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

Thanks for joining us. My name is Bill Reuter, and I'm the high-yield retail and consumer analyst here at BofA. Good to see all of you. Very pleased to have Heather Stark, the CFO; and Corey Kinger of Investor Relations with WW here to talk a little bit about what the -- what's been going on. So with that, thanks for joining us, guys.

Thank you. Thanks for having us.

So maybe if we could just start big picture. There has been a whole lot of transition of the company. It's certainly been a turnaround story. Maybe if you could just start with a handful of bullet points of the major initiatives that you've undertaken, the status of those initiatives and where we're going from here.

Yes, absolutely. And it's been an eventful couple of years, I would say, and a really good and interesting start to our turnaround. If you think of who Weight Watchers is and the fact that we have been in existence for 60 years as a peer-to-peer accountability-led behavior change weight loss program. A lot has changed in those 60 years, but really dramatically in the last 2. If we think about sort of pre-COVID, our consumers were really shifting to start to engage with us digitally. We had started as a workshop business in real life, peer-to-peer accountability experience and really accelerated by COVID, we saw a dramatic shift to consumers wanting to engage with us digitally and that presented an opportunity to us to lean into and really think about becoming a digital-first company. Our app was in existence pre-COVID but it was really as a second screen and as a companion to the weight loss experience that people were experiencing with us in real life. And we really leaned into becoming a digital-first company where this is the first screen experience. And taking from what we know to be the gold standard in our weight management business of coaching, accountability and community and figuring out ways to bring that to consumers digitally. Then 1.5 years ago, we were joined by our new CEO, Sima Sistani, and that has really propelled us forward under her leadership. She is a digital product leader, a community builder in her background. And when I think of the amazing accomplishments we've had so far in those 18 months, it's been an exciting time for us. So Sima joined us and really quickly identified the need to simplify how we show up, to simplify our product. That was a really big initiative and it's still underway. So looking at our app, our product and saying, what are consumers engaging in and let's deliver those things that consumers engage in most. So streamlining and simplifying the app experience was really important and sort of cleansing those things that consumers weren't engaging in and serving up a simpler version of the app on which to build forward an engaging experience. She also undertook an immense reorganization of our company, and we looked at every which way we were operating. This is a business that she joined that was in successive years of decline and she looked at ways to help us rethink our cost base. So we relooked our workshop footprint. We underwent a significant retail, real estate restructuring this past year and also end-to-end our team structure. So in operating expenses, those teams that are focused on our workshop business. We really had to right size how we were thinking about showing it up in that space to make sure we were having good throughput in margins in that business. And also in our G&A, so the cost structure of our teams globally, we really leaned into simplifying those globally. And you see that to your question, how are we seeing all of this read through, we are seeing a more engaging app experience with engagement trends increasing year-over-year in Q2 and Q3. We're also seeing record high gross margins in both Q2 and Q3 that we're really proud of that we've -- we're managing a turnaround of this business and doing it profitably and increasingly profitably is important. And another area that we undertook to change was how we approach performance marketing. And we have really taken a data-informed approach, and we're leaning in on efficient acquisition of consumers and effectively spending our money more efficiently, when we're spending it, what channels we're spending it and really undertook to approach marketing spend from a CLTV to CAC optimization perspective. And that's reading through now. We were really pleased to share on our Q3 call that we had a return to sign-up growth which we also had in Q2, but now we have a return to subscriber growth as well. So we're excited for the future. I would say the last big change I would flag here, too, and the one that I'm sure we'll talk about is our entrance into the clinical market as well. So yes, we've got return to growth -- return to stability and now to growth in the core business, doing so profitably with improving margins. And now we've expanded into the clinical offering as well. So...

A lot.

A lot. I know, it's been a fun couple of years to be part of, so, yes.

Absolutely. A lot of legs to that stool. So you mentioned Sequence clearly at the end, which I think everyone is curious about. So I guess, first, if you could talk about the outlook for Clinical as a category, any of the challenges that you're seeing there? And then also talk about why Sequence was the right partner for WW within the competitive landscape there. And then, I guess, the ways in which you think the 2 businesses can work together that are going to drive hopefully some revenue synergies?

