WW International, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2023. Interim financial statements are unaudited. Unless stated otherwise, dollar amounts are in millions.
Business context and reporting period
WW provides digital and workshop-based weight-management subscriptions and, following its April 2023 acquisition of Sequence, clinical weight-management subscriptions. Beginning in fiscal 2023, the company reports North America and International as its two segments. The quarter’s results include Sequence from the acquisition date.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $226.8 | $269.5 | $468.7 | $567.2 |
| Gross profit / margin | $143.2 / 63.1% | $163.0 / 60.5% | $262.7 / 56.0% | $343.1 / 60.5% |
| Operating income (loss) | $26.3 | $13.4 | $(2.3) | $22.3 |
| Interest expense | $24.1 | $19.3 | $46.9 | $37.9 |
| Net income (loss) | $50.8 | $(4.6) | $(67.9) | $(12.9) |
| Diluted earnings (loss) per share | $0.65 | $(0.07) | $(0.91) | $(0.18) |
| Cash from (used in) operations | Not provided for quarter | Not provided for quarter | $(27.1) | $26.4 |
- Q2 revenue fell 15.8%; subscription revenue declined 11.8% and product sales and other declined 49.5%. Q2 total paid weeks fell 7.2% and ending subscribers fell 4.3% year over year, to 4.09 million.
- Q2 gross margin improved year over year, reflecting actions to reduce fixed costs in Workshops + Digital. For the first half, margin fell, primarily from fixed-cost deleverage in Digital.
- Q2 net income includes a $48.1 million income-tax benefit. Pretax income was only $2.8 million; the tax benefit reflects an unusually high negative estimated annual tax rate. First-half results instead include $19.5 million of tax expense and a $67.9 million net loss.
- At July 1, cash was $91.4 million, down $86.9 million from year-end 2022. Current assets were $177.9 million and current liabilities $201.4 million; working capital excluding cash was a deficit of $114.9 million.
- First-half investing cash outflow was $58.0 million, including $38.4 million of acquisition cash paid and $17.9 million of capitalized software spending. First-half financing cash outflow was $2.3 million.
- Debt principal totaled $1.445 billion: $945 million of term loans and $500 million of senior secured notes. Net debt was $1.333 billion; management reported net debt/Adjusted EBITDAS of 7.7x. The weighted-average debt rate was 7.35% excluding swaps and 6.37% including swaps, versus 5.45% and 5.50%, respectively, at December 31, 2022.
Material changes versus the prior comparable period
- First-half revenue declined 17.4% reported, or 16.5% on a constant-currency basis. Management attributed the drop mainly to fewer incoming digital subscribers and lower consumer-product sales, including North American SKU rationalization and the International product-business wind-down.
- First-half operating results deteriorated to a $2.3 million loss from $22.3 million of income. Excluding specified impairments, restructuring charges and Sequence transaction costs, adjusted operating income was $31.6 million versus $67.5 million, a 53.1% decline.
- Interest expense rose 23.7% in the first half, primarily due to higher base rates on the term loan. First-half operating cash flow swung from $26.4 million provided to $27.1 million used.
- Sequence added $7.6 million of revenue and contributed a $1.6 million net loss in the period from acquisition through quarter-end. The acquisition consideration was approximately $132 million before purchase-accounting adjustments, consisting of cash payments and 7.996 million newly issued shares; goodwill recorded was $89.2 million.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash flows, revolver access and continued cost focus are expected to provide sufficient short- and long-term liquidity. It also noted flexibility to delay investments or reduce marketing spending. The filing provides no specific revenue or earnings guidance.
- The 2023 restructuring plan is expected to cost approximately $39 million to $46 million in total and be completed by fiscal year-end 2023. The company recorded $24.4 million of plan charges in the first half and expected approximately $16.1 million of additional cash outlays in the remainder of fiscal 2023.
- The company reported a 7.48:1.00 actual Consolidated First Lien Leverage Ratio, above the applicable 5.50:1.00 threshold. Because revolver borrowings were zero, the filing says it was not in compliance with that ratio but was limited to borrowing no more than 35% of revolver commitments, or $61.25 million, until compliant. The filing separately states the company was in compliance with the credit-agreement covenants in effect; the leverage test is conditional on revolver usage exceeding 35% of commitments.
- Management cited risks including subscriber retention and recruitment, execution and integration of Sequence, competition, telehealth and healthcare regulation, privacy and cybersecurity, substantial debt and variable rates, and the ability to generate cash. A hypothetical 90-basis-point interest-rate move was estimated to change annual interest expense by approximately $4 million in either direction.
- Other unusual items include $8.6 million of Sequence-related transaction costs in the first half and a $26.4 million impairment charge in the prior-year quarter for franchise rights and Kurbo goodwill. No impairment was recorded in the 2023 period. Annual impairment testing found limited headroom for New Zealand franchise rights and Republic of Ireland goodwill.
- The company is appealing IRS penalties related to Affordable Care Act reporting and says it does not believe it has liability; a federal tax lien is currently limited to certain IRS refunds. Management said ordinary-course legal matters are not expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether subscriber trends, particularly digital incoming and ending subscribers, stabilize and support recurring revenue.
- Whether Sequence can grow subscriptions and integrate successfully while meeting healthcare, telehealth and pharmacy requirements.
- The actual borrowing capacity available under the revolver given the leverage-ratio limitation, and the company’s progress in reducing leverage and interest costs.
- Whether operating cash flow recovers enough to fund debt service, restructuring payments and ongoing investment; review the timing and cash impact of remaining restructuring charges.
- The sustainability of reported Q2 net income, given the large tax benefit, and the sensitivity of future tax expense to deferred-tax valuation allowances and interest-deduction limitations.