WW International, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 30, 2019, compared with the three months ended March 31, 2018. WW provides Digital subscriptions, Studio + Digital workshops and subscriptions, and related products and services across North America, Continental Europe, the United Kingdom, and Other markets.
Financial results and key metrics
Amounts are in millions of dollars except per-share data, subscriber metrics, and where noted.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $363.2 | $408.2 | (11.0%); (8.5%) constant currency |
| Gross profit / margin | $200.9 / 55.3% | $221.0 / 54.1% | Profit down 9.1%; margin up 1.2 percentage points |
| Operating income / margin | $21.9 / 6.0% | $62.1 / 15.2% | Income down 64.7% |
| Net income (loss) | $(10.7) | $39.1 | Decline of $49.8 |
| Diluted EPS | $(0.16) | $0.56 | Down $0.72 |
| Cash from operating activities | $7.2 | $73.5 | Down $66.2 |
| Cash and cash equivalents | $193.4 at March 30 | $237.0 at Dec. 29, 2018 | Down $43.6 during the quarter |
| Gross debt principal | $1,743.8 | $1,782.3 at Dec. 29, 2018 | Down $38.5 |
- Service revenue was $306.7 million, down 6.7%; product sales and other revenue was $56.4 million, down 29.1%. Digital subscription revenue increased 7.4% to $148.9 million, while Studio + Digital fees declined 17.0% to $157.9 million.
- Marketing expense rose 15.5% to $114.2 million and reached 31.5% of revenue, versus 24.2% a year earlier. SG&A increased 8.0% to $64.8 million.
- Gross margin improved with a higher mix of Digital revenue and comparison against prior-year inventory obsolescence charges; fixed-cost deleverage partly offset the improvement. Operating margin contracted principally because marketing consumed a larger share of revenue.
- Investing cash outflow was $11.2 million, including $4.1 million of capital expenditures and $7.2 million of capitalized software expenditures. Financing cash outflow was $38.8 million, mainly scheduled term-loan repayments of $38.5 million.
- At March 30, gross debt principal was $1.444 billion under the term loan and $300 million of senior notes; no revolver borrowings were outstanding. Net debt was $1.516 billion and net debt/EBITDAS was 3.7x. The first-lien net debt leverage ratio was 2.91x. WW reported compliance with applicable credit-facility financial covenants.
- The revolving facility had $148.8 million of availability, after approximately $1.2 million of issued but undrawn letters of credit. Management said cash on hand, expected fiscal 2019 operating cash flow, revolver availability, and continued cost focus should provide sufficient liquidity for the next 12 months.
- Working capital was a $44.7 million deficit at quarter-end. The company reported a $180.3 million working-capital deficit excluding cash and current debt; adoption of lease accounting contributed to the increase. Operating lease liabilities totaled $157.4 million, recognized following adoption of the new lease standard.
Material changes versus the prior comparable period
- Revenue fell 11.0% reported, with foreign currency reducing revenue by $10.2 million; North America and the United Kingdom were primary sources of the decline.
- Digital subscription revenue grew, but declines in Studio + Digital fees and product sales more than offset that growth. Total paid weeks increased 4.2%, while end-of-period subscribers increased 0.9%; recruitment was lower than the prior-year period.
- Operating income fell sharply as marketing and SG&A rose while revenue declined. The prior-year quarter also benefited from a $18.1 million tax windfall on share-based awards and a $1.9 million tax benefit related to cessation of Mexican operations; the 2019 quarter did not have those benefits.
- Operating cash flow decreased to $7.2 million from $73.5 million, which management primarily attributed to the decline in earnings.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific numerical full-year revenue or earnings guidance. Management cited seasonal strength in first-quarter recruitment and said subscriber counts typically decline over the rest of the year.
- Management attributed lower recruitment partly to comparison with the successful December 2017 WW Freestyle/program launch and to ineffective marketing. It noted increased global television and online media, production, and agency spending.
- WW recorded $6.3 million of employee termination costs from an organizational realignment ($4.7 million after tax, or approximately $0.07 per share). Management did not anticipate additional costs related to that realignment.
- Debt and interest-rate exposure remain material. The term loan’s effective rate was 8.14% at quarter-end; the weighted average rate on outstanding debt, including the swap, was approximately 7.50%. WW estimated a 100-basis-point rate movement would change annual interest expense by approximately $1.9 million in either direction.
- Two securities class-action complaints were filed in March 2019 alleging misleading statements during May 4, 2018–February 26, 2019 and seeking unspecified damages. WW said it believes the suits are without merit and intends to defend them. A related shareholder demand letter prompted the board to create a special committee. Management cautioned that litigation outcomes are uncertain.
- Other disclosed risks include competition, customer and brand appeal, marketing effectiveness, technology and privacy risks, international and foreign-exchange exposure, substantial debt and debt service, and the ability to generate cash. The company reported no material change to the risk factors in its 2018 Form 10-K.
Most important facts for investors to verify
- Whether Digital growth and subscriber recruitment can continue, and whether Studio + Digital declines stabilize across regions.
- Whether elevated marketing spending improves recruitment and revenue sufficiently to recover operating margins.
- Future operating cash generation, scheduled debt repayment, leverage trends, covenant headroom, and refinancing or interest-rate exposure.
- The scope and potential financial or reputational consequences of the securities litigation and related shareholder demand.
- The effects of lease obligations and the organizational realignment on future costs, liquidity, and reported results.