WW International, Inc. (WW) Q2 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the WW International Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Corey Kinger, Investor Relations. Please go ahead.

Thank you for everyone for joining us today for WW International's Second Quarter 2022 Conference Call. At about 4:00 p.m. Eastern Time today, we issued a press release reporting our second quarter 2022 [ph] results. 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 corporate.ww.com. Supplemental investor materials are also available on the company's corporate website in the investor section under presentations and events. 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. Joining today's call are Sima Sistani, CEO; and Amy O'Keefe, CFO. I will now turn the call over to Sima.

Thanks Corey. Good afternoon, everyone, and thank you for joining us today. When I last spoke with you in May, I've been at Weight Watchers only seven weeks. I shared my assessment of the business, immediate priorities and thoughts on where we're headed. I've spent the last 90 days diagnosing performance, building out our product road map and executing on some of the initiatives necessary to simplify the business and refocus our efforts on value drivers, namely helping people who want to lose weight, do just that. It's a scientific fact that the excess weight is associated with increased health risks. It's also well established that losing even modest amounts of weight significantly improves health. We know the need for weight loss solutions is higher than ever before. According to the World Health Organization, obesity is preventable, and yet more than 1.9 billion adults worldwide are overweight. To that point, we have seen the recent successful launches of effective obesity drugs. But high prices focus them on a minority of cases and do not address the mass market needs. Our consumer insights tell us that people not only need to lose weight, but want to lose weight in a healthy, sustainable way. Their motivation and goal isn't about fitting into skinny jeans, it's about health. I came into Weight Watchers with a clear-eyed vision that building a digital community around a shared interest of health and weight loss is the key to member success and subscriber growth. And now after three more months at the company, I'm even more confident that it is the right path forward. Weight Watchers of the past was a true phenomenon, a movement even. That pride and excitement for being a member was not for our science-backed number one, doctor recommended weight loss program, which it is, but rather because of the positive, empathetic community and coaching that brought the program to life. The move to digital has been successful and that 80% of the members now access Weight Watchers via a mobile first experience, but not enough attention has been paid to bringing what we do best in our workshops to the digital experience. That's what our product team is focused on delivering and where I am committed to fixing. It will take time to evolve, but I anticipate many wins along the way. We are acting with urgency to simplify the business, drive throughput and ensure accountability. In the second quarter, we executed on a number of initiatives to do just that, with the goal of stabilizing current sign-up trends and returning to sign-up growth in 2023. This year will be a transition year, but one of critical actions that will lay the groundwork for the years ahead. A quick rundown on what we executed so far. As previously announced, we commenced a restructuring to simplify and flatten the organization in order to minimize redundant workflows and improve decision-making. These actions were primarily focused on reducing layers of executive leadership with VP and above position decreasing by about 30%. We have realigned the reporting structure of our international leadership teams. Instead of having country-level GM roles, we are now operating with a broader regional view consolidating key functions. We believe these structural changes will allow for more effective management of resources as we operate as one global team. We are optimizing our workshops' business, driving increased attendance year-over-year while managing our cost structure and expanding gross margin. In the U.S., we closed 24 fixed locations in the quarter, bringing our footprint to approximately 406 fixed locations and 700 third-party locations. At the same time, we are investing in our coaches who are the heart of our in-person experience. Effective May 1st, all U.S. member-facing employees received a wage increase, a move that has boosted morale and demonstrated our commitment to workshops. We completed the sunset of our Digital 360 product with the process commencing immediately following our May earnings call when we announced our decision. I'm pleased to say the process has gone smoothly, which is helping us retain these members consistent with our expectations. Turning to our Consumer Products and e-commerce business. As we previewed, we have begun rationalizing our SKU count in North America. At the end of Q1, we have 358 active SKUs with 20% contributing approximately 80% of the consumer product revenues. By the end of Q2, our active SKU count was 113. We are also refocusing our efforts to grow our high-margin licensing business. As we continue to evaluate our business, there are two very recent updates. The first, we've decided that Kurbo, our coaching program for kids and families, which we acquired in 2018, no longer fits into our go-forward plan. Therefore, we will sunset the program effective August 19. This is not a decision we came too lightly. The thesis for the acquisition was that Weight Watchers could help Kurbo scale, but the synergies in reality were not there. Kids and families have unique needs that I don't believe we are best suited to provide. And the second update, we have evaluated the effectiveness of our in-app rewards program and made the decision to phase out WellnessWins. After years of building sticky gaming and social experiences, I'm confident that our path forward for driving better activation and engagement rest in native features meant to inspire and motivate. This is a muscle we will be flexing between our product and behavior science teams for our members to achieve better outcomes. In short, our team gained a lot of ground in the quarter, and it's because we are now committed to instilling a company culture, a bias to action, data informed decision-making and evergreen innovation. We are leveraging our data to identify and then encourage the behaviors that correlate with member success. Of course, we know that