth every quarter, and we currently expect digital subscriptions to be about 75% of total subscriptions this year.Recruitment channel such as Invite a Friend and In-App purchase continue to work well for us, and they're highly effective in attracting first time members. We expect that about 15% of our global recruits will continue to join through these two channels.On a global basis, average retention is over 10 months, a record level for WW. We're focused on continuing to expand our retention through member engagement initiatives. Overall, we expect subscription revenues to be approximately 85% of our total revenue in 2020.In product sales and other revenue growth is expected to accelerate in 2020, benefiting from our expanded line and increased availability of WW products. We recently relaunched our ecommerce platform, and we will incorporate the WW shop into our app during 2020.We expect full year 2020 revenue to approach $1.6 billion, with similar year-over-year growth rates on a constant currency basis across each of our geographic segments. Our full year GAAP EPS guidance range is $2.15 to $2.40. This guidance assumes 71 million shares outstanding for the full year, and this guidance incorporates the fact, that fiscal 2020 inclusive 53rd week, which bridges the last week of December 2020, and ends on January 2, 2021. Due to the heavy marketing activity during that week, this timing has an expected negative $0.06 impact on the full year EPS and that's reflected in our EPS guidance.A few assumptions of note in our full year EPS guidance. On December 16, we announced the extension of our partnership with Oprah Winfrey, through May 2025. Upon approval of the associated 3.3 million share option grants at our Annual Meeting in May, we'll record a onetime charge in the second quarter of 2020, and the actual charge which would reflect the stock price as of the date of shareholder approval in May, is not reflected in our EPS guidance.Below the line, our guidance assumes a full year effective tax rate of about 23%, and pending the finalization of regulations that could impact tax on foreign income, our full year tax rate could be closer to 20%.Our guidance assumes full year interest expense to be approximately $126 million, reflecting our current interest rates. Given our financial and balance sheet momentum and dependent on market conditions, we believe we may have an opportunity to reprise our term loan during 2020.The WW Presents

[Mindy Grossman:]

