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

Good afternoon, everybody, and thank you so much for joining us. My name is Nathan Feather, and I am Morgan Stanley Small and Mid-cap Internet analyst. I'm excited to be joined this afternoon by Heather Stark, WeightWatchers' CFO; and Rémi Cossart, Head of WeightWatchers Clinical. Thank you both so much for joining us. Thank you.

Thanks for having us.

Now before we begin, quick housekeeping item. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please [ send ] them to your Morgan Stanley representative. And with that, let's begin.

So Heather, for people that may be unfamiliar with the story, can you give an overview of the WeightWatchers business across the core and clinical.

Absolutely. So WeightWatchers, for those of you who don't know us from the past, we've been around for over 60 years now. And we have been in the business of behavioral weight management for some time and really providing a service at the intersection of human accountability coming together in communities and working on people's weight together, let's say, through coming together in communities. And really accelerated by COVID, we have pivoted to being a much more digital-focused or digital-first company. So we took what was really going on in real-life experiences in WeightWatchers and move them much more digitally. And about 1.5 ago, we had a new CEO join us, Sima Sistani, and she comes from a background of digitizing communities. And this was a great opportunity for us to basically rethink, renovate WeightWatchers as we think about it. And we really leaned in. We simplified our product offerings. We did a lot of work to rightsize our cost base and rightsize the products that we were offering in general, simplified and streamlined all around the organization. And then into our world came the clinical side of the conversing, and I'm sure we'll talk much more about that in the conversation of today, but we took the opportunity. 1 year ago this week, we announced the acquisition Sequence and Rémi is actually one of the co-founders of Sequence and just a great new addition to our team this past year. But yes, since this time last year, we added the clinical offering to WeightWatchers and now can meet people wherever they are on their weight health journey in the spectrum of offerings that we have for behavioral to behavioral plus clinical. And yes, rest is history, as they say.

Yes. Absolutely. So Rémi, great to turn to you. And be helpful I think if you could walk through your background, why you started Sequence and the opportunity you now see about a year in after the WeightWatchers acquisition.

Sure. Yes. Yes. To Heather's point, it's fun looking back on just a year, but rolling back on the original, my own background. So I come from a tech background. I started a previous company, and it was focused on using technology to drive efficiency for e-commerce companies, particularly in customer support, built on the previous generation of machine learning models, not the GPTs that everyone's very excited about now, but the previous generation of machine learning models. And we ended up signing the company into Google. I joined Google bringing the technology in there. And while I was there, I have a desire to start another company, in particular, in health care for -- frankly, heavily for personal reasons. So I grew up with chronic migraine. I still have them to this day. And through that process, just really felt from a first-hand experience, all the ways health care can be broken, and also the importance of nutrition and exercise can lead towards healthier outcomes, avoiding other health conditions, and that really stuck with me. And so one of the issues that came out of that though was I realized, while the patient experience was really broken fundamentally, and health care wasn't supporting patients in ways that allow them to feel like that they're at the center of the system, the issue existed on the health care provider side, too, fundamentally. And so from a provider perspective, many health care providers get into the industry with a real desire to help patients. And instead, they find themselves mired in the what we call the administrivia of health care, a lot of paperwork and spending less time providing care. So the core concept behind Weekend Health and our program, our key program was called Sequence. And all of that was acquired by WeightWatchers. But the core idea originally was to help solve those problems that I saw and really put the patient at the center and build a technology platform, which really combine the best of the skills that providers -- health care providers need to provide care to patients would then allow patients to be able to access that care. So really putting those 2 together and building that health care platform in a way that is scalable, fundamentally. That was the core idea. We actually got started relatively recently in the grand scheme of things, put again certainly the WeightWatchers' 60-year history, it's kind of almost tail of the other story, where we got started in the end of 2021, relatively young company, but really focused on technology. I come from that background as I mentioned and so does my co-founder, also an engineer and our CTO. And so that was the core concept behind the system we built. And we saw huge success in our scaling, growing primarily from organic -- the vast majority from organic growth. And so we can get into more about the opportunities there, but that's the background.