Yes. So first, on the market opportunity, it was very apparent to us. We have an in-house insights and science team that are looking to guide us as an organization to drive our product, what we serve up to the consumer -- in where consumer demand meets science. So when consumer demand overlaps with science, that's what we look at to launch in our product roadmap or any food plan we've ever launched anything like that. It's based on consumer insights and science. We also have a scientific advisory board made up of advisers that help us think about where we should be approaching a path forward in a science-based way and we saw such strong evidence of that consumer interest in the space and the scientific evidence that this was really an important space for us to be in. We became increasingly aware that behavior change alone isn't enough for some people to help them with their weight health. And we are so dedicated to helping people with their weight health and to become aware of the need, but also the ability to help people with weight loss through these medications. It was just so clearly and obviously a space that we should be thinking about being a part of. So then forward to the acquisition of Sequence. In parallel, we looked at build versus buy. We're a product tech organization. We could build something in this space. But at the time that we looked at it, we also looked at buy in parallel and made the choice for time and -- the bet on Sequence themselves based on what we saw when we looked at Sequence as well as other competitors in the space. We actually looked at over 30 competitors in the space, quickly narrowed it to a top runner list, but it would -- became overwhelmingly clear that Sequence was the leader in this space that we should be looking at acquiring. The big leading factors for what differentiated Sequence in the space were really the platform that we acquired. This is a platform built by engineers that looked at a problem to solve and thought about like how do we build something scalable in this space. There are a lot of other players in the space, and they haven't necessarily thought of it in terms of how do we take an approach to building a platform that's going to allow for nonlinear scaling of this. A lot of the players in the space were doing things very manually, wanting to help people get telehealth access to these obesity medications but hadn't necessarily looked at a platform to be able to scale it beyond a human constraint. So this platform brings together the clinicians, a care team and the consumer, all seamlessly on one platform. And it also helps -- in the platform there is help with improved outcomes in insurance filing. So as consumers come in and they'll meet with a clinician. They will, if they qualify, be prescribed with a medication and then the next stage for a consumer is getting insurance help. So filing a prior authorization is one of the steps along the way, obviously, to getting your insurance completed, and it's a requirement of most insurers. And we, with this platform, have improved outcomes on the insurer -- the success of a first-time prior authorization. So we see -- or we understand there to be about a 20% to 25% coverage for these medications for Americans. And we're seeing upwards of 30% and 35% success rates on these first-time prior auths and that comes from machine learning where we're figuring out ways with a platform to have greater success in getting a first-time approval done, learning what certain insurers need in the steps to filling things out and being able to do this on a platform rather than overly leveraging human capacity. So again, supporting that nonlinear growth that we expect to have happened. Another differentiator for Sequence was that they had grown. At the time we announced the acquisition, they had grown to 24,000 subscribers. And they did that organically. They did that without spending into marketing, and that was a huge differentiator. Everyone else in this space is experiencing incredibly high cost to acquire and one that is just so remarkably inefficient and Sequence was able to do this organically. And why? I would believe that to be a high satisfaction of the clinicians who want to work with us, talking about this platform and bringing in people to work on this and high consumer satisfaction on the platform, talking about the experience that they're having. Then you add to that, Weight Watchers is the acquirer. We are leaders in the weight loss space. We have a trusted name, and we bring our marketing machine with us -- the performance marketing machine, I referenced earlier on this as well. And altogether, we think this is a really exciting future pathway for us.

Absolutely. Clearly, I -- clearly, the market's got some pretty high level of excitement when it got announced. So I think one of the core topics that people are trying to get their head around is the increase in subscribers, which is the first time in a couple of years...

Since 2020.

Yes. But then we also had lower revenue per subscriber. So clearly, there are some changes in terms of the length of contract terms, which I think are expected to generate longer, more sustainable revenue streams. Can you talk a little bit about what the changes to the marketing strategy has been in terms of pricing and what you've seen from consumer adoption?

Sure. I'll start with revenue, though. Place where we are in revenue is about where we are in return to growth and the fact that we're a subscription company. So as you were saying that I interjected with since 2020, we have been in a successive decline since the end of 2020. And when you're in a subscription business, you have consumers who are in this commitment pricing period. So they join us and they commit to 9 or 12 months and they get commitment pricing while they're in that period. And then when their commitment is over, they flip into a recur-bill month-to-month pricing. With the successive declines leading into Q3, 2023, where we shared excitingly a return to subscriber growth, the tail of recur-bill subscribers is shrinking repeatedly as you're going towards there. So when you look at a revenue per subscriber, you're increasingly losing the powerful tail of those recur bill subscribers. But now we've hit this inflection point and a return to growth. And over time, you should see that read through into, again, compounding a tail of recur-bill subscribers that should, over time, increase revenue per subscriber. Then to your other part of your question around commitment pricing, we also have subscribers choosing longer and longer-term commitments with us. So this time last year, we had subscribers committing to about 5 months on average with us as they joined and chose a commitment period. This year, we're seeing subscribers commit to nearly 8 months. They're about 7.9 months, I think, in Q3 and that means the lower commitment price being paid is stretching further into your commitment with us and delaying that time when you flip over into recur bill. So again, that puts pressure on average revenue per user. And then back to the very first comment I made, I think, was more and more our consumers are shifting to digital and away from workshop. And our digital subscription comes at a lower price, but I would note at a much richer margin for us. So when you put all of that together, where we are in our return to growth, the picture in a moment in time is lower rate per user, lower revenue per user. But we've just returned to growth. So this is all going to take time to read through in the return to growth story and then on commitment pricing, I would add, we are confident that this is the right decision for us to be making in our approach to pricing. We A/B test all of our pricing, and we know that the actions we take and the plans that we put in front of people are maximizing the conversions that we're getting. In a return to growth, it is extremely important that we grow that population of subscribers and that we optimize and grow our top line revenue, and that's what we're doing with our commitment pricing.

Can I ask a question on that topic.

Sure.

Sure.

The Street is obviously concerned about everything that you just articulated. And I was curious if you felt like there was a need to push back at all on the Street's concerns or it's just simply a function of, we believe this is the right strategy, and we'll talk to you in a year, something like that.

I firmly believe this is the right strategy, and it's informed by data and our view to all of our retention curves and all of our cohort curves. And I think that my biggest takeaway from the pushback, as you say, from the Street, is that I've got work to do to help people understand the remix of the base, to understand the impact and implications of a subscriber base that is more digital versus workshop. And next year will be increasingly clinical versus digital versus workshop. So there's a remix of the subscriber base. And importantly for me and our team is going to be helping everybody along to understand how to model this and understand the growth pathways forward. And I think to appreciate that we're focused on subscriber growth. We are focused on profitable revenue growth. And you see that reading through in record high gross margin posted for the last 2 consecutive quarters. I think we're focused on the right things, and we're committed to and know we're making the right decisions in this commitment pricing. Thank you.

So we haven't touched upon the incremental growth opportunity of B2B on the clinical side and working with employers, corporates. I guess, can you talk about what the outlook is there? Have -- has this -- at what point will this begin to be a growth driver for that side of the business?