WW International, Inc. (WW) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Weight Watchers International's First Quarter 2013 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, May 2, 2013. At this time, I would now like to turn the meeting over to Lori Scherwin of Weight Watchers International. Please go ahead, Ms. Scherwin.

Thank you, Fred, and thank you to everyone for joining us today for Weight Watchers International's first quarter 2013 conference call. With us on the call is David Kirchhoff, CEO; and Nick Hotchkin, CFO. At about 4:00 p.m. Eastern Time today, the company issued a press release reporting the first quarter financial results of fiscal 2013. The purpose of this call is to provide investors with some further details regarding the company's financial results, as well as to provide a general update on the company's progress. The press release is available on the company's corporate website located at www.weightwatchersinternational.com. Reconciliations of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are also available as part of the press release. Before we begin, let me remind everyone that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and, except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to Dave. Please go ahead.

Good afternoon, and thank you for joining us as we review Weight Watchers International's performance for the first quarter of fiscal 2013. Despite a challenging recurring [ph] picture, our Q1 results benefited from appropriate actions on our cost structure and exceeded our earlier expectations. Revenue declined 3.3% versus the prior year with meeting fees declining 6.5% and meeting product sales declining 14.8% and Internet revenues growing 10.9%. Gross profit declined 3% and operating income was essentially flat versus prior year. With the benefit of the reduced share count from last year's tender offer and related share repurchases only partially offset by the associated higher interest expense, Q1 2013 EPS was $0.87, up 18% from Q1 2012 EPS of $0.74. 2013 is proving to be a challenging year for recruitments across most of our business, but we're pleased that retention in our meetings and online businesses have remained strong. As we discussed in our last call in February, a winter campaign failed to drive the level of interest in trial we were looking for. This, combined with continued difficulty in the consumer macroeconomy, poor weather in Europe and the rapid acceleration in the trial of free assets created a particularly muted environment. In response, we've made numerous adjustments to improve our bottom line performance and we're making progress. We reacted quickly over the course of the first quarter and we were able to enter the spring campaign at the beginning of April with fresh advertising. Our meeting star featuring Jennifer Hudson focused on a recent clinical study showing 5x more weight loss than self-directed dieting and we're much more direct in our messaging. Further, we formed a relationship with Saturday Night Live alum and Suburgatory star, Ana Gasteyer, to create a new set of Weight Watchers Online spots. While we've seen some evidence that this new creative is providing some incremental benefit to our recruitment since we launched it post Easter, we do not anticipate these changes alone will be sufficient to overcome the headwinds in the business. Given the top line challenges we're facing across the business, the team has moved quickly to improve our cost structure by aggressively seeking efficiencies across cost areas, with a particular focus on inefficient marketing spend and G&A. As Nick will review shortly, we've made early progress, which will benefit our ability to mitigate the impact of the lost volume. Equally as important, we're driving efficiency without stepping back from our medium- to long-term investment areas. Over the past few months, we've had time to diagnose the issues impacting our business. The combination of continued uncertainty about the global economy, as well as the impact of local changes, such as the retirement of the U.S. payroll tax holiday, have created meaningful pressure on multiple segments of the consumer economy, particularly the lower middle income demographics. In our consumer research, we've consistently found commercial weight management to be among the more discretionary consumer spending categories. In the same research, we've increasingly found that concerns over money and financial commitment have become, by far, the biggest reasons for postponing enrollment in a commercial weight-loss program. This macroenvironment would have been difficult in isolation, but add to this, we're also experiencing an explosion of interest by consumers in various free fitness and weight-loss applications. In this cash-strapped environment, the sudden proliferation and popularity of free alternative offerings has created a surge of trial in these apps. The resulting impact is contributing to a challenging recruitment environment, similar to what we saw back in 2000 with the low-carb diet fad. Although the macro factors are somewhat out of our control, we acknowledge that our new program, Weight Watchers 360, and the supporting marketing campaigns we launched in January were not as effective in generating trials as they should have been, which exacerbated the situation. As I shared on our last call, the Weight Watchers 360 program was designed to build upon PointsPlus by providing tools to help our members not just lose weight, but to give them the skills and tools to keep it off. In retrospect, the program resonated more with current members versus potential new consumers unfamiliar with our offering. While a useful step for us to take in developing our offering, the 360 program has not proved to be effective in improving our ability to drive trial. Beyond 360, our marketing communications had other challenges. We were forced late into our planning to put our relationship with Jessica Simpson on pause due to her pregnancy, and our advertisments were not nearly direct enough in communicating it a fair weight-loss benefit. Finally, our Weight Watchers online advertising campaign focused more on the features versus the value proposition, which will be important for us to continue increasingly incorporating going forward. While I'm pleased that we acted quickly to have new marketing air for the spring season, we know there is much more to do. Before I share more about our strategic plans, Nick will review the details of our Q1 performance and cost-saving efforts, as well as provide guidance on our forecast for the duration of the year.

