WW International, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 28, 2020, compared with the three months ended March 30, 2019. WW operates Digital subscriptions and Studio + Digital services, alongside product sales and other revenue, across four reportable segments. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $400.4 | $363.2 |
| Gross profit / margin | $211.0 / 52.7% | $200.9 / 55.3% |
| Operating income / margin | $24.9 / 6.2% | $21.9 / 6.0% |
| Net loss attributable to WW | $(6.1); $(0.09) per diluted share | $(10.7); $(0.16) per diluted share |
| Cash provided by operating activities | $8.4 | $7.2 |
| Cash used for investing activities | $(25.9) | $(11.2) |
- Revenue grew 10.2% reported and 11.3% at constant currency. Digital subscription revenue was $174.5, up 17.3%; Studio + Digital fees were $150.1, down 4.9%; product sales and other were $75.7, up 34.1%.
- Gross margin fell 2.6 percentage points. Management attributed the decline primarily to the tour’s net profit as a share of revenue and higher studio compensation, partly offset by a mix shift toward Digital.
- Interest expense declined 10.4% to $31.6. The $3.7 goodwill impairment for Brazil reduced reported operating income; excluding it, non-GAAP operating income was $28.5 and margin was 7.1%.
- At March 28, cash and equivalents were $292.3, including the $148.0 revolver draw; management separately cited $144.3 of cash excluding that borrowing. Total debt principal was $1,734.0, net debt was $1,414.1, and net debt/Adjusted EBITDAS was 3.9x. Cash interest-bearing debt included $1,286.0 term loans, $148.0 revolver borrowings and $300.0 of notes. The company reported compliance with applicable covenants; revolver availability was only $0.8, with $1.2 of undrawn letters of credit.
- Current assets were $432.6 and current liabilities $560.3; the reported working-capital deficit was $127.6. Total deficit was $704.5. Cash flow from operations less investing activities was negative $17.5.
Material changes versus the prior period
- Growth was led by Digital: total Digital subscription revenue increased 17.3%, and end-of-period Digital subscribers rose 15.9%. Studio + Digital fees declined 4.9%, and end-of-period Studio + Digital subscribers fell 5.1%. Total paid weeks increased 11.4%; total end-of-period subscribers were 5.03 million, up 9.2%.
- North America revenue rose 13.5%, including increased product and other revenue associated in part with WW Presents: Oprah’s 2020 Vision tour. Continental Europe revenue rose 5.0%; UK rose 1.7%; Other declined 6.0%.
- Cost of revenue increased 16.7%, faster than revenue. Marketing expense increased 3.2%, while SG&A was essentially flat. The prior-year quarter included $6.3 of restructuring expense; no additional expense for that realignment was recorded in Q1 2020.
- Cash rose from $182.7 at fiscal year-end, principally reflecting the $148.0 revolver borrowing. Investing outflows increased, including a $5.0 investment in ClassPass and higher capital expenditures.
Outlook, management commentary and risks
- COVID-19 had no significant effect on reported Q1 results, but recruitment fell significantly beginning in mid-March and the decline continued through April. Management expected a more significant effect on Q2 results and potentially later periods; it could not reasonably estimate the financial impact.
- In-person workshops were suspended and shifted to virtual delivery. Management noted Studio + Digital recruitment was more affected, and that reopening timing, consumer demand, restrictions, staffing and additional operating costs remained uncertain. WW expected its future studio count could be lower and anticipated one-time restructuring and real-estate realignment costs.
- WW is implementing a $100.0 cost-savings initiative to preserve liquidity and fund investment and debt obligations. Management cautioned that not all savings may be achieved and that the target may be insufficient. It stated that cash, operating cash generation and the initiative were expected to provide adequate liquidity for the next 12 months, while noting it could delay investment or reduce marketing spend.
- Management is accelerating its digital transformation, including virtual workshops and a planned digitally enabled, community-focused, coach-led offering later in 2020. Launch timing, costs, and member adoption are uncertain; the filing gives no quantified full-year earnings or revenue guidance.
- The $3.7 Brazil goodwill impairment followed a decision to shift that market to an exclusively Digital business and reflected COVID-19, challenging local conditions and lower projected cash flows. Further impairment risk remains dependent on future performance and assumptions.
- Risks include pandemic-driven demand and retention changes, substantial debt and variable-rate exposure, limited revolver availability, execution of cost reductions and digital initiatives, studio lease obligations, currency and economic conditions, and litigation. Securities class-action and derivative matters were pending; the company said it considered them without merit. No clear estimate of potential loss is provided.
Important facts for investors to verify
- Subsequent recruitment, subscriber retention and cancellations, particularly after workshop suspensions and during reopening.
- Actual savings achieved against the $100.0 target, related implementation costs, and the effect on liquidity and investment plans.
- Cash generation, revolver availability, debt-service requirements, covenant headroom and refinancing needs.
- Studio reopening or consolidation decisions, associated lease and restructuring costs, and the performance of virtual offerings.
- Assumptions supporting the Brazil impairment assessment and any further impairment, plus developments in pending litigation.