food and weight tracking are critical. But what are the behaviors and metrics that really matter? For example, a house party we identified that getting a user to a three-person video chat in their first 24 hours was critical to retention. We call this time to party. In Facebook's early years, their KPI was getting a user to seven friends at 10 days. Having a singular focus on the aha moments in paramount to growth. At Weight Watchers, we are honing in on identifying our aha moments. And this goes much deeper than sign-ups for months of retention. By driving the behaviors and the connections that lead to members' success, it will help us create a network effect that delivers efficient acquisition, improved engagement and longer retention. As part of this analysis, it's now clear that our 2022 program innovation, PersonalPoints, could have and should have performed better, negatively impacting our sign-up performance. We have been digging deeper to diagnose why PersonalPoints did not resonate with consumers and lagged behind our recent innovations. There are elements of PersonalPoints that move the science forward, such as the ability to deliver a program for members living with diabetes and a new point’s algorithm that incorporates the latest in nutritional science, including advances in fiber, healthy fats and added sugar. The good news is that the science and the efficacy of PersonalPoints isn't a challenge. The challenge is that we added complexity to the experience when consumers were begging for simplicity. We launched PersonalPoints saying that no two people are alike, so no two plans are alike. But I believe White Watchers' super power has always been its ability to unite people into a community and the data supports this point of view. Our members long for simplicity and connection. For instance, the ability to easily find other members like them, easy sharing of recommendations and recipes, feel like part of a supportive group. The weight loss journey is hard. It can be lonely. The easier we can make it for people to comprehend and connect, the better off they will be. We are critically evaluating and testing ways to update our program, combining the best elements validated by data and behavior science to deliver an improved program experience that is simple, effective and engaging. In addition to food program evolution, we remain focused on creating a new app experience. Our tech and product teams are executing on the road map with a future pipeline around our three pillars of coaching, accountability and community. For example, since I joined, we've already shipped feature improvements such as predictive food tracking, optimized on-boarding, weight tracker improvements and coming soon, nutrition label scanning improvements. So individually, these updates may seem small. It represents how we're modernizing the app and increasing our development velocity and delivering those quick wins. For instance, a single UI update in the purchase funnel led to double-digit growth in our workshop take rate. While we execute on the product road map, we are also taking actions to stabilize sign-up trends in the back half of the year, including investment into a fall marketing campaign, particularly as we see increased efficiencies in social media and search as an opportunity to be a lever in driving our business. With that in mind, I'm pleased to announce that Amanda Tolleson will join Weight Watchers as our Chief Marketing Officer on August 15th. Amanda is an analytical, product minded, full-stack marketing leader and does brand strategy and performance marketing. She has nearly 20 years' experience working with growth, omnichannel and subscription businesses. Looking ahead, there are several initiatives that I believe are essential for Weight Watchers as part of our competitive advantage. One is our workshops. The in-person member experience is a critical differentiator. In June, we launched an omnichannel recruitment campaign to reinvigorate the workshop business, which helped drive the highest week of workshop sign-ups since January and resulted in overall improved trends in June versus May. At the same time, community activations such as Motivational Mondays and Walking Weeks tested well, delivering high satisfaction scores among participating members. We will continue iterating to identify what drives the best engagement and recruitment potential for workshops. Another focus area we talked about on our Q1 call is serving members living with diabetes. The prevalence of diabetes among adults in the U.S. with a BMI over 25 is estimated to be 12%. The percentage of our U.S. members self-reported as people living with diabetes is just about half that, illustrating a significant under-penetration in which should be our highest need segment. The first step to serving this population was adding the capability to create a food plan specifically designed for their unique needs, which we delivered with the introduction of our latest program. The efficacy of our program was validated by the positive results from our three center clinical trial. Results from the six-month trial demonstrated that Weight Watchers diabetes tailored program have clinically meaningful and statistically significant effects, including reduction in HbA1c by 0.76, average body weight loss of 5.7% and decrease in waist circumference by more than 2 inches. Decrease in diabetes distress by 9.8%. Additionally, participants experienced a 13.1% decrease in hunger and 13% improvement in overall well-being. We are complementing our diabetes program with content and product features that tailor our core products for people living with diabetes. Last month, we added the ability to track blood glucose in the Weight Watchers app, which gives members the ability to see patterns and changes over time as they track their glucose alongside their diet. In order to further enhance our offering, we have entered a strategic partnership with Abbott, a global leader in diabetes care, to create a seamless experience for people who use Weight Watchers and Abbott's FreeStyle Libre portfolio of continuous glucose monitoring systems. The integrated product experience is expected to become available to U.S. members in 2023. In other words, we are partnering the world's Number 1 CGM with our Number 1 doctor recommended weight loss program to make it possible for people living with diabetes to reach their weight and healthy living goals, while enjoying the foods they love and consulting with their health care provider to gain better control of their glucose levels. And now I will turn the call over to Amy to discuss Q2 performance and our outlook.

