WW International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; compared with the three months ended April 4, 2015. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
The company operates meetings, digital subscriptions, product sales and licensing across North America, the United Kingdom, Continental Europe and other markets. Its multi-year transformation plan focuses on cost control, repositioning the brand and services, healthcare-channel growth, and technology and organizational capabilities. Management identified the December 2015 launch of Beyond the Scale and the partnership with Oprah Winfrey as important parts of its repositioning strategy.
Financial and operating metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $306.9 million | $322.1 million |
| Gross profit / margin | $149.7 million / 48.8% | $157.3 million / 48.8% reported |
| Operating income / margin | $13.6 million / 4.4% | $18.0 million / 5.6% reported |
| Net loss attributable to WWI | $10.8 million | $5.4 million |
| Diluted loss per share | $0.17 | $0.10 |
| Operating cash flow | $43.3 million | $(7.4) million |
| Cash and cash equivalents, period end | $127.8 million | $211.0 million |
| Total debt principal | $2,085.0 million | $2,234.6 million at January 2, 2016 |
- Revenue declined 4.7% year over year, or 3.0% on a constant-currency basis. Foreign exchange reduced Q1 revenue by $5.4 million.
- Gross margin was 48.8% in both reported periods; adjusting Q1 2015 for restructuring charges, its margin was 49.5%. Marketing expense was $86.5 million, or 28.2% of revenue; SG&A was $49.6 million, or 16.2% of revenue.
- Interest expense was $30.0 million. The effective interest rate including swaps was approximately 5.25% at quarter-end; debt was variable-rate, with swaps hedging a portion of exposure.
- Cash from operations improved by $50.7 million year over year, principally due to a $55.4 million favorable year-over-year working-capital change. Investing used $9.0 million and financing used $149.6 million, primarily for debt repayment.
- Current assets were $241.2 million and current liabilities $414.9 million, a $173.7 million working-capital deficit. The company stated that subscription prepayments contribute to its structurally negative working capital.
- Q1 EBITDAS, a company-defined non-GAAP measure, was $29.7 million versus $38.5 million. The reported consolidated leverage ratio was 7.42:1.00.
Material changes versus the prior comparable period
- North America revenue increased 1.6% (2.3% constant currency); the other regions declined. UK revenue decreased 15.9% and Continental Europe revenue decreased 16.5% as reported.
- North America end-of-period subscribers rose 11.2%; total company-owned end-of-period subscribers increased 4.8%. Total paid weeks increased 2.0%, while incoming subscribers decreased 4.8%.
- Operating income fell 24.9% as reported, primarily reflecting weaker UK and Continental Europe results. Management cited worldwide discounting, lower high-margin licensing revenue and higher marketing and SG&A as pressures on profitability.
- Net loss worsened from $5.5 million to $10.8 million. The prior-year comparison included a $4.8 million gain on early debt extinguishment and $5.8 million of restructuring charges; the filing also provides adjusted prior-year comparisons excluding those items.
- Cash declined $113.7 million from year-end, mainly after the company used $144.3 million of cash to repay the remaining Tranche B-1 term loan due April 2, 2016. Total debt principal declined from $2,234.6 million at January 2 to $2,085.0 million at April 2.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2016 revenue to be slightly above $1.2 billion, supported by higher recruitments and stable retention. It anticipated approximately $20 million of revenue headwind from lower incoming subscribers and $14 million from foreign currency at then-current rates. The filing did not provide specific full-year earnings guidance.
- Management reported that the transformation had reduced gross annualized expenses by $250 million versus the fiscal 2012 cost base by the end of fiscal 2015. It said it believed liquidity was sufficient for obligations over the next 12 months and to execute the transformation plan.
- The company targeted year-end 2018 net debt/EBITDAS below 4.5x, based on improved operating performance and cash generation. This is a target, not a guarantee.
- Brazil goodwill of $16.9 million passed an interim impairment test, but estimated fair value exceeded carrying value by less than 10%; changes in assumptions could lead to impairment.
- Reported legal matters included securities and derivative shareholder litigation and a putative consumer class action concerning website and app glitches. Management said it believed the cases were without merit; outcomes are uncertain.
- Key risks cited include competition, the success of new products and strategic initiatives, marketing effectiveness, heavy debt service and refinancing, technology and privacy/security issues, foreign exchange and international operations, seasonality, impairment, and litigation. The company reported no material change in its previously disclosed risk factors and said disclosure controls were effective at the reasonable-assurance level.
- Other notable items: the quarterly dividend remained suspended; substantially all assets secure the credit facility, which has customary restrictive covenants but no financial maintenance covenant. The company recorded $1.1 million in Q1 services from Winfrey and related entities.
Important facts for investors to verify
- Whether recruitment and subscriber gains—particularly in North America—translate into sustained revenue growth and retention, given weakness in the UK and Continental Europe.
- Whether the fiscal 2016 revenue outlook of slightly above $1.2 billion remains achievable after currency and subscriber headwinds.
- Debt repayment capacity, liquidity and leverage progress, including the path toward the year-end 2018 net debt/EBITDAS target and exposure to variable interest rates.
- Whether operating margins recover from discounting, reduced licensing revenue and elevated marketing and SG&A, and whether Q1 operating cash flow is sustainable beyond favorable working-capital movements.
- Developments in the Brazil goodwill assessment, the disclosed lawsuits, and execution of the Beyond the Scale, technology and healthcare-channel initiatives.