WW International, Inc. (WW) Earnings Call Transcript & Summary

All right. Thank you, everyone, for joining us today. We're thrilled to have Nick Hotchkin and Corey Kinger from Weight Watchers. I'm Lauren Cassel, Morgan Stanley small mid-cap entry analyst. And before we get started, I'm going to read 2 disclosures for you. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. And some of the statements that WW will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that WW makes are based on assumptions as of today, and WW undertakes no obligation to update them. Please refer to WW's Form 10-K for a discussion of the risk factors that may affect its results.

All right. So housekeeping's out of the way. Maybe just we can start off, talk here a little bit about the earnings print last week. The guidance for the first quarter. You guided to mid-teens subscriber growth for the first quarter. That was sort of at the high end to slightly better than what people were expecting through the mid 10% to 15% range. So maybe talk about what's driving that strength? And then how should we think about subscriber growth for the rest of the year?

Yes. Thanks for having us today. Good afternoon, everybody, and like it's terrific to have had such a fantastic start to the year. So subscribers over 5 million for the first time and supporting the mid-teens increase in end-of-period subscribers guidance for the end of Q1. Many things are driving the strong start to the year. Let's start with this wonderful new program, myWW. Most personalized, most easy way to lose weight that we've had. New program is resonating well globally. Our marketing, global marketing integrated campaign has been very well received also. And then finally, in the United States, we're getting some wonderful buzz out of this 9 city WW Oprah tour. So all of those things. And then you asked about long-term subscriber projections. We expect the strong start to the year to hold throughout 2020. So from a seasonal peak Q1 end, we certainly expect sales to be up year-over-year and subscribers as we go through the year at a nice clip. And this is a normal seasonality that we saw. 5 years had been 13% decline from Q1 peak to year-end trough. We'd expect this year to follow last year's trends and be about in the 8% trend Q1 to trough as we go through the year.

Okay. Great. One of the areas that I think may have been slightly disappointing to investors was just the flow-through on the subscriber growth and the incremental marketing and G&A spend. Maybe talk through what was driving that? And then how should we think about sort of the medium-term earnings algorithm?

Yes. Look, I think national consequence of the 53rd week and the specific accounting for the tour. That adds some complexity to the numbers. And when you strip that away, I think folks will see that the conversion of revenue growth into operating income growth is comfortably in the 40s. So this wonderful high incremental margin, cash-generative business model is performing as we'd expect. Look within that, we are investing. We're investing in G&A, primarily in tech and product resources to drive future innovation and features that will get people to come and join WW in a second year of our food plan innovation in 2021, that's what we're looking towards and beyond. So look, with revenue growth, you're going to have margin expansion in this company.

And typically, we've seen WW launch significant food program innovation once every 2 years. You had Freestyle in 2018, you had myWW this year. How should we think about that pace of innovation going forward? And what are some of the initiatives that you have in place to drive that second year growth?

Yes, I think you're right. We have been on that 2-year cadence, and certainly wouldn't want to change our food plan approach or algorithm every year. It would confuse people. So in the second year of our food plan innovation, other levers for growth become important. That can include, of course, updating myWW, adding new features to it other than changing the core food program. Things we're excited about. Excited about the work we've been doing in sleep and adding sleep solutions, functionality and features to the program. Excited about this personalization journey. Now we've got a personalized food program now. We're just in the early innings of our overall personalization strategy. And I think virtual group coaching can be a real game changer for us. Right now, there are only 2 choices. Most of our folks join the digital program or our studio members all of whom have access to the digital tools choose to pay a premium to go to workshops also. Virtual group coaching, an offering, a slap bang in the middle between digital and studio, it gives us a great opportunity to upsell and add even more value to our digital members.

Okay. And I guess, what would you say to the skeptics out there who say, there -- what we saw in 2019 will happen again in '21. I guess, what gives you the confidence that, that won't repeat?

Yes. Look, I think, look, we were very forthright about the start to the year in '19, that was driven by the marketing execution not resonating as well as we'd hoped. And at year-end, as you see, the WW brand really take hold, and 15,000-seat arena is full every Saturday of people enjoying the holistic WW experience. We know why we didn't perform well in the first quarter of '19, and we're very forthright about it. We know what we have to do to perform well in '21. And -- but going back as recently as '17 or '12, we've shown that we can have sustainable growth in the second year of food plan innovation.

