WW International, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023, compared with the three months ended April 2, 2022. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted.
Business context and results
WW provides digital subscriptions, Workshops + Digital services, and consumer products. Beginning in fiscal 2023, it reports two segments: North America and International. The company said lower subscriber levels and recruitment weighed on revenue; the quarter’s results are also affected by seasonal patterns in its business.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $241.9 million | $297.8 million |
| Subscription revenue | $211.0 million | $257.0 million |
| Gross profit / margin | $119.5 million / 49.4% | $180.1 million / 60.5% |
| Operating income (loss) | $(28.6) million | $9.0 million |
| Net income (loss) | $(118.7) million | $(8.2) million |
| Diluted loss per share | $(1.68) | $(0.12) |
| Cash used in operating activities | $26.7 million | $10.5 million |
Revenue fell 18.8% reported, or 17.1% excluding foreign-exchange effects. Digital subscription revenue decreased 22.0% reported; Workshops + Digital fees decreased 5.8%. North America revenue declined 16.4% and International revenue declined 23.9% reported. Management attributed the subscription decline primarily to fewer incoming digital subscribers; total paid weeks were down 13.5%.
Margins, cash, debt, and liquidity
- Gross margin decreased 11.1 percentage points to 49.4%. Excluding restructuring charges, management reported adjusted gross margin of 57.1%, versus 60.5% in the prior-year quarter; it cited business mix, fixed-cost deleverage, and accounting for promotional bundles.
- Marketing expense declined 18.0% to $88.2 million, mainly due to lower TV advertising and spending shifted to later in the year. SG&A declined 5.8% to $59.9 million.
- Cash and cash equivalents were $140.8 million at quarter-end, down from $178.3 million at December 31, 2022. Investing cash outflow was $10.3 million and financing cash outflow was $0.7 million. Net cash decreased $37.5 million.
- Principal debt was $1.445 billion: $945 million of term loans and $500 million of senior secured notes. The reported carrying value of long-term debt, net, was $1.423 billion. Weighted-average debt interest rate was 7.20% excluding swaps and 6.30% including swaps at April 1, 2023.
- Net debt was $1.283 billion and net debt / Adjusted EBITDAS was 6.7x, both company-presented non-GAAP measures. Q1 Adjusted EBITDAS was $7.3 million; trailing-12-month Adjusted EBITDAS was $190.2 million.
- Working capital was a $31.6 million deficit, versus an $84.8 million surplus at year-end. Current liabilities included $62.1 million of income taxes payable, largely associated with the unusual tax expense described below.
Material changes and unusual items
- Net loss included a $67.6 million income tax expense despite a pretax loss of $51.1 million. The company cited a valuation allowance against U.S. deferred tax assets, related to limits on interest deductions, as the main driver of its unusually high negative effective tax rate. Management expected the expense to largely reverse in fiscal 2023’s remaining quarters as it expected pretax income; this is an expectation, not a guarantee.
- The company recorded $22.6 million of Q1 restructuring charges, including $14.3 million of lease termination and related costs and employee termination costs. It expects total charges under its 2023 plan of approximately $39 million to $46 million, with execution expected by year-end 2023. Most plan costs are expected to require cash payments.
- Interest expense increased 22.4% to $22.8 million, primarily because of higher base rates on the term loan.
- On April 10, 2023, after quarter-end, WW completed its acquisition of Sequence, a subscription-based telehealth weight-management platform. Stated consideration was approximately $132 million, including cash, about 8.0 million newly issued WW shares, and two $16 million cash payments due in 2024 and 2025, subject to agreement adjustments. The company reported a net cash outlay of $40.3 million, including transaction costs, and said the acquisition would initially dilute earnings per share. Sequence results are included from the closing date; purchase-price allocation was still pending.
Outlook, risks, and contingencies
Management said operating cash generation, cash on hand, available revolving credit, and continued cost controls were expected to provide sufficient short- and long-term liquidity. It also said it could delay investments or reduce marketing spending if needed. No specific revenue or earnings guidance was provided in the filing text.
- Although WW reported compliance with other applicable credit agreement covenants, its first-lien leverage ratio was 6.39x, above the applicable threshold. Consequently, revolving borrowings were limited to 35% of commitments, or $61.3 million, until the ratio is met. The company reported $173.9 million of facility availability subject to terms and conditions; this limitation is important when assessing usable liquidity.
- The company cited subscriber retention and recruitment, competition, execution of strategic initiatives, economic and consumer conditions, debt service, variable interest rates, and access to financing as risks. Sequence adds integration, telehealth competition, healthcare regulation, privacy, clinical, and fraud-and-abuse compliance risks.
- WW expects to transition its credit agreement away from LIBOR before its anticipated cessation around June 30, 2023. A hypothetical 90-basis-point rate increase was estimated to raise annual interest expense by approximately $4 million after swaps.
- The company is appealing IRS penalties related to Affordable Care Act reporting and said it believes it has no liability. An IRS lien remains limited to certain refunds while the appeal is pending. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscriber recruitment, retention, paid weeks, and digital subscription revenue stabilize after the reported declines.
- Whether the expected tax-expense reversal occurs, and the cash and earnings effects of the valuation allowance and income taxes payable.
- Revolving-credit availability under the leverage restriction, covenant calculations, and progress toward reducing leverage.
- Cash requirements for the restructuring plan and Sequence acquisition, including deferred acquisition payments and integration costs.
- Sequence’s contribution to revenue and earnings, and the company’s progress on telehealth regulatory, clinical, privacy, and compliance obligations.