Thanks, Dave, and good afternoon, everyone. Total company revenue declined 3.3% in Q1 and paid weeks growth of 1.4%. I will first provide details of each segment's first quarter performance versus prior, as well as our updated volume outlook. Starting with weightwatchers.com. First quarter Internet revenues grew approximately 11% on a constant currency basis. Paid weeks rose 10%, which was somewhat ahead of our earlier expectations with growth in both the U.S. and International. Continental Europe and Canada had stand-out double-digit performance. That said, sign-ups grew weaker and turned negative in the U.S., though they were up strongly internationally. As a result, end-of-period active subscribers rose 6%. Importantly, retention remains unchanged at 9 months. We expect weightwatchers.com paid weeks growth in each quarter this year, albeit at decelerating rates, given the lower sign-up trend in the first quarter. For the year, paid weeks should now be up low-single digits, which is slightly ahead of our prior guidance of flat to up slightly. This outlook assumes the economic and competitive environment remains the same. Within the meetings business, total NACO revenue in the first quarter declined 6.6% versus the prior year. Paid weeks were down 6.5%, and attendance declined 15.9%. We have been seeing a widening in the gap between attendance and paid weeks. This is a natural function of the increase in the average tenure in our active base. In-meeting product sales declined 15%, the result of lower attendance. We continue to look at opportunistic franchise acquisitions. We completed the purchase of our Alberta-Saskatchewan franchisee late in the first quarter, and the impact of all 4 franchise acquisitions completed over the past 6 months contributed 1.3% to NACO revenue in the quarter. Within B2B, the regional business has stabilized and the transition away from Monthly Pass for these smaller accounts is progressing smoothly. But while we're pleased with our progress, the regional At Work business, which is not subsidized by employers, is also being impacted by the same recruitment dynamics as our overall business. That said, our strategic accounts business, which generally in subsidized, continues to have stand-out double-digit growth, with recent account wins including Chico's and several hospital systems. Looking forward for Q2 and to the full year, we expect continued softness in the NACO meetings business, with volume declines in the high-teens for attendance and low- to mid-teens for paid weeks. Next, the U.K. meetings business. This market has been our most troubled, with significant revenue and volume declines versus prior. The key factors are the macroeconomy, weather and an aggressive local competitor. First quarter paid weeks declined nearly 18%, and attendance was down 26%. We expect similar trends to persist for the balance of the year. It goes without saying that these results are not acceptable and we are taking aggressive corrective actions. Finally, the Continental Europe meetings business. Paid weeks declined 1% in the quarter and attendance fell 11%. While we are expecting paid weeks to decline mid-single digits and attendance to decline high-single digits for the second quarter and full year, macroeconomic conditions are not improving and continue to put heavy pressure on consumers across the continent. Our other revenues, which include franchise commissions and licensing revenue, declined 2.7% in Q1 versus the same period last year. Licensing sales are up, offset by lower franchise commissions. In summary, for both Q2 and the full year, we expect low- to mid-single digit declines in total company revenue and total company paid weeks. Now on to some specifics for other key financial metrics for the quarter. In Q1, gross margin rose 30 basis points to 57.5%, well ahead of our earlier expectations. Pricing mix shift toward our higher-margin online business and cost savings were partially offset by spending on our retail upgrades and deleveraging from weaker volume and lower meeting sizes. Mix was the primary driver of the gross margin increase, as both the meetings and .com businesses saw declines in their gross margins. Weightwatchers.com showed some increase in its operating costs as it absorbs a higher proportion of technology and call center expenses. Pressure in the meetings business margin remains a function of softer volume, as well as the retail initiative and call center costs. Meetings pricing, as measured by lecture income per paid week, was up about 7 -- 1.7% in Q1, benefiting from the 2011 price increases. At the end of Q1, 71% of active Medicare Monthly Pass subscribers were on the higher price. This was 64% at the end of last year. Marketing spend was down about $11 million or 9% in the quarter to 24.4% of sales versus 25.9% in the year-ago period. The decline was driven by a combination of achieving efficiency savings in our digital spend ahead of schedule, and the decision made last year not to invest in a men's specific campaign for