Okay. Great. Maybe talk a little bit about the trends that you're seeing in digital versus studio. And how we should expect that to trend going forward? And specifically as it relates to revenue per subscriber in those 2 channels?

Look, I think both businesses are doing great. It is important for us to get our studio business back to growth. So seeing our studio recruitment up year-on-year in Q4. Since we've had a strong start to the year, you could expect that to lead to maybe end-of-period subscriber growth year-over-year in studio maybe as early as Q1, revenue growth for studio year-over-year maybe as early as Q2. So great to get that studio business back to growth. That said, it doesn't surprise us at all that our digital business is growing faster. There's a larger natural market for that business. We're all using our smartphones all the time. So we don't expect that business to continue to grow faster.

Great. You've talked about average subscriber retention about 10 months. I think that's increased from 8 months several years ago. I guess, what are some of the initiatives that you have in place to drive that number higher over time? Where do you think that number can ultimately go?

It's all about engagement. It's all about engagement. So anytime you think of picking up the app to track food, to earn WellnessWins points, to interact with our Connect community, to take an Aaptiv audio workout, listen to a Headspace meditation, get a recipe, it's all about engagement in the app and creating a better workshop experience. So that's the strategy. That's why we're investing in tech and product to fulfill that strategy. That's what's going to drive it. And it would be really transformative for our business model if we're talking about retention in years, not in months. We'd love to get retention over a year, and that's what we're focused on achieving. I think a key next layer of our engagement journey is gamification. So we've just introduced streaks into our WellnessWins platform to encourage people to come to the app more often. More gamification, more fun inside the app, more personalization, that's where we're headed strategically.

Okay. You talked about technology and how that's been a key focus for the business over the past several years. What are some of the key investments in technology that you're looking to in 2020? And sort of what are those key -- KPIs that we should be looking for along the way?

Yes. It starts with people. Invested in a San Francisco tech and product hub based on -- initially started with 3 small tuck-in acquisitions in the Bay Area. Just recently started a Toronto tech hub that is more focused on growing our health care capabilities. And you'll see those folks working on a better app experience and on some of the things we've discussed, particularly a lot of work right now on sleep, on virtual group coaching, on personalization linked to what we can bring to market in the winter of 2021. The much -- I've been with the company for 8 years. And there's a digital transformation to the point that right now we're a true digital subscriber platform. 75% of the folks who joined us today are doing the program exclusively within the app, and that's reflected in the tech and the product investments we've been making.

Okay. Great. We've gotten a lot of questions from investors over the past several months on Noom and the impacts, if any, it's having on your business? I guess, how do you think about not only them but the competitive landscape overall for WW?

Yes. And no surprise we have competition in this attractive health and wellness space at all. Faced lots of competition over the years in our 57-year history. And you have longevity in this space primarily if you work. Do you have a sustainable cost-effective weight loss solution? And more and more, as you see us doing strategically, can you marry that? Can you become a leading wellness company powered by the world's best weight loss program? That's why we're building out our wellness ecosystem. Look, as we look at the competition, our competition is the 95% of people who start a weight loss or a healthy living journey and feel that they can do it themselves and they don't need to pay anybody for it.

Okay. You're also sort of in middle innings, I would say, of rebranding the business from traditionally a weight loss business to a health and wellness brand. Maybe talk about how you're educating consumers about that brand shift. And again, any sort of milestones that we should be looking for along the way?

Yes. Look, it's a terrific 1 year into really seeing the WW coined with a central message, Wellness that Works, so it really take hold. And you see us in our advertising, saying WW, Weight Watchers Reimagined, we'll do that for as long as we need to, to make sure that the WW message is sticking, but our brand scores and brand affinity and recognition have seen good strides for this year. The tour has been a great vehicle for really bringing the WW brand to life. I mean, arriving at a stadium at 8:30 on a Saturday morning, as I have been for many Saturdays this year. We've done 8 cities so far. And knowing that, that stadium is going to be full of 15,000 people, many of whom don't know the first thing about WW. They came here to see Oprah or Lady Gaga in Fort Lauderdale or The Rock in Atlanta or J.Lo in Los Angeles. Seeing them show up for just such a meaningful daylong extravaganza of wellness content and WW benefiting not from only the people in the arena getting that WW experience, but imagine the ripple effect as they go and tell their families and friends about it and also the huge PR and news cycle buzz that we've been getting in every city stop.