Thanks, Nick. I can think of no better way to kick off the new year than by joining Oprah Winfrey on tour. We just completed our seventh tour stop in San Francisco, I have to say the response has been incredible. Oprah’s power to connect with people and inspire them to live their healthiest and best life is unmatched.Have Oprah not only tell her story and share her perspective, but also engage directly with audience members and lead them through a holistic wellness assessment, spanning mind, body and spirit, assessing and identifying their wellness focus, intention and making a personal commitment is truly a powerful experience.And then to have packed arenas of more than 15,000 people, sold out together participating and everything from a dance party to a mass meditation, to hearing from some of the most influential people in the world about their own wellness journeys, including Michelle Obama, Lady Gaga, Dwayne The Rock Johnson and this Saturday in Los Angeles, Jennifer Lopez makes it an event like no other.These sold out full day wellness events filled with inspiration, community, activity and fun, demonstrate the power and appeal of our vision to make wellness accessible to all. A highlight of the day includes an onstage moment, with an inspiring local WW weight loss success story, showing how one person joining WW and transforming his or her life, starts a ripple effect of wellness in their community.The tour is generating significant media coverage and has fueled overall interest and enthusiasm about WW. The nine city 2020 vision tour has generated over 24 billion media impressions, across online, print and broadcast thus far. And for those of you who saw the Oprah and the Rock Super Bowl spot, that was a result of spontaneous creativity by the teams to reinforce our wellness mission. We believe this high visibility has had a halo effect well beyond those who are in the audience.In addition, the tour helped reinforce our brand transformation, showing how WW is your partner in both weight loss and wellness. For instance, in post-event surveys, we saw strong increases as attendees perception of WW both as a plan for me and as a modern brand. And WW and Oprah engage with the local communities in each tour city, with surprise visits to local restaurants, participating in the WW favorite programs, Oprah joined local groups for their morning walks and more.In addition, over $1 million of tour proceeds has benefited WW good, our philanthropic arm that helps bring fresh healthy food to underserved communities in each of these local markets.WW is now the wellness partner of OVG, the venue partner in most of our tours to the arenas. Our partnership is continuing beyond the tour dates, with WW signage, member recruitment offers and WW healthy concessions to be offered at select venues, spreading our wellness message to their live audiences. We believe the tour has been fantastic for accelerating overall brand awareness and perception of WW.We are consumer obsessed and continuously monitor brand perception and awareness. In January of every year, we conduct a brand perception study. And our 2020 results not only showed, that consumers have a strong familiarity with the WW logo across all our global markets, but also has strong awareness of the new myWW program.We see opportunities to advance these perceptions even further, including by highlighting our weight loss and healthy living leadership, and by advancing areas such as personalization, and gamification.Our journey over the past three years has been significant. 2018 was about forming and defining our brand and growth strategy. 2019 was launching as WW and presenting ourselves as a wellness company, in addition to being the world's leader in weight loss. And then looking at 2020, we have returned to a growth trajectory and are focused on accelerating our momentum. These past three years have been about strengthening the foundation of this company, enhancing our capabilities, strengthening our team and modernizing the brand. These are investments, they're only now beginning to pay dividends, but our work is not finished.For 2020, our key objectives of recruit, retain and elevate to WW brand, will continue to guide our actions as an organization. Within that framework, our key priorities for this year are focusing on growing and maximizing our core business in the immediate term, and making the strategic investments which will fuel the business, not only in 2020, but also in 2021 and beyond.Since 2016, we have innovated on our food program every two years, but know, that we are always constantly innovating. And as we move forward toward 2021, we're already focused on the value added offerings and features, we will bring to market for next year to sustain interest in the program and deliver sustainable business growth.Our 2020 priorities are being known for coaching and amplifying the power of community, as we evolve and create more personal offerings, we are focused on providing solutions to our members in the formats that fit their lives best and see a range of possibilities, to integrate our coaches in the WW experience, from 24X7 chat in our app to dedicated one-on-one personal coaching, from group workshops in our studios, to virtual communities and members and coaches. We see coaching as an integral element of the WW experience.We will continue focusing on growing our studio subscriber base and amplifying the magic that happens in our studios. Studio member signups so far in 2020 are up, and we are focused on delivering the inspiration and celebration our members crave. Beyond the traditional studio locations, we are exploring partnerships such as our relationship with Kohl's, where we can incorporate either full WW workshops or pop-up health hubs into high traffic partner locations that are complementary to our brand, and make WW more visible and accessible to various audiences.We are very enthusiastic about the future potential for virtual group coaching, as a new subscription tier to drive revenue growth. With 75% of our members being digital only, we see an opportunity to upsell those members to an enhanced offering, bringing the inspiration and community of our workshops into a digital environment, with programming led by our expert WW coaches.Virtual group coaching is in pilot now, and we plan to launch more broadly in late 2020. We will continue testing and refining virtual group coaching, knowing its value is a market differentiator and its ability to modernize the brand, while staying true to our foundation of community. We believe virtual group coaching will be a compelling offering and great way to connect more of our members with our extraordinary coaches, who we know have a positive impact on members level of engagement and their wellness journey.Our wellness ecosystem and deepening the app experience and gamification is key. In addition to our leading weight management program, we will continue building features and tools to help our members improve their overall health and wellness, particularly in the areas of activity, mindset, motivation, hydration and sleep, forming a deeper integration between all these important factors and nutrition and weight loss. Our science team has completed a body of work on sleep, and we know our members have a strong interest in sleep related actionable content. During 2020, we will be launching sleep solutions features and functionality into the WW experience.I'm also thrilled to announce today, that we are partnering with ClassPass, to bring our complimentary offerings to each other's members. ClassPass is a monthly subscription service providing access to the world's largest network of boutique, fitness, studios, spas and gyms. In the coming weeks U.S. WW members will receive a complimentary allotment of fitness credits, and ClassPass members will receive an offer for WW digital subscription. This is just the first step of our partnership and we see various opportunities, where we can work together on content and integrations that benefit our respective members.We will also continue to elevate our digital experience. As part of this, we will really zero in and using the app as a behavior change tool, along with gamification to help our members succeed on their journeys. We look forward to introducing challenges, added competition and excitement to the experience. We've recently tested a streak challenge that rewarded members for tracking meals multiple days in a row, and the challenge resulted in higher overall levels of meal tracking and lifted engagement with our wellness wins loyalty program. We will be launching this streak challenge more broadly to iOS users next month.Consumer products and ecommerce growth as well as product expansion, reformulating and repackaging our products was a huge step for us, and we're going to continue supporting our members by providing the things they need to succeed from cookbooks to kitchen tools, from SmartPoint friendly snacks to meal kits. And we know our members want to have access to WW products beyond just the studios, and we've made huge strides in our ecommerce platforms. We will focus on expanding this in 2020 and beyond, including through integration directly into the WW app.Our health solutions business, is going to allow us to be the partner of choice. Our health solutions team has done considerable foundational work, in building out the talent and technology, to support and drive this business. We're focused on increasing awareness of WW as a wellness benefit and demonstrating the value of WW to strategic partners, representing employers, providers, physicians and payers.I'm proud to say that our partnership with the City of New York will continue for three more years, making WW available as special rate to New York City's more than 440,000 employees. During our Brooklyn tour stop earlier this month, we were thrilled to invite on stage a group of NYPD employees. Since the start of our partnership with the City of New York, nearly 40,000 city employees have lost weight on the WW program. A clear demonstration of the positive impact WW can have on health and wellness.We see a significantly larger opportunity in the years to come. As we focus on adding more value to our offerings, from total wellness to diabetes, we intend to be the partner of choice for wellness and weight loss. Community activation events and creative content will allow us to diversify our consumer base and maximize engagement. Building on the success of the WW Presents