this year. The digital spend savings have been highly accretive, where we have seen no loss of volume while significantly reducing our spend. As expected, given our decision to not run a men's specific campaign, we have seen some erosion in men's sign-up volume in our weightwatchers.com business, but we are confident that this was the right financial trade-off for the company. G&A expense rose 5% in the first quarter or up 100 basis points as a percent of sales, to 11.9%. This was an improvement versus our earlier expectation, as we deferred some expenditures while we finalized our cost savings agenda. As a result of the factors I've just discussed, our total company first quarter operating profit was essentially flat, and operating margin rose 80 basis points to 21.2%. I'd now like to update you on our cost savings program and our outlook. As you know, during the quarter, we embarked on a comprehensive effort to improve our cost structure to give us better flexibility to fund future growth and also improve margins over time. I am pleased with early results and the company-wide buy-in, which has enabled us to already start seeing some P&L benefits, most notably in marketing in the first quarter, and several initiatives are also underway across operating expenses and G&A. We're finding opportunities across the P&L. Every line item, region, business and function. As you might expect, some initiatives will provide immediate benefit, whereas others will begin to deliver savings next year and beyond. Some key opportunities identified include: one, within marketing, mix optimizations, inclusive of reductions of unproductive digital spend and production agency fees; two, within operating expenses, optimizing our meetings network, streamlining monthly possible promos, supply chain and the call center; and three, within G&A, reduction, and in some cases, elimination of professional fees, as well as T&D [ph] discipline and tight cost controls for any new large expenditure, which help to partially offset the rise in G&A expenses related to our key strategic investments. While over time we expect margins to benefit from the cost savings agenda, during the balance of 2013, we plan to reinvest a good portion of our operating expense and G&A savings back into the business across strategic areas, including product innovation, B2B healthcare, technology and importantly, NACO service provider compensation changes, areas that we believe are critical to driving our top line growth longer-term. As such, despite the gross margin improvements achieved in the first quarter, we expect pressure on our operating expenses for the balance of the year in the order of around 250 basis points per quarter. Specifically, Q2 through Q4 will see a higher rate of gross margin pressure, given the soft recruitments in Q1, as well as higher expenses related to service provider compensation. We now expect gross margin to be down roughly 200 basis points for the full year. For marketing, we now expect our spend to be down at least $40 million versus the prior year, given further identified efficiencies. These savings should be split roughly equally across the quarters. Turning to G&A. Before the impact of our cost savings program, we had previously expected full year G&A to be up around $40 million as we fund our future growth initiatives. We now expect the increase to be closer to $20 million as a result of savings we have identified. Please note that we expect a disproportionate share of the full year increase in G&A to happen in Q2, primarily due to onetime events and a variety of timing issues. A few of the metrics for the quarter and outlook, and then I will turn this back to Dave for concluding remarks. Our tax rate in the quarter was 38.5%, which we continue to expect for the balance of the year. Foreign currency had a negligible impact on results. Turning to cash flow. First quarter cash flow from operations was $115 million versus $105 million a year ago. For 2013, we expect to spend up to $65 million in CapEx, down from around $80 million last year and below our earlier expectation for $70 million as we look for efficiency in all areas across our business. G&A for the year should be about $45 million. At the end of the first quarter, we had approximately $2.3 billion of net debt. As we previously reported, at the beginning of the second quarter, we successfully refinanced our debt, taking advantage of the unique market conditions to optimize our long-term capital structure flexibilities. Given the refinancing, our updated interest expense projection for the full year 2013 is now approximately $100 million to $105 million, or about $0.15 per share higher than prior guidance. In the second quarter, we will record a onetime charge of about $20 million related to the write-off of prior financing fees. Post our refinancing, our priorities for our cash remain unchanged, investing in the business, opportunistic franchise acquisitions, deleveraging and maintaining our dividend. I will now turn this back to Dave.

