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

Okay. Great. I'm Cory Carpenter, an Internet analyst at JPMorgan. Joining me this afternoon is Amy O'Keefe, CFO of WW International; and Chief Digital Officer, Michael Lysaght. WW, formerly known as Weight Watchers, is a global wellness company with 5 million subscribers. Amy joined the company last year as CFO. Michael has been with the company for 7 years in a variety of roles, including previously as Chief Technology Officer. Amy, Michael, thanks for joining us today.

Thanks for having us, Cory.

Good to be here.

So I'm going to read a quick disclaimer, and then we'll jump in. 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. All right. So I'll kick off with questions, but if anyone in the audience would like to ask, you can submit, you click on the blue ask a question button. You can type in your question, and we'll get to, any time permitting, at the end.

So thanks for joining. Maybe to kick off a higher level for those newer to the story. I think the business has changed quite a bit over the past few years. So I thought it would be helpful to start with an update on how the business has evolved and how you would describe the state of the business today.

Sure. I'll kick that one off. WW is the world's leading weight loss and wellness digital subscription platform. And you mentioned some of the statistics in your opener. But just to reiterate, as we stated on our earnings call, we've got 5 million subscribers, all of whom have access to our 4.8 star rated app. Of those subscribers, 4.2 million are digital subscribers or about 85% of the total population. And that's been growing significantly over the past several years. It was up 16% in Q1 and hit an all-time high for digital subscribers. I think it's worth noting that only a year ago, our mix of digital was about 70%. So we've grown the mix of digital subscribers in our base, and that's been a priority for us as it's got a very high gross margin profile. Our member retention is at an all-time high of over 10 months. And with this digital subscription mix shift, our adjusted gross margins have been over 60% for the last 4 consecutive quarters. Probably also mentioned, which is a high point for me, specifically, we've got really strong cash flow with this digital subscription model, and we just had the opportunity to refinance the debt early in Q2. Underlying the success and the transformation of the business is really a wellness and weight loss program that works. It's backed by over 100 scientific studies on efficacy, and we've got a strong community of WW coaches who support members along their journey. There are really, just by way of background, 3 ways to join our program. We've got a digital-only membership vertical that provides all the digital tools that you need for your weight loss and wellness journey. Then we just launched a new membership vertical in the mid-tier called Digital 360, which really builds content and coaching in a one-to-many format on top of the core digital platform. And then finally, we've got a digital plus unlimited workshops category, which is how we've been most known over the years, where members can choose either a face-to-face or newly over the last 12 months, a virtual workshop experience. And in 2021, we're continuing to focus on our key priorities, which are enhancing the membership experience, driving engagement, retention and lifetime value; continuing to build out and optimize our Digital 360 platform, which we believe has exceeded our expectations in Q1, and we've got early days where we've got some early successes. We are focused on our 2022 food innovation, which, as you may or may not know, there's a cadence to food innovation for the company every other year. And so we'll be launching a new food program late in Q4 or late in 2021 for 2022. And then we've also been focused on our health care and diabetes vertical, where we think that the broader health care market presents a great opportunity for WW to continue to expand our penetration. And so I'll pause there, Cory.

So I don't want -- a lot that we'll get -- probably get more into. And maybe before, just 1 question, not to go backwards, of course. But this year has certainly been challenging not just for you guys, but for the world. I guess my question is, how is your business impacted? What have been some of your key learnings over this time?

So over the past 12 months, obviously, the business has been impacted significantly, particularly on the workshop side of the business. So we had face-to-face studios where members would go and join with their community and their coach to be supported on their wellness journey and to have a sense of accountability. And in the last 2 weeks of March 2020, those were shut down entirely. And the business had a lot of work to do to respond on the workshop side of the business to rightsize that cost structure. But the benefit that we had was a mature digital platform that had been building, and Michael will talk about this, but had been building over years before that. And so while COVID certainly impacted by accelerating some of our digital priorities, we were pretty well prepared to make a shift to virtual, a virtual or remote environment pretty quickly. On the workshop side of the business, for example, you'll -- you would hear Mindy talk about how we introduced virtual workshops to replace that face-to-face community in 7 days. We launched on the Zoom platform, giving our members -- really trying to meet them where they are, giving members an opportunity to continue to stay connected with their community over the long haul. And so I would say that while the pandemic certainly had an impact on the workshop side of the business, I think it really focused us on accelerating some of the digital strategies that we already had in place.

So now we can go, I guess, forward-looking again. I mean, it feels like you're coming out of it in a pretty good position. Like you said, it accelerated a lot of the changes that you guys were already making. What trends are you seeing as the economy is starting to reopen?

