WW International, Inc. — Form 10-Q Summary
Reporting period: Second quarter ended June 29, 2019; comparisons are with the quarter ended June 30, 2018. The six-month period is also compared with the six months ended June 30, 2018. Financial statements are unaudited.
Business context and results
WW generates service revenue from digital subscriptions and its Studio + Digital offerings, alongside product sales and other revenue. In Q2, total revenue declined, led by lower Studio + Digital fees and product sales; digital subscription revenue grew. Management attributed weaker recruitment partly to cycling against the December 2017 program launch and ineffective marketing early in 2019.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $369.0m | $409.7m | $732.2m | $818.0m |
| Gross profit / margin | $215.8m / 58.5% | $244.8m / 59.7% | $416.8m / 56.9% | $465.8m / 56.9% |
| Operating income / margin | $105.5m / 28.6% | $127.7m / 31.2% | $127.4m / 17.4% | $189.8m / 23.2% |
| Net income attributable to WW | $53.8m | $70.7m | $43.1m | $109.8m |
| Diluted EPS | $0.78 | $1.01 | $0.62 | $1.57 |
Reported revenue fell 9.9% in Q2 and 10.5% in the first half; excluding foreign currency effects, declines were 8.1% and 8.3%, respectively. Q2 digital subscription revenue increased 3.9%, while Studio + Digital fees declined 18.6%. For the first half, digital subscriptions rose 5.6% and Studio + Digital fees fell 17.8%.
Q2 gross margin fell 1.3 percentage points, primarily from fixed-cost deleverage, partly offset by a shift toward higher-margin digital business. First-half marketing expense increased 6.4% to $164.2m, and SG&A increased 2.9% to $125.2m; both increased as a share of revenue. Operating income declined 17.4% in Q2 and 32.9% in the first half.
Interest expense was $34.7m in Q2 and $69.9m in the first half. The first-half effective tax rate was 24.2%, versus 6.2% a year earlier. The prior-year comparison included a $22.2m tax benefit from stock-compensation windfalls and a $1.9m benefit related to the cessation of Mexican operations.
Cash flow, debt and liquidity
- First-half operating cash flow was $79.8m, down from $168.6m; investing cash outflow was $23.7m and financing cash outflow was $111.9m. Cash declined $56.3m to $180.6m.
- Financing outflows included $50.0m of voluntary term-loan prepayment and $57.8m of scheduled principal repayments. Capital expenditures were $7.6m and capitalized software expenditures were $16.2m.
- Debt principal totaled $1,674.5m: $1,374.5m under the term loan and $300.0m of 8.625% senior notes. The revolver was undrawn, with $148.8m available. Net debt was $1,461.6m; reported net debt/EBITDAS was 3.7x. The first-lien net leverage ratio was 2.93x.
- The weighted-average interest rate including the swap was 7.61% at quarter-end. The company reported compliance with applicable credit covenants. Current assets were $284.1m and current liabilities were $350.2m.
Outlook, management commentary and risks
- Management stated that operating cash generation, $180.6m of cash, revolver availability and cost controls were expected to provide sufficient liquidity for the next 12 months. The filing gives no specific revenue or earnings guidance.
- WW identified reducing leverage as a capital-structure priority. Its business is seasonal, with recruitment historically strongest in the first quarter.
- An organizational realignment resulted in $6.3m of pretax termination costs in the first quarter; management did not anticipate further costs from that action. The remaining $2.4m liability was expected to be paid in fiscal 2019.
- Lease-accounting adoption added operating lease assets of $155.2m and liabilities of $163.5m at adoption; it materially affected the balance sheet but not net income. Quarter-end operating lease assets were $144.9m.
- 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 trigger impairment charges.
- A securities class action and related shareholder demands allege securities-law violations and fiduciary-duty breaches; damages sought are unspecified. WW stated that it believes the class action is without merit and intends to defend it. Management noted that litigation outcomes are uncertain.
- Other disclosed risks include competition, execution of strategic initiatives and marketing, substantial debt and debt service, technology and privacy issues, international and currency exposure, impairment, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscriber recruitment and Studio + Digital trends improve, particularly in North America, and whether digital growth offsets declines in other offerings.
- Whether revenue and operating margins stabilize, given first-half declines and higher marketing and SG&A costs as a percentage of revenue.
- Cash generation, debt repayment capacity, leverage, interest costs and covenant headroom; management’s liquidity statement is an expectation, not a guarantee.
- Whether Brazil goodwill or New Zealand franchise-rights valuations deteriorate, and whether the securities litigation or shareholder demands result in material costs or liabilities.
- The effects of seasonality and foreign-exchange movements when assessing future results against these interim figures.