[Operator:]

[Operator Instructions] Our first question is from Olivia Tong from Bank of America. Go ahead.

[Olivia Tong:]

Thanks. Good evening. I wanted to talk a little bit about the subscriber growth and then also the cost of driving that growth, because that 5 million number obviously a big number for current subscribers, that’s great. And the mid-teens growth that you're looking for also fantastic. But then looking at Q1, the expenditure is pretty high. So, can you just talk about the cost of driving that growth?And then in terms of the Oprah tour, can you talk about the effectiveness of the tour, because it's great to see that attendees were energized around wellness and all that. But how much of that actually resulted in member signups with the various tour stops or cookbook sales or anything like that? Did you see more substantial signups in the cities where you had event? And this is something that you hope you do again? Thanks.

[Nick Hotchkin:]

Hi, Olivia, thanks for that. Marketing expense in 2020, $275 million, increase versus prior year, bear in mind, that 53rd week impact, that's the heaviest marketing time of the year for us. So beyond that, be it in our winter campaign or spring campaign, we're investing behind the integrated marketing initiatives that are working for us. And you see those paying off in double digit recruits so far and anticipating end of pay subscribers to be up in the mid-teens and getting to that milestone over 5 million members.But, we will be always be nimble in managing our marketing spend, but I think the team's doing fantastic work globally, right now. And we're firing on all cylinders, across all channels, good TV campaign, a great work this year in digital and social eCRM, et cetera.In terms of the tour, the tour is being such a wonderful way to bring more exposure to the brand, and it's certainly had a halo effect on our recruitment in the United States, given all the wonderful PR and buzz. It's been great to be in the tour cities and seeing people enjoying our studios. And actually one of my favorite things is seeing people in the concourses signing up to do WW in breaks during the event. And roughly, 10% of the attendees at each tour stop have signed up at WW while they're there, and that just shows, how the brand and the tour is resonating.

[Olivia Tong:]

Thank you.

[Operator:]

Our next question is from Jason English from Goldman Sachs. Go ahead.

[Jason English:]

Hey, guys, thank you. Thanks for squeezing me in. So, to pick up on the question, Olivia's question around marketing, to make it just cleaner for us can you just give us the number for the 53rd week? How much it's adding to revenue and marketing so we can parse that out and get a cleaner underline read?

[Nick Hotchkin:]

It's in the teens, yes. Its mid-teens. Now, think about it in terms of being $15 million.

[Jason English:]

Of marketing. Got it. Okay, that's helpful. I appreciate it. And then on the gross margin side, we've got the services gross margin, much softer than expected in the fourth quarter. And I appreciate, we've got some of the noise with a tour coming in the first quarter, it's going to keep it soft but you also may mention to the WW launch cost. Can you give us some more clarity and color on what drove the margin softness in the fourth quarter? And then any sort of quantification, the dub-dub launch cost and whether that's sort of a new cost base, or are there components of these launch expenses that fall away overtime?

[Nick Hotchkin:]

Yes. Look, we clearly expected Q4 gross margin to be down, based on the launch cost and the field training expenses that have resulted in a good recruitment trajectory. So, those are onetime costs in Q4 and some in January related to higher staffing levels for higher volumes of people in the studio. So, the business model is performing with growth, exactly how I would expect it to. We're seeing operating leverage, we're forecasting operating leverage, and we're benefiting from a richer digital mix.Bear in mind within 100 basis points of gross margin leverage forecast for 2020, that includes the direct tour expenses, which will be booked in gross margin that's about 100 basis points for the year. We know there's wonderful benefits beyond those direct costs of those the direct costs.And another factor is licensing is down year-over-year, that's about a 100 basis points and that gross margin walk to and that's why we're very excited to be introducing new partners to the brand and focusing on new revenue streams to offset that licensing business going forward.

