WW International, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparative quarter ended October 1, 2022. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context and results
WW operates Digital, Workshops + Digital, and Clinical subscription offerings, plus product sales and other activities. It reports North America and International segments. Sequence, a subscription-based clinical weight-management and telehealth business, was acquired on April 10, 2023; its results are included from that date.
- Q3 revenue: $214.9 million, down 14.0% year over year (down 15.3% at constant currency). Subscription revenue was $203.5 million, including $10.0 million from Clinical; product sales and other revenue was $11.4 million. Management cited fewer beginning-period subscribers, lower-priced initial commitment-period subscriber mix, a shift toward Digital, and the continuing wind-down of consumer products.
- Profit and margins: Gross profit was $141.8 million, down 7.0%; gross margin increased to 66.0% from 61.0%. Operating income was $30.6 million versus an operating loss of $254.5 million, which included $312.7 million of prior-year franchise-rights impairment. Excluding specified impairments, restructuring and other adjustments, Q3 operating income was $36.6 million versus $61.9 million, and adjusted operating margin was 17.0% versus 24.8%.
- Net income: $43.7 million, or diluted EPS of $0.54, versus a $206.0 million net loss, or $2.93 loss per diluted share, in Q3 2022. The 2023 result included a $38.4 million income-tax benefit; the reported effective tax rate was an unusually high negative 727.7%, driven by the annual tax-rate calculation and a valuation allowance against certain U.S. deferred tax assets.
- Operating expenses and interest: Marketing expense rose 34.8% to $48.1 million, mainly on higher online advertising. SG&A rose 7.9% to $63.0 million. Interest expense increased 17.2% to $24.5 million as borrowing rates rose.
- Subscriber indicators: End-of-period subscribers were 4.02 million, up 6.0% year over year; incoming subscribers were 4.09 million, down 4.3%. Total paid weeks increased 1.0% in Q3. Digital and Workshops + Digital subscriber/revenue trends remained mixed, while Clinical had 45,400 end-of-period subscribers.
Nine-month performance and liquidity
- Nine-month revenue: $683.6 million, down 16.3% year over year. Gross profit was $404.4 million, down 18.4%; gross margin was 59.2% versus 60.6%.
- Nine-month operating results: Operating income was $28.3 million versus an operating loss of $232.2 million, which included $339.2 million of prior-year impairments. Adjusted operating income was $68.2 million versus $129.3 million; adjusted operating margin was 10.0% versus 15.8%. Net loss was $24.1 million versus $221.1 million; diluted loss per share was $0.32 versus $3.15.
- Cash flow: Operating activities used $1.2 million, compared with $80.5 million provided in the prior-year period. Investing activities used $66.7 million, including acquisition spending; financing activities used $1.9 million. Cash fell $70.8 million from year-end to $107.5 million at September 30.
- Debt and liquidity: Principal debt was $1.445 billion, comprising a $945 million term loan and $500 million of senior secured notes; reported long-term debt net of financing costs and discount was $1.425 billion. Net debt was $1.318 billion, and net debt/Adjusted EBITDAS was 8.8x. The weighted-average debt rate was 7.48% excluding swaps and 6.44% including swaps. Cash was $107.5 million; working capital was positive $24.8 million including cash, but negative $82.7 million excluding cash.
- Revolver constraint: The company reported $173.9 million of nominal revolver availability, but its 8.64:1.00 first-lien leverage ratio exceeded the applicable 5.50:1.00 threshold. As a result, it was limited to borrowing no more than 35% of commitments, or $61.3 million, at quarter-end until it meets the ratio. There were no revolver borrowings; $1.1 million of letters of credit were outstanding. The filing also states the company was in compliance with the covenants then in effect.
Material changes, outlook and risks
- WW completed the Sequence acquisition for stated aggregate consideration of approximately $132 million, including cash paid or payable and newly issued shares. The filing’s purchase-price allocation reports aggregate merger consideration of $121.7 million after specified adjustments. Sequence contributed $17.6 million of revenue and a $4.8 million net loss for the nine months from acquisition close through September 30.
- The company revised its expected total 2023 restructuring charges upward to approximately $47 million–$54 million, from $39 million–$46 million, and expected the plan to be fully executed by fiscal year-end 2023. Most costs are expected to require cash; restructuring actions include job eliminations, centralization and real-estate rationalization.
- Management said cash from operations, cash on hand, revolver availability and cost controls were expected to provide sufficient short- and long-term liquidity. It noted flexibility to delay investments or reduce marketing spending, while warning that a changing demand environment and failure to manage costs could adversely affect liquidity and results.
- No specific financial guidance was provided in the supplied filing text. Key risks include subscriber retention and recruitment, competition, Sequence integration and initially dilutive EPS effects, extensive and evolving healthcare/telehealth regulation, variable-rate debt and debt service, and the restricted practical access to revolver capacity.
- The company identified previously issued income-tax accounting misstatements, concluded they were not material individually or in aggregate, and revised prior-period financial statements. The revisions included a $5.5 million reduction to opening 2023 retained earnings and changes to previously reported 2022 results.
- The IRS assessed penalties related to Affordable Care Act reporting; WW is appealing and does not believe it is liable. While the appeal is pending, an IRS tax lien is limited to certain refunds. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether subscriber recruitment, retention and revenue trends stabilize, particularly in Digital and Workshops + Digital.
- Whether Sequence can grow subscriptions and achieve integration benefits while managing clinical, regulatory and operating risks.
- Cash generation, debt-service capacity and the practical availability of revolver funding given the leverage-ratio restriction.
- Progress against the revised restructuring cost estimate and expected completion timetable.
- The effects of the unusual tax benefit, revised prior-period statements and pending IRS appeal on future reported results and liquidity.