Thanks, Nick. The challenges we're facing have created an opportunity to use them as a catalyst to launch into the next stage of this great company's journey. Our confidence in our business flows from one simple fact: Weight Watchers works. The final results from a major end market clinical trial show that those assigned to lose weight with Weight Watchers were 8x more likely to achieve medically significant weight loss than those assigned to self-help. The same research shows that the combination of following program by attending meetings, using mobile applications and our online tools produced superior results than any one component on its own. This underlying efficacy will make the difference and allows us to not only recover from this current challenge, but ultimately return to growth. As an organization, we're focused on and committed to achieving our goals, both in the short-term and the long-term. First, we will continue to pursue our tactical efforts to recover financially this year and strengthen the core offering. As you heard Nick review, our cost reduction efforts are proceeding nicely. Further, we will continue to seek tactical opportunities to sharpen our marketing effectiveness over the course of the year. Second, we're rethinking our marketing approach to driving trial and are already planning a new approach to driving improvement in January 2014. As we've noted on previous calls, our goal is to enter each new year with an impactful marketing campaign combined with meaningful product and service news. Recognizing the limitation of what we brought to the market in January of this year, the team is heavily focused on developing product news that will have much more appeal to someone considering joining rather than focusing on somebody already on the journey. We will then seek to multiply the benefit of this by combining it with a high-impact marketing campaign. All of the above will be designed to ensure that we enter 2014 with a competitive cost structure and an energizing campaign to get us back in a growth trajectory. At the same time, we're focusing our long-term growth strategy in 2 areas: One, more fundamentally innovating our underlying product offering. As I noted on the last call, Weight Watchers brings a combination of assets and capabilities that are unique in their ability to help people achieve their weight loss goals. Our ability to combine science, expert advice, face-to-face support and technology is unmatched and difficult to replicate. However, in a category in which consumers often favor the new, bright and shiny object, we have to work harder to increase the overall appeal of our offering. Over the past 10 years, there have only been 2 ways to participate with Weight Watchers: purely online or in meetings combined with online tools. We could imagine many permutations that could significantly broaden our appeal and much more clearly differentiate us from any competition we're seeing today. Ultimately, our ability to drive ongoing engagement in weight loss success in a more appealing and inclusive way will create the opportunity to significantly open up our B2C possibilities in a very strategically defensible manner. We're now underway in this effort. These kinds of changes have to be executed thoughtfully and deliberately and therefore, will take some time to bring to market. Two, continue to pursue the B2B healthcare channel. We continue to see good growth in our strategic employer business with double-digit revenue growth. We've also been making good progress in deploying data collection capability in key traveling and network locations so that we can more comprehensively provide individual participant progress data to our B2B customers. This capability will prove to be increasingly important over the coming years and is an area where we will continue to invest in. Finally, the health services organization we have incubated continues to build and strengthen its capabilities. At its core, Weight Watchers is purely driven by the efforts of the people who work here. It is a passionate, mission-driven organization and nowhere is this more evident than the people who lead our meetings, our leaders and receptionists. It's our responsibility to provide a working environment that is energizing and supportive and uniquely focused on helping them do what is more important than any other goal: helping the members lose weight. With this in mind, we've undertaken a comprehensive effort to improve the quality of their jobs and the compensation. While we're aggressively seeking cost savings opportunities throughout the organization, we will be investing back into a new compensation system that will be rolled out over the course of this year, beginning in late May. The challenge for this organization is to be efficient so that we can invest where it counts. I cannot imagine a more important place to invest that in the people that deliver the support that our members need. Executing against our ambitious plans will require focused prioritization rigor. It will require energized leadership in a culture of success and entrepreneurship. It starts at the top. And in this light, I'm thrilled with the team that we're building. Nick joined us in late August and Jim Chambers, our president and COO, joined us in early January. They have both exceeded all expectations in how quickly they've had an impact on the company and its direction. Their combination of strategic insight, operational focus, consumer orientation and leadership has been impressive to witness. Around that, we will be elevating responsibility for up-and-coming, high-potential executives, as well as recruiting several new members of the management team. This new team will bring a renewed sense of energy and focus necessary to carry this company forward into the next 50 years. As we now stand at this inflection point, we have a unique opportunity to both create substantial shareholder value and to achieve a critical societal mission. Despite all the near-term challenges we face, I cannot imagine a more exciting time for this company moving forward. Moving on to 2013 earnings guidance. With all the forecast estimates on the top and cost lines that Nick just shared, we're narrowing our guidance range, providing full year EPS range of $3.60 to $3.90 per share, which now includes approximately $0.15 impact of higher interest expense associated with the refinancing, but excludes the onetime charge related to the write-off of prior financing fees. At this time, operator, I would like to take questions.