[Jason English:]

Helpful stuff. Thank you. I'll pass it on.

[Operator:]

Our next question is from Kara Anderson from B. Riley FBR. Go ahead.

[Kara Anderson:]

Hi, good evening. Thanks for taking my question. I just was hoping that you could talk about how the broader shift to show up kind of holistically as a wellness company has translated into your subscriber base. Are you seeing a shift in the demographic or maybe even weight loss goals of the people that are signing up? Just curious if you had any thoughts there you can provide? Thanks.

[Mindy Grossman:]

Yes, Kara. We know from all the qualitative and quantitative research that definitely there's a shift in the brand perception across all markets. Over the course of the last couple of years, we have continued to see diversification, particularly in our digital subscriber base, as we have been focused on all elements of diversity, age, gender, race, ethnicity, geography, and very focused on life stage as well. And we see that from our Connect groups, which we launched last year, the engagement has been significant. So, that will continue to be a focus for us and certainly being out in the community and the ways we have has contributed to that.

[Kara Anderson:]

Thanks. And if I could just squeeze one more in. If you don't mind, can you provide us an update on international growth plans. I know that's a growth lever for you. Just curious if you had an update on the timeframe for that or if you're any closer to sort of launching something like that?

[Nick Hotchkin:]

Yes. Look, we're not anticipating launching in any new markets this year. One thing we are excited about is we're going to be launching myWW in our Brazilian business later this year. We're excited about that launch and rejuvenating that important business for us. Look, I think international market expansion is a natural long-term growth lever for this company, but no new countries planned right now. We're in the research and planning phase.

[Mindy Grossman:]

And actually the way you can think about Brazil, it's a complete brand launch, not just the program launch. So, we're excited to be down there for that. But as Nick said, we've been doing the planning stages on market growth and really looking at the timing, especially given a lot of what's happening right now externally.

[Kara Anderson:]

Got it. Thank you.

[Operator:]

Our next question is from Brian Nagel from Oppenheimer. Go ahead.

[Brian Nagel:]

Hi, good evening. Thanks for taking my question.

[Mindy Grossman:]

Hi, Brian.

[Brian Nagel:]

Nice start to the year. So I had a couple questions. First off, and I know it's early, but as you look at this, the members signing up now under the new program, is there any indication yet? And maybe you had mentioned the retention now climbing to I guess, above 10 months. But is there any indication yet in the early data that there could be a higher retention associated with these new members coming in with a new program?

[Mindy Grossman:]

Yes. So, here's why I'm excited about, kind of the new program, because it's the first time in our history that we have launched a program that has appealed equally to new members, existing members and lapsed members. Because, existing members were able to either transition into a similar program and what they had or be able to switch. So nothing was taken away from anyone. And as much as we saw was very successful, there were people who were not as happy with it as their prior program. So this has basically had incredibly positive impact across. And we would hope that that will have an impact on retention across, number one.Number two, the fact that everyone took a personalized assessment that this is a plan for them, we also believe will be a positive relative to retention. And then the third bucket of that is certainly all the elements that we continue to integrate into our app experience. And we've been very focused on measuring engagement as you heard from some of the statistics that I put forth. So, I think the combination of all those things gives us confidence that we can continue to see improvements on retention.

[Brian Nagel:]

It's really helpful. I appreciate it. One follow-up question. So now is the tour winds down, which I think clearly has been a very successful event for you. How should we think about Oprah's involvement with the brand and particularly the marketing following the tour?

[Mindy Grossman:]

Yes. So, clearly, I mean Oprah's just been a great partner, certainly to the company, certainly to me. She's incredibly engaged, I mean, this tour has been electrifying. I think how we really need to think about it, and I think you saw that she's extended her relationship with us till 2025, and we will continue to work closely with her where we can integrate into effective marketing efforts or the future of what we may do down the road.We work very closely on what's intuitive, and what's going to make the most success. The other thing that I'm very excited about, clearly, I'm glad that the tour is doing well and Oprah is incredibly engaged in the business is reflecting it. But I'm also excited that we're seeing double digit growth in every single market around the world. And we've been engaging our ambassadors around the world and also the team that is producing this tour that we have built is an incredible team.And they are going to beyond the tour being working on activations and community events and content creation that we feel will be a vertical growth vehicle for us in the future. So, we think the combination of all these elements is very positive.