Yes. We think we're very well positioned. So over the past 12 months, we have the opportunity to address the fixed overhead cost structure on the workshop side of the business. From the beginning of 2020 through quarter 1, we've reduced the physical -- we have WW-branded physical footprint that are at leased spaces, for all intents and purposes, and we were -- we've reduced that footprint by over 40% globally. And so we've been hard at work managing that cost base, rightsizing the structure to meet demand, and then having the option to ramp that back up as consumer mindset changes as we come out of this thing in a more cost-effective way. So we'll be able to use -- take advantage of using third-party locations like hotels, for example, in a model where we pay by the meeting versus paying for a multiyear lease. So on the workshop business, we think we did all the right things to where I said the cost structure are prepared to ramp back up as people feel more comfortable returning to a face-to-face environment in a much more cost-effective way. On the digital side of the business, like I said, we accelerated many of our priorities and grew our subscriber base in quarter 1 by 16%. So we're seeing significant tailwind of the focus and effort that we put against the digital side of the business. So we think that we'll be ready. As people in varying parts of the world feel more comfortable reemerging, we think we'll be ready to service our customers however they choose to engage with WW in a cost-effective way.

So I want to talk a bit. So 4 different types of memberships. And you alluded to this earlier, but Digital 360 being the newest, could you maybe just talk about how that's different and how the customer reception has been so far relative to your expectations?

Sure. So Digital 360 is really -- it's a third membership vertical. So we've got 3 ways to join [indiscernible] digital platform, the mid-tier Digital 360, and then the digital plus unlimited workshops. Worth noting that all of those members have access to our digital platform. But D360 really approaches how a member does WW in a totally different way. We've always been known for our coaches, our community and science that works for your weight loss and wellness journey. But D360 really brings that to life in a different way with an entirely new cohort of coaches that you can join and follow and be part of their community and view either live or on-demand content in a one-to-many environment. And so I often think of it as really targeted -- it was a program that was built by millennials for millennials, really targeting a different age demographic than our historical member. And I think it's interesting to note that the content team who developed the D360 program was the same content team that built the Oprah's 2020 Vision Tour and continues to do her periodic virtual experiences. And so we're really excited about the content and the way that we're delivering the content to attract a new audience to the membership. And some features in there, for example, are podcasts that you can listen to about members, success in the member journey. We've got walk talks on here where people can be active while listening to well-known influencers like Oprah Winfrey and like Dr. Sanjay Gupta, for example. And it's a more flexible model sort of designed to the way people maybe want to receive that content versus going down to a workshop at a scheduled time listening to on-demand content or watching on-demand content, we think, really speaks to that newer audience.

Okay. Michael, thanks for being patient. So could you talk about -- so I mean, you're Chief Digital Officer today, prior CTO. So I'd be curious to hear from your perspective just the evolution of the company more from the technology side and maybe some of the investments that you're making, really laying the groundwork for becoming a digital-first company.

Yes. Well, look, I think first off, I think we all feel really good calling ourselves a technology-experienced company. As Amy mentioned, we have a 4.8 star app with 1.6 million reviews in the U.S. app store. 85% of our subscribers are digital. And every single one of our members has access to the app. TechRepublic recently published that we were one of the top 4 health and fitness apps in the Apple App Store. And we've seen about 250% growth over the last 5 years in digital subscriptions, and our members are staying longer. So we have become a direct-to-consumer digital subscription business. And it's been a journey. If we look back, we started off investing in technology actually in 2001, and I give that team a lot of credit. They built a successful .com business when a lot of other businesses were going bust. I think for us, the problem was we were still using that platform and those technologies in 2014. And so since that period of time, we've invested heavily in technology. So everything from moving to the cloud and using technologies that allow us innovative pace to our people. We used to outsource a lot of technology. We've actually hired hundreds of people over the last few years and built that muscle internally and really have a world-class technology team and product organization. We've invested in our processes. We've become very much user-centered, embracing concepts like design thinking and agile. Used to ship our product twice a year. We now ship every 2 weeks. So -- and we've created a culture of innovation. And if you were to walk into our offices, we acquired a handful of start-ups in San Francisco. We have an office in Toronto, New York and in the U.K. They look and feel like any technology company that you would walk into today. So having invested in these platforms and the people and the processes, that's allowed us to do things like innovate and launch products like D360, myWW+ last year. It allowed us to move workshops online over 6 days. And we recognized and realized that we need to continue to invest in these platforms to compete in the future.

So I think this is sticking with you. But just -- I mean, like you kind of alluded to, I mean, you've been -- the company has been around for decades. And so I would imagine that you need to have a lot of data. So how are you able to leverage this data that you have? What does it mean in terms of how you can personalize things in the future?