Okay. That's very helpful. And I want to kind of blend those 2 together. Given the strategy evolution you've seen at WeightWatchers and the combination of these 2 businesses, what's the synergy that you see between the clinic and the core? And then how do you feel the WeightWatchers brand has really translated to the weight loss medication space?

Why don't I start with our choice to get into it. When we think about WeightWatchers, we have always gone where there's the intersection between consumer interest and science. Everything we do is rooted in science. And going back 1.5-plus years ago. Our consumer insights team and our Scientific Advisory Board just saw such compelling evidence of the efficacy of the medications that are part of this clinical offering, but also just very high consumer interest. So it's something we had to look at getting into obvious opportunity for us. So as we started looking at it, we looked at build or buy, leans towards buy for speed to entrants. And we looked at over 30 companies in the space, like basically everyone who was anything in this space already at that time. And Sequence rose to the top, very dramatically relative to everybody we looked at in the space, and I think still do for several key reasons. And Rémi touched on several of these in leading through the background, but the technology that they had built, and we see that as just the way that we could actually scale this thing. So the machine learning, the things you talked about there in your technical terms, those were the things that were going to allow us to scale this great consumer experience that was allowing them to grow organically. They spent almost nothing on marketing until the time we acquired them and grew through organic word of mouth, which suggests great consumer experience, great clinician experience, great platform that people wanted to be on. And this was in a space where everybody else was spending these -- the wild cost to acquire that we were seeing and everybody else that we looked at was quite different in all of the competition. And then when you look at WeightWatchers being the acquirer in this situation, we were bringing to the table 4 million current subscribers, a 20 million lapsed member database, plus millions others that know us have used us at some point along the way. But all this played out into a great opportunity for us to get into.

Yes. Okay. Great. Now Rémi, the overall obesity medication space, it's clearly been going quite quickly. How do you see the market opportunity here? And what is really the clinic business and Sequence addressing?

Yes. So I think for the space as a whole, it's worth thinking about is on the continuum. And to build on what Heather was just talking about, the behavior program serves really well across that entire continuum, so the way we think of the market on the clinic side, in particular, is really supporting the existing behavior change across that continuum, too. Right now, the GLP-1 space, as you mentioned, it's a very exciting space. It's growing very rapidly. We see about -- projected about 50% of folks struggling with obesity by the year 2030. And a larger portion when you count folks with -- who are overweight, but with the weight-related comorbidity, which is the FDA indication for the GLP-1, so it's a really large market and growing quickly. And so we see that as a real opportunity, but we also view there being opportunity across that whole spectrum. The clinic offer services that can support members throughout their journey. And so we don't really view the journey or the weight spectrum as being fixed in time. You see actually members there's times when they're struggling with weight, and we have programs to support them on that side. If they're higher obesity and have weight comorbidities, all the way towards if they've made progress and they want to be on the behavior program with some limited clinical support and then, of course, simply just the behavior program alone. So we view all of those as working together, and this is something that Sima recently talked about on the earnings call around this expansion, this opportunity to really help members across the whole spectrum based on from where they are at that moment in time on their journey.

Okay. Great. Now interested to hear focusing on the WW Clinic business specifically. What do you see as the really 1 or 2 key differentiators that have allowed you to get the initial traction? And then on the flip side, where are the kind of 1 or 2 pinch points that you're looking to really help improve over the course of '24?