[Brian Nagel:]

Well, thank you very much and congrats again.

[Operator:]

Our next question is from Alex Fuhrman from Craig-Hallum Capital Group. Go ahead.

[Alex Fuhrman:]

Hi, thanks very much for taking my question. I wanted to ask about -- just thinking about the 2020 vision tour and how many, 10s of thousands of nonmembers there were at those events. Just curious what your thoughts are on ways that you can tap into how much engagement that there is and has been and continue to will be with Oprah and the brand, particularly amongst potential members who aren't necessarily looking for a commercial weight management program? What are some ways that you can tap into that engagement to benefit the brand?

[Mindy Grossman:]

So, throughout the day of the tour, okay, there's a very big focus on everyone identifying kind of where they sit in their own wellness ecosystem, almost like their wellness score. So, it's very focused on all areas of wellness. And there are activations throughout the day, Oprah has a text number that people can text and we can engage.So, throughout the concourse, we have met with and talked to a lot of different people to explain the program and people are really looking at the brand in a new way. And the way I talk about it, even at the tour, is those 15,000 people, many of whom are not most of whom are not, members are now going to go out back into their home and back into their community and talk about their experience.And that's what really was, what we wanted to do was to create and that's what Oprah wanted to do was to create that ripple effect around the brand and get people to understand, we are for everyone, regardless of your wellness goal. And, I've been seeing that in every arena on the tour. Obviously, every market is different, the personality of the market, Brooklyn is not St. Paul office not Atlanta. But I can say that the one commonality is people coming together around one key thing, how are they going to live their best life and how can we help them do that.

[Alex Fuhrman:]

Great, that's really helpful. Thanks, Mindy, and congratulations on a great start to the year.

[Mindy Grossman:]

Thanks.

[Operator:]

Our next question is from Lauren Cassel from Morgan Stanley. Go ahead.

[Lauren Cassel:]

Great. Thanks for taking my question. I guess just following up on some of the earlier questions of the subscriber growth that you've seen thus far, 1Q, what percentage are sort of completely new to the brand versus last? And then of the ones that are new are there any specific demographic groups within that, that you would call out specifically?

[Mindy Grossman:]

Yes. The mix has been about 60% last 40% new, which is a good split for us. So, we're pleased with that. And again, within that we are seeing diversification across all of those elements that I described earlier.

[Lauren Cassel:]

Okay. And then just a quick follow-up on the seasonality of the business that Nick called out. Any reason why the slope would decline further in 2020, worth the negative 8% or should we sort of expect further improvement in that trend going forward?

[Nick Hotchkin:]

Yes. Like that versus the 13%, historical been 8% in '19 was important step forward for us. It was driven by recruitment gains during the year, and also a focus on engagement and retention, driving initiatives. So, we're going to continue those in 2020, of course. So, I'd expect the season slope to be similar in 2020 versus 2019.

[Lauren Cassel:]

Great, thanks so much.

[Operator:]

Our next question is from Linda Bolton Weiser from DA Davidson. Go ahead.

[Mindy Grossman:]

Hi, Linda.

[Linda Bolton Weiser:]

Hi, how are you? I was just curious, if you could give us maybe you said your third potential offering of virtual group coaching is in pilot testing. Can you give us a sense of what price point you're testing at and any early reads on that?

[Mindy Grossman:]

Yes.

[Linda Bolton Weiser:]

Yes, go ahead.

[Mindy Grossman:]

Linda, I'm very excited about virtual group coaching on a number of levels. One, I think it really gives us the ability to meet people where they are and really give an alternative particularly for our digital members or new members coming in to have a different level of support and one-on-one interaction. Certainly, it doesn't take anything away from our face-to-face which a lot of people want, but for people's lifestyle, this really gives us an alternative.We see it being priced in the midpoint, between our digital membership and our studio membership. And we're still doing testing within the pilots on pricing. Response to the pilots have been very strong. If you remember, our original pilots was started in Sweden and in Canada, but more through Facebook platform all the pilots now are within our app. We're actually expanding our coaching network for people who will be very specifically trained for virtual group coaching. And we really think this is an important new revenue stream for us that we will be launching later this year.

[Linda Bolton Weiser:]

Great. And then, sorry if I missed this, Nick, but did you say how much of the $0.20 per share earnings loss in the first quarter is specifically due to the tour expenses?

