WW International, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019. The interim financial statements are unaudited; amounts below are in U.S. dollars and, unless noted, millions. WW provides digital subscriptions, in-person workshops combined with digital services, and related products.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $348.6 | $365.8 | $1,080.8 | $1,183.7 |
| Gross profit / margin | $194.8 / 55.9% | $215.4 / 58.9% | $611.5 / 56.6% | $681.2 / 57.5% |
| Operating income / margin | $94.7 / 27.2% | $118.9 / 32.5% | $222.1 / 20.6% | $308.6 / 26.1% |
| Net income attributable to WW | $47.1 | $70.1 | $90.2 | $180.0 |
| Diluted EPS | $0.68 | $1.00 | $1.30 | $2.57 |
| Cash from operations | Not separately provided for Q3 | $151.7 | $254.6 |
- Q3 revenue fell 4.7% year over year (3.3% excluding currency); nine-month revenue fell 8.7% (6.8% excluding currency). Digital subscription revenue grew 7.4% in Q3 and 6.2% for the nine months, while Studio + Digital fees declined 14.6% and 16.8%, respectively.
- Q3 gross profit declined 9.6%; management attributed lower gross margin principally to fixed-cost deleverage, partly offset by a mix shift toward higher-margin Digital. Nine-month operating income declined 28.0%; higher marketing and SG&A as a share of revenue weighed on operating margin.
- Cash and cash equivalents were $239.2 at September 28, versus $237.0 at December 29, 2018. Nine-month investing cash use was $34.3 and financing cash use was $112.4. Financing outflows included scheduled debt payments and a $50.0 voluntary term-loan prepayment.
- Debt principal was $1,674.5: $1,374.5 term loans, $300.0 of 8.625% notes due 2025, and no revolver borrowings. Revolver availability was $148.8, with $1.2 of undrawn letters of credit. Net debt, as defined by WW, was $1,404.5; net debt/EBITDAS was 3.9x. The company reported compliance with applicable credit covenants.
- Current assets were $329.9 and current liabilities $365.8. The working-capital deficit was $35.9, or $198.1 excluding cash and current debt. Operating lease liabilities totaled $155.9; adoption of the lease standard added material lease assets and liabilities to the balance sheet.
Changes versus the prior comparable period
- Profitability weakened materially: Q3 diluted EPS fell 32.2%, and nine-month diluted EPS fell 49.3%. Nine-month operating cash flow was down $103.0 from the prior year.
- North America was the principal source of revenue pressure. Q3 segment revenue declined 4.5%; for the first nine months it declined 8.5%. Across the business, Studio + Digital fees and product sales were weaker even as Digital subscriptions grew.
- Management cited lower recruitment, cycling against the December 2017 program launch, and ineffective marketing early in 2019 as factors behind the nine-month subscriber and revenue trends. Total Q3 paid weeks increased 3.7%, but Studio + Digital paid weeks declined 9.1%.
- The effective tax rate rose to 23.0% for the nine months from 9.8% in 2018. The prior-year period benefited from substantial tax windfalls on share-based awards and other tax benefits.
- Debt principal declined from $1,782.3 at December 29, 2018, including $107.8 of payments during the nine months. A further $50.0 voluntary term-loan prepayment was made on October 10, 2019, after quarter-end.
Outlook, commentary, risks and unusual items
- No numerical full-year guidance is provided in the supplied filing text. Management stated that operating cash generation, $239.2 of cash, $148.8 of revolver availability, and continued cost focus were expected to provide sufficient liquidity for the next 12 months.
- Management identifies debt service, consumer demand and competition, effective product innovation and marketing, subscriber recruitment and retention, technology and privacy, international and currency exposure, and seasonality as important risks. Recruitment is historically strongest in Q1.
- WW recorded $6.3 of restructuring expense in Q1 2019, with $1.7 remaining to be paid in fiscal 2020; it did not expect further expense from this realignment. Q3 results also included higher global TV media costs and higher salary-related SG&A.
- A securities class action and related shareholder derivative demands allege securities-law violations and breaches of fiduciary duties; plaintiffs seek unspecified damages. WW disputes the claims and intends to defend them. Management says other ordinary-course litigation is not expected to have a material adverse effect, while noting outcomes cannot be predicted.
- Annual impairment tests found no impairment, but estimated fair value exceeded carrying value by only about 3% for Brazil goodwill and New Zealand franchise rights; changes in assumptions could result in impairment charges. The company also reported a $24.3 derivative liability, principally related to interest-rate swaps.
Important facts for investors to verify
- Whether digital subscriber growth and recruitment can offset continued Studio + Digital subscriber, fee, and product-sales weakness, especially in North America.
- Whether margins and cash generation stabilize after the reported declines, and how marketing spending affects customer acquisition and retention.
- Debt repayment capacity, floating-rate exposure, covenant headroom, and the impact of the October 2019 $50.0 prepayment on liquidity and leverage.
- Progress and potential exposure in the securities class action and related derivative matters.
- Key assumptions supporting the narrow impairment headroom in Brazil and New Zealand, and whether operating trends or market values change those estimates.