Yes. So in terms of the key differentiators, Heather touched on this a little bit before, but I think one of the big ones is the ability to scale. At the end of the day, this is a business which is operational in nature. And there's a number of components we just need to scale. And I talked about that in part on the motivation. It turns out that a lot of those administrative aspects of work, not only are they bad for the clinician's experience or the health care provider's experience, but they're also just plain old inefficient. And so driving where possible the ability to scale and drive efficiency, that's an important part. And I think it's something that we've done that others haven't been able to replicate. So I think that's a key component. And that yields a few advantages. Like I mentioned, there's the ability to scale, of course, but we also see that on the side of health care providers, recruiting health care providers. At the end of the day, we are a 2-sided marketplace at some level. And our ability to attract talent on the health care provider side is also a point of differentiation and allows us to grow more rapidly and bring the best providers there. So that's really unique. And on the patient side, that same platform allows us to provide a higher level of quality of care. And so back to the other point, Heather mentioned, that shows up in our ability to grow organically, the word of mouth. These sort of components you only really see when you have the sort of -- it's almost like a magical flywheel where your -- the platform provides support allows you to bring in clinicians who are efficient, but then also excited to work on the platform. And that in turn results in a better member experience and they spread the word and drive more membership. So you see that flywheel. And we've certainly seen it throughout, prior to the acquisition and then onwards. So that's really exciting. To your second point around the opportunities to grow and expand, there's a few different ways to look at this, but I think this dovetails neatly into some of that project expansion stuff that Sima was talking about before. There's a few different components here. So one opportunity for us in terms of expansion is taking some of those clinical services and allowing our members to access them throughout the spectrum of care. So it's things like dietician support even when not on the GLP-1 medication. This is also using our wide formulary. So I mentioned this in terms of your -- the advantages. Another unique aspect is while GLP-1s are a key part of this market, the reality is that the set of clinical interventions even on a medical perspective are broader than just GLP-1s. And while there's a lot of excitement on the GLP-1 side, we shouldn't forget that wider formulary to other medications, which are effective. And so those can be appropriate for other folks as well as I mentioned the dietitian support and certain metabolic testing, which can also be accessible for our members across the spectrum. That's only expansion of care. And then there's 2 other components I'll touch on briefly. One is on expanding how folks pay and access the program. A lot of the services we provide are at the end of the day, insurance billable and working with insurance, which is a much more traditional approach to health care. That's a big opportunity, which while it will take some time, I think we'll start to see unlock in the road ahead. And the other is accessing through working with employers and payers, so the B2B side. And that's another area where these -- this is a longer-term structure that we're taking -- approach that we're taking, but we'll see, I think, in fruits of that work start to bear out over the future. So those are some things we're focused on going forward.

Okay. That's great. And I want to dig a little bit more into the flywheel. I think that was really shown during 4Q with subs up nearly 50% quarter-over-quarter, taking share in the market. Can you talk through what led to that recent traction? And to what extent did the rebrand to WW Clinic and the launch of the in-app experience help propel that momentum?

Yes. I mean zooming out a second, I think the reality is we've seen that rapid growth since the inception of the Sequence program. I mean like I mentioned, talking 2021 isn't that long ago in the grand arc of growth. So that's -- I think that flywheel I mentioned has played a role throughout the period. Certainly, we saw it in Q4, but I think we've seen that since the beginning, really. In terms of the rebrand and the in-app experience, those certainly played a role. We saw really exciting uptake from about 50% of lapsed members to clinic and -- or 50% of our uptake was from lapsed members and another 20% from active members. So what you're seeing there is almost another sort of flywheel, not to reuse that concept, but we see WeightWatchers members really excited by the opportunities with the clinic offering and attaching to it. And you see that from the in-app as well as from lapsed members. In terms of how much of that comes from the single event, the actual launch, I think we'll see a lot of lasting benefits going forward. Certainly, we're continuing to see elements of that, and that's really, I think, exciting. And supporting aspect of this core thesis that our members on the WeightWatchers across the membership base, both existing and lapsed, are really interested in what the clinic provides. So it's a really exciting moment for us all.

Well, really exciting stuff. And I think one thing that has made it a little bit more difficult is the tight GLP-1 supply. And so can you talk to the impact you're seeing in the business today in terms of conversion and retention, especially in terms of people getting access to the intra doses? And then do you have the opportunity to ramp the clinics out of the business faster to the extent that supply starts coming online a little faster?

Yes. It's a good question. Certainly, shortages have been a big talk of the industry for some time now. Yes, I think there's a few things here. One, as I mentioned, we have this wide formulary. So it's not entirely based off of GLP-1. But certainly, we've -- our goal has been to grow in a manner that allows us to still deliver good value for our members and a good experience. And so shortages certainly play a role in that. That prevents us from growing at some level. And as a result, over the period, we've kept marketing at a level that's been matched with the supply. So that has had some impact there. Though I think what you'll also see is that retention ends up having a -- or sorry, GLP-1 has a big impact on retention. At the end of the day, the most common reason someone will churn off of the clinic program is because they're not able to get access to the medication because of shortages or other similar reasons. So at the end of the day, what you'll see, I think, is that shortage return, we'll be able to match that on the growth side, but also we'll see improvements on the retention side, too. So I think you'll see it across.