[Nick Hotchkin:]

We said the tour had $15 million of direct revenue and $20 million of expenses. So think of the tour in the range of $0.05 or $0.06 of that up to $0.20 loss in Q1. Obviously, it's a quarter where we invest in marketing to drive trajectory and revenue growth through the year.

[Linda Bolton Weiser:]

Great, thank you very much.

[Operator:]

Our next question is from RJ Hattovy from Morningstar Research. Go ahead.

[RJ Hattovy:]

Thanks for taking my question. Nick, this one's for you. Hey, Mindy. Big picture question, as we start to look beyond 2020 and theoretically start getting near those peak revenues of $1.8 billion, is there any reason to believe that you couldn't hit the same time margins at that level and then they were high 20% to 30%. Just trying to think about the big picture in terms of the revenue mix, the customer mix, areas of investment and how you're thinking about that in terms of future margin expansion opportunities with the business, especially inflation and some of the changes and the business has evolved? Just kind of I'd like to hear your thoughts on that.

[Nick Hotchkin:]

Yes. RJ look, you see us investing for future growth, things like opening a Toronto tech hub and hiring tech people and those digital product people in San Francisco, New York and Toronto. And any future modeling, I’d assume that we continue to invest in those future growth drivers, both in G&A and marketing. So, I would assume marketing and G&A, as they are this year, pretty much flat on a percent of sales basis, but growing to support that growth.And in terms of gross margin, but the continued mix shift to digital has rate leverage implications. And, as I said, when I look at our gross margin rate this year a 100 basis points, some one-time impacts the 400 basis points, and licensing declines also about 100 basis points. They tend to that 100 basis points leverage that shows the sort of operating leverage that this company has with growth. And that's why we're so focused in what's been a terrific start to this year, focusing on those strategic growth levers to drive growth into '21 and beyond. But to answer your question, yes, I see further margin expansion opportunities for this business come with future revenue growth.

[RJ Hattovy:]

And then I had a follow-up question with respect to the health solutions business. It's been a while since we've had an update. It's exciting to hear that the New York City partnership is being renewed. Can you give us a sense of how much that is in terms of revenue. Once upon a time, you had a goal of $300 million for this business. And I'm curious, where it stands today and potentially where, if you have any new updates in terms of revenue potential. I know, it's kind of a reset year or foundational year, I guess, a better way to put it, but just kind of how you are thinking about that one over the next couple years.

[Mindy Grossman:]

Yes. Let me just give you a perspective on the business and I'll let Nick chime in as well. When I joined the company, I looked at that business and said this is definitely an opportunity but we have work to do to present ourselves in the right way to really be a valuable resource to all those constituencies, obviously, starting with employers and going from there.So we have built a new team, new leadership across all areas of the business. We've built a new tech platform. We have focused on the dashboards and deliverables. And so we rebuilt the entire foundation of that business. And now we're going to focus on expansion, and that's why I brought it up. I think it's an opportunity for us also expanding in the diabetes space. So, I think now was the right time to articulate that it will be a focus. But we're being very strategic about that growth with the right partners, but we have kind of the right structure in place today.

[Nick Hotchkin:]

Yes. And I don't want to disclose a specific revenue number. I can say it's a largest partner in the health solutions business, the city of New York is.

[RJ Hattovy:]

Thanks.

[Nick Hotchkin:]

Yes. So I think of health solution business a little over $50 million of revenue in the City of New York being our biggest account, but one of a couple of hundred corporate accounts.

[Mindy Grossman:]

Yes. We have great corporate partners. And to your point, the runway for this business, it'd be great.

[Operator:]

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

[Mindy Grossman:]

Thanks, everyone. We're thrilled with our strong start to the year. We're focused on our priorities, which will enable us to recruit, retain and elevate our brand and contribute to long-term sustainable growth.So just to reinforce for 2020 we'll continue to update you on our progress against the core priorities of coaching as integral element of experience, particularly the launch of virtual group coaching, building out our wellness, ecosystem, through deepening our app experience and launching new pillars of wellness, our consumer products and expansion of our e-commerce growth, health solutions, as we talked about. And then our community activation events and creative content which will allow us to diversify our consumer base and certainly maximize engagement and our confidence that these strategic priorities will fuel the business not only in 2020, but also in 2021 and beyond.And finally, I want to thank the incredible WW teams around the world, their passion and focus on our continued growth and impact. So thanks for joining us today and we look forward to updating everyone on our progress this year.

[Operator:]

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