WW International, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended October 1, 2022; year-to-date period covers the first nine months of fiscal 2022. Financial amounts below are in millions of U.S. dollars unless noted. The filing is unaudited.
Business context and results
WW provides digital subscriptions, Workshops + Digital memberships, and related products and services across North America, Continental Europe, the United Kingdom and other markets. The company stopped offering Digital 360 in Q2 2022, transitioning most associated members to Workshops + Digital; this affects comparisons between business categories.
Management attributed weaker subscription performance mainly to lower sign-ups, worsening consumer sentiment, and PersonalPoints not resonating with consumers as anticipated. The company also cited inflation, social and political unrest, challenged economic growth and the evolving effects of COVID-19.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $249.7 | $293.5 | $816.9 | $936.7 |
| Gross profit / margin | $152.4 / 61.0% | $178.0 / 60.7% | $495.4 / 60.6% | $557.5 / 59.5% |
| Operating income (loss) | $(254.5) | $79.7 | $(232.2) | $142.2 |
| Net income (loss) | $(206.0) | $46.3 | $(218.9) | $37.0 |
| Diluted earnings (loss) per share | $(2.93) | $0.65 | $(3.12) | $0.52 |
- Q3 revenue fell 14.9% year over year, or 10.7% excluding foreign currency effects. Subscription revenue declined 15.9%; Digital subscription revenue declined 20.2% and Workshops + Digital fees declined 3.3%.
- Q3 reported operating results included $312.7 million of franchise-rights impairment charges. Excluding impairments and specified restructuring items, Q3 operating income was $61.9 million, versus $88.4 million in Q3 2021; this is a non-GAAP measure.
- Nine-month reported results included $339.2 million of franchise-rights and goodwill impairments. Adjusted operating income was $129.3 million versus $161.6 million, and Adjusted EBITDAS was $168.3 million versus $211.7 million. Both are non-GAAP measures.
- Q3 interest expense was $20.9 million, up 8.4% year over year; the company cited higher Term Loan Facility base rates. Nine-month interest expense was $58.8 million, down 14.4%, reflecting lower rates following the 2021 refinancing.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $80.5 million, down from $125.4 million. Investing cash outflow was $33.7 million, including $27.6 million of capitalized software spending; financing cash outflow was $2.1 million.
- Cash was $188.3 million at October 1, 2022, up from $153.8 million at fiscal year-end. Total debt principal was $1.445 billion: $945 million under the term loan and $500 million of senior secured notes. The revolving facility had no borrowings.
- Net debt, as defined by the company, was $1.233 billion; net debt to Adjusted EBITDAS was 5.2x. The reported weighted-average debt rate including swaps was 5.28% at quarter-end. Interest-rate swaps covered $500 million of variable-rate exposure.
- The revolver showed $173.9 million of availability, but management said it may not satisfy the leverage ratio in the near future, potentially effectively limiting access. The actual Consolidated First Lien Leverage Ratio was 4.99:1.00.
- Management said cash, operating cash generation, revolver availability and cost controls were expected to provide sufficient short- and long-term liquidity, while cautioning that the uncertain demand environment could affect liquidity. Working capital excluding cash was a deficit of $98.5 million.
Material changes, outlook and risks
- Impairment: A Q3 interim test resulted in $312.7 million of charges for U.S., Canada and New Zealand franchise rights. Management cited weaker performance versus assumptions, declining market capitalization and higher interest rates. After the charges, estimated fair values for those units were equal to carrying values; the filing notes that further adverse changes in assumptions could cause additional impairment.
- Subscribers: Company-owned end-of-period subscribers were 3.79 million, down 15.0% year over year; total paid weeks fell 13.6%. Digital end-of-period subscribers declined 17.7%, while Workshops + Digital subscribers declined 2.0%. Digital 360 transitions affect category comparisons.
- Restructuring: The company revised expected fiscal 2022 restructuring expenses to approximately $33 million, including about $20 million for employee termination benefits and $12 million for lease termination and related costs. It recorded $22.7 million for the plan in the first nine months and expects remaining liabilities to be paid through fiscal 2024.
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects studio locations to remain below pre-pandemic levels and says demand, consumer behavior and COVID-19 effects remain uncertain. It may delay investments or reduce marketing spending to preserve flexibility.
- Other risks and contingencies: Risks include subscriber recruitment and retention, competition, inflation and weaker economic conditions, execution of strategic initiatives, substantial debt and variable rates, access to the revolver, impairment assumptions, technology and data security, foreign currency and litigation. Management does not expect ordinary-course legal matters individually or collectively to have a material adverse effect, but outcomes are uncertain. The company is appealing IRS penalties related to Affordable Care Act reporting and says it does not believe it has a liability. It does not currently expect a material impact from the Inflation Reduction Act.
- Management stated that disclosure controls were effective at the reasonable assurance level and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscriber recruitment, retention and Digital revenue stabilize, and whether PersonalPoints gains consumer traction.
- Whether revenue and operating cash flow can support the company’s debt service and its 5.2x net-debt-to-Adjusted-EBITDAS measure.
- How much revolver borrowing capacity is practically accessible given management’s warning about future leverage-ratio compliance.
- Whether the impairment assumptions remain supportable; the key U.S., Canada and New Zealand franchise-rights units had no reported fair-value headroom after the Q3 test.
- Actual restructuring cash payments and completion of the real-estate and organizational changes, alongside the progress of the cost-saving plan.
- Future interest expense as variable rates change and the $500 million of swaps approach their March 2024 termination date.