Okay. Now I want to shift over to the core behavioral side. Now you've continued to see expanding adoption of longer commitment period plans, 75% of subs on a 10-month or longer plan kind of quarter-to-date. That has increased the sub based from retention, but pressured ARPU, at least in the short run. How should investors get conviction that driving subs of those plans is similar or superior LTV to CAC and not simply discounting to try to get the [ subs ].

Yes, good question and one that we think a lot about. And when we think about bringing subscribers in, we are optimizing for LTV to CAC. So let me talk first about ARPU because I think there's some understanding that I can help convey there. When we look at ARPU, and we've guided that we expect it to be down mid-single digits year-over-year, and there's some key drivers to that. So I'll walk you through them. First, we came into 2024 with more subscribers in commitment. So when a subscriber comes to us, they will commit to a certain duration at a certain price for that commitment period. And then when that commitment period ends, they will convert over into a recur-bill price. So if I use the example of our most commonly used long-term commitment plan, someone is paying $10 a month for 10 months. And then at the end of the 10th month, they convert over into $23. By having more people coming into the year that are in commitment versus in recur bill as a proportion year-over-year, that pressures down ARPU in the short term. And as well, and we think our consumers are showing us some price sensitivity. Our consumers are actually choosing to subscribe to us for longer durations. So this time last year, they were subscribing on average at 5 months at a time. So months under commitment were on average 5 months this time last year. In the fourth quarter, it was 8.6 months. So people are choosing to subscribe for longer, which then also puts pressure on that ARPU rate year-over-year and pushes out the time that they turn to recur bill. So we're seeing consumer choice dictate that a bit. Then if we flip over into sort of line of sight to when that should turn positive because that's an important indicator to give investors confidence, it's on the horizon. I don't expect it to happen this year based on the trajectory of what we came into the year with and what we expect to acquire in new consumers through the year. But I would say it's on the horizon, but not by the end of 2024 that it turns positive. And importantly, to give you conviction that we're doing the right thing with how we're bringing subscribers in, if we look at LTV to CAC, we are optimizing for LTV/CAC when we look at what to spend and how to spend. And LTV year-over-year has stabilized. So when we look at this time last year in 2023, we were seeing some LTV compression year-over-year. But now we're seeing stability in that, and we expect it to be stable through 2024. But I wanted to point out that as we think about how we're pricing these commitment plans and as people are choosing to come in and the price sensitivity that I talked about, there are instances where we are giving up points of LTV, but we're doing it to grow the whole thing together. So less focus on the LTV per subscriber coming in and more focus on getting the most LTV acquired that we can. Let's get the biggest pool of subscribers we can get and the biggest pool of LTV. That turns into turning revenue positive year-over-year. So if I go back to the 10 for 10 example that I started with, a 10-month subscriber paying $10 a month has a slightly lower LTV than does what used to be our most common offering, which was 6 months at 50% off. So if the base price is $23, they're paying roughly $11.50 for those 6 months. They actually had a slightly higher LTV, but the $10 for 10 month plan converts 10% better than does the 6-month plan. That's significant, and we end up with more subscribers and in aggregate, more LTV. So the right decision, and I hope giving conviction to our investors that we're making the right calls on these. So trajectory for ARPU returning to positive and LTV is stable, and we're making the right decisions.

Okay. Well -- and I think building on that, it is a little difficult to blend the shifting revenue timing given the average plan. So is there anything you can share in terms of that total LTV bucket that you talked about and how that's changed on a year-over-year basis versus last year?

The total LTV bucket. Well, I would say it's stabilized. And when we look at the subscribers coming in, we do have shifts between workshop and digital and clinical. Clinical subscribers, obviously, have a significantly higher value to them. It's at a higher price point, obviously. And yes, we are seeing continued downshift in the workshop value that's being contributed with fewer consumers choosing workshop. And we are offsetting quite a bit of that with the digital subscribers as well.