Yes. Look, when we think of personalization, we're really thinking about how we can help every unique member on their journey be successful. And members are sharing things with us like their nutrition and their activity. And they expect then for us to show up in a contextual and relevant way and that we actually know of. So our program is obviously personalized. It's based on your profile and your own targets. But we've had personalization there for a while from things like your favorite recipes to recently tracked foods. But we've invested heavily in data science and data analytics. We're trying to understand what makes people successful and show that up in the experience. One of the things we launched as part of myWW+ was recommended recipe. So that you got presented with new ideas for food based on the things you've tracked and what other people like you have tracked. We also have tools like what's in your fridge, where you can look at what's in your pantry and your fridge and we can recommend recipes. We're helping you with meal planning. And also just having timely notifications and not just to help you keep inspired and motivated. So the investment in our data and how we show up for our members and investing in personalization is a key strategic initiative for us. And what's interesting is as our machine learning models evolve, the experience will get better. And we're just going to continue investing in this as a critical area for us to differentiate ourselves.

Okay. Maybe, I think, back to you, Amy. So I know you kind of talked about rightsizing, if you will, the cost structure, the workshop business. I think a question that I have is, just what role do workshops play longer term in the business?

So we are committed to helping our members wherever they are, be the most successful that they can possibly be on the program. And some people, in order to -- need the support of the community, need the accountability of a face-to-face workshop. So we're committed to providing the experience that our members need for efficacy. So I think that you'll see us continuing to support our workshop program, our workshop vertical. But as I mentioned, we're able to do that, I think, in a more -- with a cost structure that's more variable versus fixed. And I think it's worth noting also that we're -- at WW, we're fairly agnostic to how members join. So our strategy is to drive members to the site or to the door. And then how they choose to participate should be based on what works best for them. And from a margin perspective, it's fairly neutral to us. So we've got, for example, the digital-only membership at $21.95 a month with gross margins over 80%. The workshop business is at $44.95 a month with historical margins of 40%. And so sort of twice the revenue at half the margin. And so there isn't a terribly meaningful difference economically about the verticals as long as we're paying -- we're laser-focused on managing that fixed overhead structure, which I think we did quite effectively. And so I think as we come out of this thing, and as people feel much more comfortable going back to the workshop environment, we'll be there. It's interesting to know with the social distancing restrictions and everything, our capacity on attendance at workshops has been constrained. And with the work that we've done on the cost structure, we can actually double the attendance in our workshops without 1 incremental dollar of cost. And so we're pretty excited that we're ready and positioned to welcome members back. And even with the work that we've done, adjusting our footprint, we're still within -- for 70% of the U.S. population, for example, within a reasonable driving distance. And so if members choose to come back that way, fine with us. If they choose to continue, we'll also offer virtual workshops. So if that turned out to be more convenient for a member, they can still do that. So we're ready.

Okay. I want to talk about your customers for a bit, your members. As you've shifted to more digital, how has your customer demographics evolved? Are you reaching a different audience maybe than you were a couple of years ago?

Yes. So look, our goal really is to be the everything app for your wellness journey. So we want a program and a full suite of programs for everyone. But we think that the longer opportunity to expand our reach into different demographics is a significant growth opportunity for the business. And we're doing that through the user experience that Michael talked about, the content and delivery mechanisms that I discussed with D360, the coach profile that may appeal to a different demographic, our ambassadors and our mix of media to social and digital. And we think that all of those things provide us with the opportunity to address different demographics that we don't have or that we haven't had in the past. So today, for example, a typical member is a woman in her mid- to late 40s. But while it's still early days on D360, 50% of first-time WW members to the D360 platform are under 40 years old. And so we're seeing signs of that shift in demographics, and we think that we have the opportunity to apply that to other demographic categories as well, whether it's gender or ethnicity. We think that we are nimble enough to be able to pivot with our content, with our investors, with our marketing to attract those audiences.

So I guess, sticking with the members, I think you mentioned earlier member retentions around 10 months. How has that trended over time? Is there room for it to expand? And kind of curious as well, just how do you think about churn conceptually?

Yes. So I can keep that one-off, and then I know Michael has an awful lot to say about strategies to drive retention. But as I mentioned, our global retention today is over 10 months. We're not going to be happy until we're talking about something that is over a year, and that's certainly our goal. Mindy Grossman would tell you, she'd like to be measuring this in years. But we believe that retention is all about efficacy. So is the program working for you and engagement, really. And so our core strategies are focused on driving efficacy and engagement. I'm sure Michael can talk about some of the things that we're doing and some of the metrics that we track in order to measure that.