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

Good morning, everyone. Thank you for joining us. I'm Lauren Schenk. I'm Morgan Stanley's small mid-cap Internet analyst. And I'm thrilled to be joined this morning by Mindy Grossman, WW's Chief Executive Officer; Amy O'keefe, WW's Chief Financial Officer; Michael Lysaght, our Chief Digital Officer; and Cory Kinger, WW's Head of Investor Relations. So thank you, everyone, for joining us today. Before we get started, just a few housekeeping items. 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 SEC filings for a discussion of the risk factors that may affect its results. And from my side, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And then lastly, we will take audience questions at the end of the fireside chat. So please enter your questions throughout the presentation at the bottom of your screen. All right. So with that out of the way, you reported your fourth quarter last week. And so I just want to start digging a little bit into your outlook for 2021, and then we'll go a little bit bigger picture in terms of the digital transformation map mat that WW is undergoing. But thank you all for joining us this morning.

Great to be here, Lauren.

Great. So maybe first, just talk a little bit about what you're seeing from a first quarter recruitment perspective between digital members, the new Digital 360, and studio members in the first quarter and how those trends have compared to your expectations.

Sure. We continue to see digital growth and expect to see strong digital growth in revenues at the end of Q1, very much fueled by the launch of myWW+ and the launch of D 360, our newest membership vertical around on demand, coaching, content community built on the myWW+ digital platform. However, we continue to see pressure on workshops as around the globe, most of our workshops have had to be closed or open on a limited basis. And we are managing that as effectively as possible from a flexibility standpoint, and we've made significant progress against that. So that is the mix of the whole, but what it really reinforces is our transformation to leading weight and wellness, digital subscription model with multiple membership verticals and alternative revenue streams. And that ultimately is going to create a healthier, more profitable and more sustainable business model. In particular, D 360 has had a very strong start. We're already in excess of 100,000 members, and that really is before any extensive marketing of the program with 30% of the members being new to WW and 40% being prior digital members who have upgraded to the new membership, which is at the midpoint of our membership verticals. So very strong and early indications of where we're going. So based on this, and again, it's part of what we've been working towards and investing in over the last number of years. By the end of 2021, our model should be 90% digital and 10% digital plus our varied workshop businesses. By the way, includes virtual, which is why we've been able to maintain our retention even in the reduced recruitment period for studio. That compares to about 70%-30% in 2019 and 85%-15% in 2020. So again, just reinforcing what our business is today and the benefits of them from a margin flow-through and engagement flow-through. And so we feel that we're really positioned for strong growth in digital across 2021.

Excellent. So I guess moving off of that, how should we think about the cadence of the year from a revenue and ending subscriber perspective, given some of the softness that we're seeing in studio right now given the COVID backdrop? Is it fair to say that this year might see sort of the opposite seasonality that you typically observe in terms of 1Q being the peak and trailing off in there? Maybe we see the opposite this year.

Yes. So we do expect that 2021 could be a seasonal anomaly based on the unusual impact that COVID has had on the business, particularly, as Mindy mentioned, in workshops. In a couple of weeks, we'll start to see the anniversary of the impact from COVID in 2020. And combining that with the success of the D 360 launch, the subscriber seasonality very well may take a different shape in 2021. After we get past the year-over-year comp, which is really in the back half of March, we expect to see strong recruitment growth and expect to end Q1 with strong subscriber growth, particular -- subscriber growth in digital. As we look beyond quarter 1 in Q2 through Q4, we expect to return to year-over-year revenue and earnings growth, led by the continued strength in digital, accelerated by the success of D 360 and a really strong spring campaign.

Excellent. Maybe switching back to the workshop for the studio business for a moment. You touched on it a little bit, but how do we think about -- or how should we think about that business in the second half of the year as the world reopens? Are you expecting some of those lap subscribers, maybe people that move to a digital subscription to return? Or do you think maybe that potential downgrade is sort of more permanent?