[Operator Instructions] The first question is from Glen Santangelo from Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: Yes, David, I was just kind of curious. When you guys reported in mid-February, you gave some very conservative guidance with respect to NACO in terms of the paid weeks. And obviously, you guys did a better job in this quarter than, I guess, you were sort of forecasting. I'm kind of curious, like, in the second half of the quarter, maybe you can drill that divergence based on what you saw that time. And then sort of as a follow-up to that, we're seeing an increase in divergence between paid meetings and -- I'm sorry, paid weeks and attendance. And Nick touched on it a little bit, but I was wondering if you could elaborate on that trend and what you're expecting going forward.

I'd be happy to. So the -- if you look at the pattern of enrollments that happened over the first 3 months of the year, effectively, it took an interesting but somewhat different shape from what we're typically used to seeing. And so I'll try to take you through kind of a quick tour of what that shape looked like in terms of enrollments and sign-ups. As I think I had mentioned on the last call, the first week when the campaign fully got started off was actually pretty strong for us, particularly in the online business. And then we saw sort of unexpected drops in terms of overall levels of enrollment and recruitment activity as we were going through January into the first week of February. If anything, what we saw as we were getting toward the end of February and then moving back into March, is we saw a nice bit of stabilization. It still wasn't where we would have liked it to have been, but it definitely got a little bit better than what we were expecting could be the case. And so I think that led to some of the improvements in terms of what we were ultimately able to see from paid week perspective. To get to your second question, in terms of the divergence between paid weeks and attendances, the way to think about that is that, particularly if you go through a period in which enrollments might be softer, is to keep in mind that when somebody starts with us, that they're going to be attending virtually every meeting. So that if you have a high level of enrollments, you're going to see a high level of attendances that follow that. And so -- and during those times, paid weeks and attendances will match pretty closely. On the other hand, if the average tenure of somebody in our active base increases versus what it looked like the previous year, what you'll see is paid weeks holding up better than attendances, and that's effectively what's happening right now.

I think that's actually right, Dave. And look, Glen, the only thing I'd add versus our expectations going into the quarter, look, total revenue was relatively flat versus our expectation. For me, a key driver, our weightwatchers.com paid week growth at 10% was better than our mid- to high-single digits expectation. Glen J. Santangelo - Crédit Suisse AG, Research Division: Nick, if I could just ask one follow-up. I'm just kind of curious. I mean, it sounds like your initial commentary around the spring campaign is it's sort of yielding marginal results. And I don't want to put words in your mouth, but it kind of sounds like that, that's not going to be enough to sort of solve your problems. And it kind of feels like your doing a great job on the cost side, but what's the risk as you go out there and search for new members that you're cutting too deep and basically making the back half of the year even more difficult than it needs to be? And how do you sort of balance between cutting your marketing spend, which is contradictory to trying to drive new member growth?

Yes, so here's a few points on that. First off, to your point, in terms of a spring campaign, as we noted on the call, we don't have an anticipation that having the creative we currently have, which we do think is better and fresher and everything else, that, that, by itself, is going to be sufficient for turning around any trend. And more specifically, what's been pretty typically the case for us is that really, it's a combination of advertising creative and news, product, program, service, that those things working together is typically what's necessary to change the trajectory of the business trends. Now to your second point on the way we're approaching costs with respect to the marketing spend and potential knock-on effects of volume. Keep in mind, when we talk about reducing marketing spend, we're talking almost purely about 2 areas of savings: One is the decision we made this year for, this year, not to run a dedicated men's campaign. That's about half. And the other is the decision we made this year to take a fresh look at the way we're doing digital advertising in a way where we would be looking for efficiencies. On the first, the men's campaign, to be clear, when we reduce that, that advertising pressure, there are sign-ups and enrollment activities that will drop off correspondingly with that, but our view is that when we look at the cost per acquisition in the cycle economics of those acquisitions, that it was a financially prudent move for us to make this serious. So we're comfortable that the financial trade-off was the right one to make. Second, if you look at the digital side, what we -- what -- the conclusion we're increasingly coming to is that -- again, the point I would make with digital advertising is that there's a presumption for years that if somebody merely saw a banner ad, in the way that the digital agencies do a lot of their analytics metrics, if somebody saw a digital banner and then 2 days later they signed up, that the digital banner would get credit for it, the banner will get credit for it and then you would continue advertising against that banner ad. We increasingly became skeptical that this was still true. And so we began a series of tests that ultimately led us to the conclusion that we could significantly tighten up and optimize our digital advertising with literally no lost volume. And so far, that's actually what we found, is that by the reductions we've made in digital advertising spend by optimizations has resulted in virtually no loss of volume. So it's almost purely profit-accretive. In other words, that reduction in digital advertising spend is not having any impact on our ability to recruit people in. For the duration of the year, these are going to be that types of things that are going to be different. It's going to be a somewhat of a different advertising strategy in summer, which is typically a low-enrollment period anyway, in addition to not having a men's campaign in fall. Other than that, throughout the course of the year, there's really no change other than the reduction in the digital advertising. And in that sense, what we have no interest in doing is pulling back on any of the things that we typically do to bring in our core market, either on the meeting business or online business. It was much more of a pre-calculated strategy that we were taking for tightening up how we do things from an advertising point of view.

The next question is from Brian Wang from Barclays.

Just -- actually, just a first question is just a follow-up on that last question. I think the original target for marketing decline and marketing savings was about $25 million and now it's, I believe, $40 million is what you said. [indiscernible]

That's right.

Okay. And then, I guess, where is that incremental cost saving come from? Is that all on the digital side because you saw it wasn't really having an impact on traffic?

Yes. Hey, Brian, Nick. You're absolutely right. That's primarily driven by these digital spend efficiencies. And, look, we spent $344 million in 2012. The high watermark of 19% of sales. With these new levels of reductions, we'll still be spending over $300 million of marketing in 2013, which is still above 2011 levels. So we couldn't stress more that we can make these marketing efficiencies while still spending everywhere we need to sensibly maximize our profitable top line.

