WW International, Inc. — 2018 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2018, compared with the periods ended July 1, 2017. Financial statements are unaudited. WW provides meetings, digital subscriptions and related products across North America, Continental Europe, the United Kingdom and other markets. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $409.7 | $341.7 | $818.0 | $670.7 |
| Gross profit / margin | $244.8 / 59.7% | $189.0 / 55.3% | $465.8 / 56.9% | $353.1 / 52.6% |
| Operating income / margin | $127.7 / 31.2% | $96.2 / 28.2% | $189.8 / 23.2% | $126.4 / 18.9% |
| Net income attributable to WW | $70.7 | $45.2 | $109.8 | $55.8 |
| Diluted EPS | $1.01 | $0.67 | $1.57 | $0.83 |
- Q2 revenue rose 19.9% reported and 17.6% at constant currency; first-half revenue rose 22.0% and 18.5%, respectively. Online subscription revenue grew 39.8% in Q2 and 41.2% in the first half, while meeting fees grew 10.1% and 12.8%.
- Q2 operating income increased 32.7% and first-half operating income 50.1%. Management attributed margin expansion primarily to operating leverage and a richer mix of higher-margin Online business.
- First-half cash provided by operating activities was $168.6, versus $98.1 a year earlier. Investing used $30.5, including $7.7 of capital expenditures and $13.1 of capitalized software costs; financing used $51.4. Cash increased by $84.7 to $167.8. The filing does not present a separate free-cash-flow measure.
- At June 30, cash was $167.8 and current liabilities exceeded current assets by $88.2. The company reported $148.7 of revolving-facility availability, with no revolver borrowings and $1.3 of undrawn letters of credit.
- Total debt principal was $1,801.5, comprising a $1,501.5 term loan and $300.0 of 8.625% senior notes due 2025. Net debt was $1,595.2; net debt to trailing-twelve-month Adjusted EBITDAS was 4.0x. The weighted-average debt rate, including swaps, was 7.41% at quarter-end. Current debt maturities were $118.5.
Material changes and management commentary
- Growth was broad-based across major markets. North America remained the largest segment; Continental Europe posted particularly strong reported revenue growth. Management said the WW Freestyle program supported recruitment and retention, while Online subscriber growth was strong across regions.
- Marketing expense rose 32.1% in Q2, reflecting digital marketing, the Summer of Impact campaign and brand investment. SG&A increased 21.3%, primarily due to compensation and incentive-related costs.
- Interest expense increased 32.4% in Q2 and 29.9% in the first half, mainly reflecting the November 2017 refinancing and its higher-cost term loan and notes. The prior-year periods included a $1.6 gain on early debt extinguishment; 2018 had no such gain.
- Cash from operations improved substantially, mainly due to higher net income. The company repaid $25.0 of revolver borrowings and made $38.5 of scheduled term-loan payments in the first half; $23.3 of stock-option exercise proceeds partly offset financing outflows.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said cash on hand, expected operating cash generation, revolver availability and continued cost focus should provide sufficient liquidity for obligations over the next 12 months.
- A term-loan cash-flow sweep of approximately $41.5 was considered probable for the second quarter of fiscal 2019. WW reported compliance with its credit-agreement covenants at June 30, 2018. Debt is substantial, largely variable-rate, and subject to restrictive covenants; the filing estimates a 75-basis-point rate increase would raise annual interest expense by about $1.9.
- The first-half effective tax rate was 6.2%, including a $22.2 tax benefit from stock-compensation windfalls and a $1.9 benefit related to cessation of Mexican operations. The first-half diluted EPS included a $0.25 benefit associated with Oprah Winfrey’s exercise of stock options. Tax effects under the 2017 Tax Act, including GILTI, remained under evaluation.
- Adoption of tax guidance for an intra-entity intellectual-property transfer reduced opening retained earnings by $48.6; this was a balance-sheet adjustment, not an operating-period expense. A separate revenue-standard adoption increased opening retained earnings by $2.1.
- Brazil remained an impairment-sensitive area: its reporting unit’s estimated fair value exceeded carrying value by about 10%, and a relatively small change in assumptions could lead to another goodwill impairment. A $13.3 Brazil goodwill impairment had been recorded in fiscal 2017.
- Management did not expect pending or threatened ordinary-course legal matters, individually or collectively, to materially affect results, financial condition or cash flows, while noting outcomes cannot be predicted with certainty. Other stated risks include competition, customer appeal and retention, marketing effectiveness, technology and privacy, international and currency exposure, debt service, and seasonality.
- Artal owned approximately 31.4% of outstanding common stock and can exert significant influence; the filing identifies possible conflicts with other shareholders. WW paid no dividend and said it had no current plans to do so.
Important facts for investors to verify
- Whether subscriber recruitment and retention—and especially Online growth—remain strong after the WW Freestyle launch, and how growth translates into paid weeks and revenue.
- Whether gross-margin gains can persist as marketing and compensation costs rise, and whether recent marketing investment produces durable customer growth.
- Debt reduction, cash generation, interest costs and the expected $41.5 cash-flow sweep; review covenant headroom and the variable-rate exposure.
- The assumptions supporting Brazil’s narrow impairment headroom and any subsequent changes in its operating outlook.
- Final tax treatment under the 2017 Tax Act and the sustainability of reported earnings after stock-compensation tax windfalls and other unusual tax benefits.