WW International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The filing is unaudited.
Business context and reporting period
WW operates subscription-based Digital and Studio + Digital weight-management services, sells products, and reports four segments: North America, Continental Europe, United Kingdom, and Other. COVID-19 closures and limited reopening of studios materially affected the quarter. The company shifted workshops to virtual delivery and accelerated its digital transformation.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $320.7 | $348.6 | $1,054.7 | $1,080.8 |
| Gross profit / margin | $190.1 / 59.3% | $194.8 / 55.9% | $595.8 / 56.5% | $611.5 / 56.6% |
| Operating income / margin | $92.6 / 28.9% | $94.7 / 27.2% | $168.5 / 16.0% | $222.1 / 20.6% |
| Net income attributable to WW | $54.5 | $47.1 | $62.5 | $90.2 |
| Diluted EPS | $0.78 | $0.68 | $0.89 | $1.30 |
Q3 Digital subscription revenue rose 22.6% to $188.7 million, while Studio + Digital fees fell 35.1% to $93.6 million. End-of-quarter subscribers totaled 4.66 million, up 5.3% year over year: 3.81 million Digital subscribers (+23.5%) and 0.85 million Studio + Digital subscribers (-36.5%). Management said approximately 90% of Q3 recruitments came from Digital.
For the nine months, operating cash flow was $127.4 million, down from $151.7 million. Investing cash use was $47.8 million, including $20.5 million of capital expenditures and $22.2 million of capitalized software spending; financing cash use was $61.0 million, primarily scheduled debt repayments. Cash increased $21.7 million from year-end to $204.4 million.
At September 26, cash was $204.4 million and revolver availability was $173.8 million, with no revolver borrowings. Principal debt was $1.548 billion; net debt, as defined by the company, was $1.318 billion and net debt/Adjusted EBITDAS was 3.7x. Current debt maturities were $96.3 million. The company reported a working-capital deficit of $42.9 million, or $151.1 million excluding cash and current debt. Total deficit was $584.8 million. Its first-lien leverage ratio was 2.80x.
Material changes versus the prior period
- Q3 revenue declined 8.0% (9.4% constant currency), chiefly from lower Studio + Digital fees and in-studio product sales. Gross margin improved 3.4 percentage points, mainly from the higher-margin Digital mix.
- Q3 operating income declined 2.2%; reported net income attributable to WW rose 15.8%, with diluted EPS increasing to $0.78. Results included a $7.6 million discrete tax benefit related to GILTI, equivalent to about $0.11 per diluted share, as well as $2.3 million of restructuring charges.
- Nine-month revenue declined 2.4%, operating income declined 24.1%, and net income attributable to WW declined 30.8%. The period included $32.7 million of one-time Oprah Winfrey option compensation, $13.5 million of restructuring charges, and a $3.7 million Brazil goodwill impairment. Excluding these items, the company reported adjusted operating income of $218.3 million versus $222.1 million in the prior-year period.
- Nine-month Digital subscription revenue increased 17.7%, while Studio + Digital fees declined 21.8%. Debt principal fell $57.8 million through scheduled repayments; interest expense declined 10.4% year over year.
Outlook, commentary, risks and unusual items
- Management expects COVID-19 to significantly affect Q4 2020 results and potentially later periods. It expects continued weakness in Studio + Digital recruitment; the duration and financial impact of the pandemic cannot be reliably estimated.
- The company began phased, reduced studio reopenings in June, but said locations may need to close or operate with restrictions. It expects its studio footprint to remain below pre-pandemic levels for the foreseeable future.
- WW launched a $100 million cost-savings initiative to preserve liquidity and support investment and debt obligations. Management said savings may not all be achieved or prove sufficient. It expects about $9 million of additional restructuring expense; the remaining restructuring liability was $5.4 million, expected to be paid by the end of fiscal 2021. Headcount had been reduced approximately 35% since fiscal 2019 year-end.
- The June 2020 credit agreement amendment increased revolving commitments to $175 million and relaxed the financial maintenance covenant through Q2 fiscal 2022, with specified conditions and leverage thresholds. The company said it was in compliance with applicable covenants at quarter-end. Variable-rate debt, interest-rate exposure, substantial leverage, and ability to generate cash to service debt remain significant risks.
- Other risks include consumer demand and retention, execution of the digital transition, studio realignment costs, competition, foreign currency and international operations, impairment assumptions, and litigation. Disclosed litigation includes a securities class action and a member class action concerning fees during virtual workshop substitution; the company disputes the claims.
- The company recorded $3.7 million of Brazil goodwill impairment after deciding to shift that market to a Digital-only business amid COVID-19 and difficult local conditions. Canada and New Zealand franchise-rights impairment headroom was narrower than in most other markets; management identified New Zealand as particularly sensitive to assumption changes.
Important facts for investors to verify
- Whether Digital subscriber growth and retention can offset continued Studio + Digital weakness, and how recruitment trends develop after Q3.
- Actual Q4 and subsequent effects of COVID-19, studio reopenings and closures, and the pace and costs of studio realignment and digital investment.
- Progress against the $100 million savings initiative, additional restructuring charges, and the company’s ability to sustain operating cash flow and meet debt obligations.
- Debt covenant terms and headroom, revolver availability, variable-rate exposure, and the reported 3.7x net debt/Adjusted EBITDAS ratio.
- The extent to which Q3 earnings benefited from the $7.6 million GILTI tax benefit and the comparability of reported results with adjusted, non-GAAP measures.
- Potential outcomes and financial exposure from the disclosed litigation and sensitivity of franchise-rights valuations, particularly in New Zealand.