To build on Nick's point, and particularly in terms of what's different on this forecast versus the previous forecast of marketing savings. On the digital side, it was once we had seen the results coming in from the testing we're doing gave us greater comfort that we could roll more of those savings throughout the U.S. as well as apply the same types of savings to our international markets. And so as we became more comfortable that, that was actually -- we're going to be able to do that without a loss of volume, we became -- that's one of the reasons why we're able to more confidently put forward the full amount of potential savings as opposed to what we had before.

I think that's right. Quite frankly, I was pleasantly surprised how quickly our team could react and implement these results. Obviously, you've seen our first quarter P&L was part of what drove P&L to be -- the Q1 P&L to be better than our earlier expectation.

All right, great. And then just shifting gears a little bit, I guess, to the NACO paid weeks or even subscriber base. I think you said at the beginning of the year, you sort of had decline at, I think it was 10% whole. And I guess, by the end of the -- I guess, for the average for the quarter your -- your paid weeks was down 6.5%. So it looks like you sort of did -- you kind of talked about the cadence of trends throughout the quarter. Can you, I guess, please talk a little bit about where the subscriber base stood at the beginning of the second quarter and how that's been relative to the same time last year?

We typically haven't provided quarter-by-quarter points of view in terms of subscriber base. And the reason is, is that what we have right now is obviously, the pay-as-you-go business, the Monthly Pass business. And what we have done at the end of this year is we described an ad hoc analysis that actually come to combine the 2 that shows sort of how big our overall customer base was down. We didn't go through the same process in terms of doing it for this year. However, I think what you can expect to see is, consistent with the volume forecast that Nick provided earlier in his section, that is a combination -- in terms of paid weeks outlook, for example, and NACO for the rest of the year, Q2 and full year, that is a combination of both what we're seeing in terms of the starting customer base in Q2, as well as the impact of the enrollment trends that we're now forecasting throughout the rest of the year.

Yes. And I think that's absolutely right. I think that's how you see the continuation of the tough recruitment outlook in our revenue outlook for NACO. And frankly, that's a key driver of our gross margin outlook also, with the impact of those lower-volumes growth throughout the year.

Okay, fair enough. Then, just one last one. Can you please talk a little bit about more -- a little bit more about the B2B? I guess, you obviously have been investing in it for a couple of years now. I guess, particularly, what you're investing in? I think, last quarter, you might have mentioned the results are computed and sort of the data collection-type items, but I guess, if can you give a little bit more specific about what you're spending -- how much you're spending and what you're spending it on, please?

We're not ready to give a detailed breakout of what those things are, but let me describe thematically what we're spending on, which is 2 areas in the B2B space. It's principally 2 areas. One is the -- this health services organization, which is a collection of professionals largely recruited from health services companies, account management, project management, technical expertise, marketing folks, people like that. We're virtually building a company within a company, if you will. And so part of what we've been adding therefore is sort of headcount associated with that, and that's going to be showing up in the G&A line. In addition, and ultimately this is going to be the biggest area of investment, is going to be the data collection, which is the outfitting of service providers with laptop computers, tablets, whatever the choice ultimately is going to be, to allow them to do real-time data capture at point of weigh-in. We have been gradually scaling that effort up. A lot of the investment for that is going to be continuing to build somewhat in the second half with an eye toward probably a more aggressive rollout as we get into 2014 and maybe a little bit beyond. But that's -- those are really the primary areas of investment. While we've been doing that, as you heard us mention, what's been good particularly in terms of the health services organizational investment, is that, that's been backed against the strategic sales revenue channel that we've now been bringing in, which has been growing sort of nice double-digit revenue as we've been going into this year.

The next question is from Jerry Herman from Stifel. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Just, Nick -- or if I could follow-up on that question and maybe more color. Are you guys prepared to talk about sort of the client metrics, number of clients? You mentioned 2 additional today, and is that going to be normal course? But maybe just some color in terms of where you are and maybe what the potential is in that existing client base.