No, we do expect to return to studio sign up growth as we lap Q1, which was our highest studio subscriber growth based on everything that was happening last year. But more important, as people become more confident in that we're able to open more studio opportunities. In addition to that, right now, we're very limited even to capacity. But just to give you some perspective, we've gone from a very significant number of studios even in what we call our studio ads, which are the ones that give us ultimate flexibility. So as we've been able to downsize that, we can flex and respond to what we're seeing by market in a very efficient and cost-effective manner. And what we see is the opportunity. We have always been about meeting our members where we are, and we've always built on community, accountability, et cetera. And by having this flexible model, we're able to give all our members, our digital platform, we can build coach-led community with D 360, and we can provide our ultimate accountability with our digital platforms plus unlimited workshops, whether they be physical or virtual. And even what we're seeing today are people taking the optionality of both virtual and physical. So as much as it will be a smaller percentage of the overall business, it supports our overall thesis of why we're so differentiated in our business.

Great. I guess maybe for Amy, from a real estate footprint perspective, could you talk about where WW is in its journey with that today? And ultimately, if we do see a rebound in studio subscribers this year, is it possible that the margins of that segment could actually be higher than what we saw pre COVID given the reduction in fixed costs?

Sure. We continue to manage our real estate footprint very prudently and are constantly evaluating our real estate portfolio against the demand in the marketplace. And so just to give you some numbers. In 2021, we expect to have approximately 7,000 coaches and guides; 600 WW branded studios; and depending on COVID restrictions in certain countries, approximately 2,000 third-party locations, which, by the way, we pay for those third-party locations by the meeting rather than having a lease associated with then. At the beginning of 2020, by comparison, we had approximately 16,000 coaches and guides, 1,100 branded studios and 10,000 third-party locations. So the team took very quick action in 2020 to ensure that we were matching our fixed cost base with revenues. Additionally, the launch of virtual workshops in 2020, we find will be proven to be essential to the future of our workshop business. And that workshop business, virtual workshop business has a higher-margin profile than the underlying in-person meeting model. And so we do believe that we can expand gross margin, not only by controlling our fixed cost base, but also with the addition of virtual workshops to the portfolio.

Okay. Excellent. Mindy, I think, one of the most encouraging opportunities about D 360 is its ability to bring more of those millennial consumers into the WW ecosystem. Maybe talk a little bit about the demographic changes that you've seen from a subscriber perspective during COVID, any notable data points in terms of what these new D 360 users look like. And then ultimately, your hopes for the new products in terms of that evolution of the brand.

Sure. When we came out with our Impact Manifesto in 2018, one of the #1 priorities was the diversification of our member base. And that's what we've been working certainly towards and actually accelerated in 2020. So today, 30% of our membership base are millennials, 55% or 45% or younger. And that is with D 360, still only a small percentage of our membership base and only today in the U.S. and U.K. So there is significant expansion opportunity there as well as marketing opportunity around what we're doing. And just to give you a perspective of what D 360 provides people is certainly the core platform of myWW+, but daily coach inspirations, coach lives, walk to walk talks around fitness with talks from people like Oprah or Sanjay Gupta or Matthew McConaughey and other experts. We started our own podcast series through that, and we will be not quite as extensive as you saw with the Oprah live virtual tour, but there will be live events inherent in that. And what we say, it was built by millennials for millennials. It also has an entirely new cohort of coaches who themselves are influencers from areas such as fitness, mindset, healthy eating. And it actually gives our members the opportunity to not just be one-to-one coach but have multiple interactions, and it basically functions as 24/7 on demand. And that's why -- that's what we're very excited about. But we are seeing diversification as a whole.

Okay. Great. Michael, maybe that's a good pivot to you. I mean you talked a little bit about it, but maybe just talk us through the customer journey in this new millennial-focused model. I don't know, if I was joining to be good for the first time logging on to D 360, what would my journey experience would be like in this coach-led model versus the previous digital offering?