Thanks Sima. The actions that we have taken to rightsize our cost structure enabled us to extend our adjusted operating margin year-over-year despite revenue pressure in the second quarter. Adjusted operating income was in line with our expectations, while top line demand trends were softer than we expected, particularly for digital subscriptions and e-commerce. Combined with an FX headwind, revenue was down 13% in Q2 versus prior year. For Q2 2022, we finished the quarter with 4.3 million subscribers, down 12% from the prior year and approximately 100,000 below our expectations, primarily due to worsening sign-up trends in our digital business during the quarter. As Sima mentioned, the sunset of D360 was largely completed in the quarter and the impact of conversion was consistent with our expectations. The majority were transitioned to workshops. Note, these numbers remain on D360 pricing, $29.95 per month in the U.S., which is impacting year-over-year comparisons, particularly for workshops. At Q2 end, 127,000 of D360 former subscribers were included in the total end-of-period workshop subscriber’s number of 828,000. Excluding the impact of these transitioned D360 members, end-of-period workshop subscribers would have been down 6% and end-of-period digital subscribers would have been down 13% year-over-year. Revenue of $270 million was down 13% including approximately 350 basis points of FX headwind. This decline is greater than we had anticipated due to further pressure on digital sign-ups and e-commerce. E-commerce sales were down 25% in the quarter, mainly as the result of lower traffic and conversion. We are actively rationalizing our SKU counts and have seen a modest impact on revenue in the quarter, but a resulting improvement in gross margin as we exit unprofitable SKUs. Adjusted gross margin of 61.9% is up approximately 60 basis points from prior year, primarily related to operating leverage from the actions we've taken to optimize our studio footprint and a reduction in labor costs. Marketing spend in the quarter of $52 million was down 9% year-over-year and lower than we planned. As Sima mentioned, we plan to lean into the fall marketing campaign to stabilize sign-up trends in the back half ahead of the 2023 winter season. So we expect to redeploy some of the marketing savings to the back half of the year. Adjusted G&A of $57 million was down $12 million or 18% versus prior year with some benefit from FX. We are starting to realize the savings benefit from Q2 restructuring actions in the quarter, for which we took an expected restructuring charge of approximately $19 million. Additionally, we have been cautious with spending in the current environment. Adjusted operating income was $58 million, down versus the prior year with revenue pressure and FX headwind, but in line with our expectations. GAAP EPS was a loss of $0.07, which was negatively impacted by $0.47 of items impacting comparability. These included $0.30 from non-cash intangible impairment charges, $0.20 in net restructuring charges, partially offset by a $0.03 benefit from out-of-period tax adjustments. A note on impairment; we conduct our annual intangibles impairment testing in Q2 to determine the fair value of franchise rights acquired and goodwill. In Q2, we took a non-cash impairment charge primarily related to franchise rates acquired from our Canada operations. Our restructuring plan, as announced last quarter, is on track. You will recall that this action was focused on streamlining the organizational structure, which will primarily impact G&A. In Q2, we recorded approximately $19 million of restructuring costs. We expect to record an additional $8 million in the back half, increasing our full year estimate to $27 million. We now expect annual savings to be over $35 million, up from our prior estimate of $30 million, within year 2022 savings approaching $20 million at the high end of our previously expected range. Shifting to our outlook for 2022, we expect continued revenue pressure in the back half of the year as a result of lower end-of-period subscribers at the end of Q2 and a steeper sequential decline of subscribers from Q1 to Q4 than is typical. In addition, we expect continued macroeconomic factors to impact category demand and to create FX headwinds. We are assuming that the demand trends will continue in the back half, and we're managing the business accordingly, while the product and marketing teams develop and execute plans to break through those trends. Additionally, we will continue to execute our restructuring plan with the goals of managing costs and simplifying the business, which will enable us to refocus resources on higher-impact