Let me first take a note, which is I think probably what would be a good idea for us to do is actually to go back and think through what might be some way to dimensionalize the opportunity so that we could share that with the investment community on a go-forward basis. And we typically provide a couple names just to give color, but obviously, we've brought in more than 2 accounts. In fact, it was a number. If you look, though, at places where -- sections of the economy where we've been having particularly good early progress, some of the ones that come to mind, first and foremost, have been frankly, health-based companies. So that's health systems, hospital networks, those types of organizations, as well, for example, health insurance companies, pharma companies, others, all on behalf of their employees. And that's been particularly important for us in a number of different dimensions. First off, it's good business. These are nice accounts for us to bring in. Secondly, it is allowing us to begin building an ongoing working relationship with some of the nation's leading health companies that we're going to look to leverage as we go into future years as we continue to build out our healthcare strategy. And so I think -- so that -- hopefully, that gives you a little bit of flavor. And we've also been making good progress with municipalities. And then it's been -- cities. Then it's been sort of a hodgepodge kind of across various industries, retail, manufacturing, back offices, call centers, things like that. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then you talked about compensation to the leaders, and I guess I interpreted those comments as you're going to pay more money. And I guess, a two-part question. Number one is, does that reflect some competitiveness in the market for those individuals? And number two, is it also contemplated in the gross margin in the guidance you guys gave?

To answer your second question first, yes. It is contemplated in the gross margin guidance we gave. To answer your first question, this has actually been something that's long been in the making. And if I kind of go back to what we've been doing over the past 4 to 5 years, is we've been looking to modernize and enhance the entirety of the foundation that stands behind our group support product. And that started with the program itself, and that was modernizing from Points to PointPlus, now 360. Then went into modernizing our retail network and moving into better locations and taking advantage of everything we're able to gain from a weak economy in terms of good rents and getting better retail analytics and all those good things. It's been now increasingly happening in terms of automating point of sale, with the idea of providing a more modern experience for members, as well as making life administratively easier for our service providers. And finally, it is then our recognizing that we, frankly, have been putting too much burden in terms of administrative duties on our service providers. And we have a compensation system that we know that, over the past couple of decades, really hasn't changed much. And frankly, in many respects, was starting to feel increasingly antiquated, difficult to understand, not transparent and not energizing. So our view was it was now time for us to pick a comprehensive effort across the nature of the job and the manner in which we compensate our service providers so that we could further energize them, so that the output of all this stuff is going to be beautiful meetings with a great program, with automated data capture at point of sale and an incredibly energetic and enthusiastic group of service providers delivering the service. And that, that was ultimately going to be crucial for us in terms of our expectations in driving the kind of engagement we wanted to do. So it was more about getting people focused, fired up, feeling supported than, frankly, anything else. Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division: If I could sneak just a quick one and an important one in for Nick. Nick, can you quantify the run rate savings on the cost reduction programs and how much will be realized this year?

Look, I tell you -- good question. Now, I will tell you up front, I've been pleased by the early signs we're seeing from the activities and that you can hear it as a holistic approach, marketing, operating expenses and G&A. I view this as a -- it's a multi-year effort about prioritization and removing complexity in addition to more cost-cutting. So as you can imagine, there are a lot of moving parts. And frankly, as you heard us say, our key goal here is to support the long-term imperative of achieving sustainable top line growth. To come down to how big this could be, if you think of us in 2012 as a $1.8 billion revenue business with $500 million of OI. We have a $1.3 billion cost sand box to play in, if you will. Given our need to invest to fuel growth, I personally think we probably need to achieve somewhere in the region of up to $100 million of annual gross savings to support our long-term strategy. That's my current view, and I'm sure we'll find that over time as we get into some of these longer-term initiatives.

Your next question is from Chris Ferrara from Bank of America Merrill Lynch.

Guys, I was wondering if you can talk a little bit about the online business. And I guess, can you describe what the shift has been like from, I guess, sitting behind your computer terminal online on the Internet as opposed to mobile? To what extent has the usage of online in Weight Watchers shifted from sort of behind the desk, behind a computer to mobile apps?

It's obviously a very salient question, Chris, which is, I think, if anything, we have been -- and frankly, I think the majority of the functioning economy has been surprised by the rate of shift of computing happening kind of at a desktop, on the computer and on the traditional Internet to smartphone devices, tablets, those types of things. And that's certainly what we've seen in usage of our own product. I don't have any figures right off the top of my head to share with you, but I would tell you we've seen a pretty significant increase, for example, in the portion of foods that are being tracked on apps, as opposed to on the website. And frankly, much faster than what we expected to see. And I think sort of -- that's obviously heavy in the backdrop in terms of some of the other competitive trends we're seeing in the market, that we now are sort of moving quickly to respond to and in terms of adjusting the -- our product offering, the way strategically we're approaching this business.

And is -- I mean, is that the primary issue here? And do you -- I mean, does the online business become commoditized? Like what portion of the functionality advantage that Weight Watchers Online has traditionally enjoyed relative to another online service is eroded when it becomes mobile as opposed to behind the desk?