So look, D 360 is fundamentally a new way of doing WW. Like we've been known for our great coaches, for our science and for our community. And D 360 brings that to life in a digital native way for a millennial consumer. So at its core, Mindy mentioned, we have these inspirational coaches, who come from different backgrounds like fitness and mindset and with their own unique way of living a healthy life on WW. You get the opportunity to interact with these coaches in a number of ways. We have these premium events, which are coach lives. And a coach will typically have a topic of the data they want to discuss. And the community is able to interact with the coach, and they can do that either live or on demand later. And we -- the coach is also publishing content. So little tips and tricks and motivations that help our members be successful. And you also get to join the community of the coach. So you had that 24/7 social platform where you and like-minded people interact with each other and the coach as well. And as mentioned -- Mindy mentioned, we have podcasts where you get inspirational -- inspiration from other people's journeys, and you get to learn the challenges that they went through and how do you overcome those challenges. We have the walk talks, as Mindy mentioned. And so it really is this full 360 surround that allows our members to get all the support that they want on top of our core program and on top of our core platform.

Okay. Excellent. WW has undergone a significant digital transformation over the last several years that really has allowed WW to accelerate the pace of innovation and newness things that you've just talked about. Could you talk maybe about the one or 2 key or most meaningful technology investments you've made over the past 3 to 5 years that has really played the groundwork for this innovation?

Yes. Look, we really been on this transformation for probably 5 or 6 years and we've actually been successful in transforming into a human-centric technology experience company. If you look today, we have a highly raised app in the App store with 1.5 million reviews and actually, on Friday, we were featured as Apples app of the day. TechRepublic recently published an article that said, we were the fourth most popular app in the health and fitness category. 90% of our members are signing up for digital and staying longer. And at the end of 2020, we probably had about nearly 2.5x number of digital subscribers that we would have had in 2015, at the end of 2015. So we really have transformed into a direct-to-consumer digital subscription business. It's been a journey, and we've looked at this on many fronts. We've hired a lot of people we brought in a world-class technology, data and product leadership team. They're being supported by world-class engineers, product managers, designers, and we have across 3 tech hubs in New York, San Francisco and Toronto. And we're now leaning into the COVID environment where we're hiring remotely as well. We've completely rebuilt our platform as we've adopted the cloud built on top of a microservice architecture. So -- and in addition to that, we've changed all our processes. We're agile. We're lean. We take a user-centric design approach. And we are doing thousands of deployments a year, releasing our app every couple of weeks. So that has really allowed us to have a continuous pipeline of innovation. And it's actually what allowed us to deliver myWW+ last year; a new membership tier, D360. We also launched virtual workshops in 6 days. So all the investments that we've made over previous years are really paying off, and we're going to continue to invest and take in product going forward.

Okay. Great. WW's collected massive amounts of the behavioral data over its history. Now you're capturing even more personalized data. How should we think about the integration uses of data as a strategy for WW? And are there any ways that you can potentially monetize this data going forward?

Well, look, first of all, our members' data -- when members share data with us, they expect that we know who they are, and they expect the experience to be tailored to the information that they share with us. That's the key of what we're doing. A couple of years ago, we invested in a data science team. And that is what enabled us to bring myWW+ to life. And what I get excited about is that the more we learn about our members, the more we're able to personalize the experience. And as we advance our algorithms, we can do more to help them on their journey, which is ultimately our goal. The monetization of data is a really interesting conversation at the moment. We are using our members' data to personalize the experience for them. We're not intending to sell that data. And I think we're a premium membership experience, and we delivered value by helping our members be successful.

Okay. Excellent. There's actually an audience question, I think, segues nicely. So I'm going to ask that one, and then we'll get back on track. But they're asking, when investors speak to grocery stores like Whole Foods, et cetera, it's clear that they're focused on building out their own connection with consumers through their own apps. Has WW ever considered developing an API to integrate into these apps either through a private-label offering or branded? It seems like a good way for WW to become closer to the customer at the point-of-food purchase, which is obviously a very important time for determining and controlling your diet.

Yes. I mean -- so -- well, we do have a bunch of collaborations and partnerships. Our members are using a whole suite of tools like Apple Watches or Amazon Halo or Google Space. So we do integrate with those partners and bring their data into our experience so that the member can have a holistic view of the experience. We're also having -- we're always having conversations with other partners and looking to see where we can form a central partnership that will help our members on their journey.