WW International, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended July 2, 2022. WW provides digital subscriptions, Workshops + Digital memberships, and related products and services across North America, Continental Europe, the United Kingdom, and Other markets. In Q2, it discontinued Digital 360 and moved most associated members to Workshops + Digital.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $269.5 | $311.4 | $567.2 | $643.2 |
| Gross profit / margin | $163.0 / 60.5% | $186.0 / 59.7% | $343.1 / 60.5% | $379.5 / 59.0% |
| Operating income / margin | $13.4 / 5.0% | $59.7 / 19.2% | $22.3 / 3.9% | $62.5 / 9.7% |
| Net income (loss) | $(4.6) | $8.9 | $(12.9) | $(9.4) |
| Diluted EPS | $(0.07) | $0.12 | $(0.18) | $(0.14) |
| Operating cash flow | Not separately provided | Not separately provided | $26.4 | $38.3 |
- Q2 revenue declined 13.5% reported and 10.0% at constant currency; first-half revenue fell 11.8% reported and 9.2% at constant currency. Subscription revenue was the principal source of decline.
- Digital subscription revenue fell 15.2% in Q2 and 11.1% in the first half. Total end-of-period subscribers declined 12.3% year over year in both reported periods. The Digital 360 transition shifted 127,200 members between business categories; excluding those members, total subscriber declines remain material.
- Gross margin improved year over year, attributed mainly to a more efficient studio footprint and lower labor costs. Reported operating income was pressured by impairment and restructuring charges. Company-reported adjusted operating income was $58.3 million in Q2 versus $64.9 million in Q2 2021, and $67.5 million in the first half versus $73.2 million.
- Q2 marketing expense decreased to $51.9 million, but rose to 19.2% of revenue from 18.4%. First-half marketing expense was $159.4 million, or 28.1% of revenue versus 27.1%. SG&A was $71.3 million in Q2 and $134.9 million for the first half.
- Interest expense was $19.3 million in Q2 and $37.9 million in the first half, down from $20.3 million and $49.4 million, respectively, in 2021, primarily reflecting the 2021 refinancing.
Financial position and liquidity
- At July 2, 2022, cash and cash equivalents were $148.6 million; total assets were $1.391 billion; and total liabilities were $1.847 billion. Shareholders’ deficit was $456.1 million.
- Debt principal totaled $1.445 billion: $945 million under the term loan and $500 million of 4.5% senior secured notes. No revolver borrowings were outstanding; reported revolver availability was $173.9 million, with $1.1 million of undrawn letters of credit. Net debt, as defined by the company, was $1.272 billion; net debt/Adjusted EBITDAS was 4.8x.
- The company reported a 4.60:1.00 first-lien leverage ratio. It cautioned that future covenant compliance could limit revolver availability. Debt is secured, and the company has significant debt service obligations; $10 million of principal was scheduled for fiscal 2027, with the remainder thereafter.
- For the first half, operating cash flow was $26.4 million, investing cash outflow $23.5 million, and financing cash outflow $2.0 million. Cash decreased $5.2 million to $148.6 million, including a $6.2 million adverse foreign-exchange effect. Capitalized software expenditures were $18.0 million.
- Working capital, excluding cash and current debt, was a deficit of $91.4 million, improved from $111.8 million at January 1, 2022. Management said cash, operating cash generation, revolver availability, and cost controls were expected to provide sufficient liquidity, while noting demand conditions could affect liquidity.
Material changes, outlook, and risks
- Impairments: Q2 included $24.5 million of impairment charges for Canadian franchise rights, $0.8 million for New Zealand franchise rights, and $1.1 million of Kurbo goodwill impairment. WW planned to exit Kurbo in Q3. The U.S. franchise-rights valuation cushion was approximately 15%; Canada and New Zealand were at estimated fair value after impairment, making assumptions and future performance important.
- Restructuring: WW recorded $19.1 million of Q2 and first-half 2022 restructuring expense for organizational realignment and lease rationalization. Its fiscal 2022 estimate increased to approximately $27 million from a prior range of $18–22 million; most costs are expected to be cash expenditures.
- Demand and strategy: Management attributed weaker recruitment to worsened consumer sentiment, inflation, social and political unrest, challenged economic growth, and PersonalPoints not resonating as anticipated. COVID-19-related shifts in behavior and demand remain uncertain. The company expects its studio footprint to remain below pre-pandemic levels.
- Other risks and contingencies: Disclosed risks include subscriber retention and recruitment, competition, execution of strategic initiatives, CEO transition, technology and data security, foreign-exchange and international risks, impairment assumptions, debt and variable rates, and litigation. The IRS assessed Affordable Care Act reporting penalties; WW is appealing and says it believes it has no liability. Management said ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
- Unusual tax item: Out-of-period income tax corrections generated a $2.15 million benefit in Q2 and the first half; the company said prior-period effects were immaterial. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control reported.
- No formal financial guidance for future periods is provided in the supplied filing text. WW stated that it may defer investments or reduce marketing spending if needed. It pays no dividend and reported no share repurchases under its authorization during the first half.
Important facts for investors to verify
- Whether subscriber recruitment and retention stabilize, and whether PersonalPoints gains traction; monitor both digital and Workshops + Digital metrics, accounting for the Digital 360 migration.
- Whether revenue and operating performance recover after adjusting for impairments and restructuring, and whether adjusted measures reconcile appropriately to GAAP results.
- Whether the revised $27 million restructuring estimate is achieved, and the timing and cash impact of remaining payments.
- Whether cash generation and revolver access remain adequate against $1.445 billion of debt, interest-rate exposure, and covenant requirements.
- Whether assumptions supporting franchise-rights and goodwill valuations remain supportable, particularly in the U.S., Canada, New Zealand, and Republic of Ireland.
- Developments in the IRS penalty appeal and other legal matters, as well as the potential effects of macroeconomic, pandemic, foreign-exchange, and consumer-demand changes.