No, I don't think it does. Not in the long term. I mean, and I -- so I think there's -- so part of this is there's a near-term issue, as well as, I think, opportunities that are emerging. Let me first off spend a little -- just a quick second, talking about kind of what I see in terms of the emergence of kind of the sort of morass of technology that has sort of encroached into the market at just an unprecedented pace. And what I would -- the way I would characterize it is in devices, as opposed to sort of what I'll call tangential apps as opposed to apps that, I think, try to offer something that's much -- feels much more directly akin to Weight Watchers. So the devices, of course, I'm talking about things like scales, activity monitors, fuel bands [ph], [indiscernible], all that kind of good stuff. The middle group of apps might be really interesting work being done in terms of dining out companion and ways of sort of searching for healthy restaurants and those types of things. And then, the sort of more direct, that feel like sort of closer in substitutes, would obviously be the Lose It!s and MyFitnessPals and those types of applications. The first 2 groups, we see a tremendous opportunity which we have not yet taken advantage of, to co-op them into what our offering, to add value to our offering, to make Weight Watchers Online that much more compelling. And effectively, the strategy was that, it was really going to be a much more aggressive approach in terms of pushing out an open API of strategy, and that's something that we're working on right now as a way of sort of leveraging other people's technology efforts to add value to our offering. In terms of kind of the core fundamental value proposition to consumers that fit with the middle Weight Watchers Online, I kind of go back to this: that when you talk to people who do Weight Watchers Online, they're following a program and the technology merely makes it easier and more convenient and more fun for them to follow that program. And it's the combination of those things that ultimately provides the meaningful value that keeps people engaged once they start doing and keeps them engaged for a long time, because the only thing that matters in weight management is extended ongoing engagement, is the only thing that leads to the weight loss, which that is the only value proposition that wins in the long term. I think the question to ask with a lot of these other sort of offerings that are coming up, is that what we're seeing is that our -- and anecdotally, that there are some people who are going to be hardcore users and some of these apps we're going to have good success with it. But frankly, we believe that the majority of people that are using them are probably using them, frankly, for 1 to 2 weeks and then not using them. Now the implication of that is it creates near-term pressure on trials because effectively, that customer has been sort of taken out of the market, if you will. But to the extent that the idea of counting calories, which is effectively what you're doing if you're doing, for example, MyFitnessPal, starts to feel tedious and doesn't really recognize that calories are created equally and all those types of things that effectively, we would expect interest in those things to decline over time. I think that the opportunity for Weight Watchers to avoid that kind of commoditization is to continue focusing on what is at the core of us, which is the 50 years of accumulated IP science, the trust in the brand, everything else. Build on those things, more aggressively attach technology, both technology we develop, but also significantly, technology developed by others, in a way that creates a value proposition that is considerably superior to what you're going to get from any one of these individual little apps that's coming out.

The next question is from John Faucher from JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Just wanted to talk a little bit about the gross margin cadence throughout the year, and also the revenue growth cadence, just so we can get a better handle in terms of the earnings flow. If we look at the gross margin, in order to get to your full year guidance, it looks like the balance of the year, each individual quarter needs to be down about 300 basis points or so on average. So can you talk a little bit about -- is that just a hockey stick from here and we'll see a straight line across the year? Or is there some sort of sequential flow to that?

Yes, I think -- we've guided that gross margin will be down 250 in each quarter Q2 through Q4, leading to 200 basis points drop for the year. Versus the first quarter, what's changing. The volume impact of the disappointing recruitment environment in Q1 is, frankly, the majority of that. And then further, as you can imagine, with the high gross margin .com business growing slower than it has,we have less of a mix benefit going through into those ongoing quarters also. Finally, as we've discussed here, our guidance implies and incorporates investment bank into the business, with the spend on service provider compensation, technology and, in our retail rollout, more than offsetting efficiencies. I do want to stress, however, our cost savings initiatives as they steam forward and focus on efficiencies across every line item of the P&L. John A. Faucher - JP Morgan Chase & Co, Research Division: Okay. And I apologize for being a pain on this. But if I used the 250 over the balance of the year, I end up with something more like a 175 type of number. Is that sort of within the range that you're thinking?

I'm comfortable with our guidance, but obviously, it depends on where you're putting your revenue, for example, within the range that we've given. But they'll certainly come forward the 200 drop guidance for the year. John A. Faucher - JP Morgan Chase & Co, Research Division: Okay. And then any dramatic differences in terms of the revenue numbers as we go through the quarters over the balance of the year?

Look, I think the shape of the P&L has been guided where we're comfortable with on revenue. I think the key thing I'd point out that we highlighted, that we expect decelerating growth each quarter in the .com, paid weeks growth. And I think that's the biggest change that I would like to draw your attention to.

This concludes our question-and-answer session. I would now like to turn the meeting over to Mr. David Kirchhoff.

In summary, while the near-term is challenging, we've experienced similar challenges in the past and we've overcome them each time. I look forward to speaking with you again at our next quarterly earnings release.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.