initiatives. With a jump-off point of 4.3 million subscribers at the end of Q2, which is about 100,000 lower than we forecasted, we would expect to end the year in a range of 3.5 million to 3.7 million subscribers. Revenue for the full year is now expected to be down in the low- to mid-double digits. Given year-over-year expansion in the first half, I would expect adjusted gross margin for the full year to be in the range of prior year at 61%, which is up 100 basis points versus our prior guidance. Related to marketing, we are down around $15 million year-over-year in the first half. As we expected in our prior guide, we plan to shift some of that savings to the back half. I am expecting marketing to be at or below $255 million for the full year, which is down from 2021. Excluding items affecting comparability, adjusted G&A will likely land in the $245 million range. In short, while we are experiencing additional pressure on the top line, we are diligently managing expenses to preserve profitability. We are revising our adjusted operating income guidance to incorporate additional FX headwinds and we now expect full year adjusted operating income to be in the $155 million to $165 million range. The effective tax rate for the year is expected to be approximately 24%. For clarity, this excludes the impact of restructuring, impairment and other items affecting comparability. And full year interest expense is expected to be approximately $81 million, about $5 million higher than prior guidance due to higher interest rates. Therefore, GAAP EPS is expected to be in the range of $0.25 to $0.30 per fully diluted share, which incorporates the net negative impact of approximately $0.55 of restructuring, impairment and other items affecting comparability. Turning to the balance sheet. We continue to generate steady cash flow from our subscription model at low CapEx and working capital. We ended Q2 with approximately $149 million of cash, an increase of $21 million versus quarter one, plus an undrawn $175 million revolver. And we will continue to manage cash and liquidity responsibly. Q2 net debt to adjusted EBITDA leverage ratio was 4.8 times, up slightly from 4.6 times at Q1. We expect our trailing 12-month leverage ratio to increase over the back half of this year and into 2023. CapEx and D&A primarily driven by capitalized software are expected to be approximately $45 million and $40 million, respectively. As we have discussed, we expect to end 2022 with a year-over-year decline in subscribers. Given the nature of our subscription business model, the starting subscriber base is an important component of revenue even before factoring in any benefit from sign-up growth. At the midpoint of our expected ending subscriber range for 2022, the lower 2023 opening subscribers would translate into a revenue headwind in 2023 of approximately $70 million. Again, this is before factoring in any lift from member sign-up growth in 2023. In summary, we performed within earnings expectations for the quarter despite a challenging macro landscape. For the balance of the year, we are focused on stabilizing subscriber trends while managing costs appropriately and ensuring a scalable cost structure is in place for operating margin expansion. I will now turn the call back to Sima.

Thanks Amy. 2022 is a year of transition for Weight Watchers. I am confident we are making all the right decisions to return the company to profitable growth. We now have a narrowed set of priorities in a streamlined organization with a lower cost structure and data-informed rigor for faster decision-making and greater ownership. Weight Watchers, through its experience at the intersection of science and community, has been the gold standard in effectiveness. We are proud of our heritage and our mission to help people better manage their weight by providing a sustainable, science-backed program grounded in nearly 60 years of experience, over 130 peer-reviewed studies and over 35 randomized controlled trials. We have the science. We have the coaching expertise. We just need to bring our DNA into our digital experience, so members feel connected, inspired, supported. When we do that, I am confident the business will return to growth. Thanks for joining us today, and we are now happy to take your questions.

[Operator Instructions] Our first question first question today will come from Spencer Hanus with Wolfe Research. Please go ahead.

Great. Thank you for the question. My first one just on digital subscriber trends. Have you guys seen an improvement in trend in the current quarter? And then you talked about investing in marketing in the back half to stabilize the subscriber trends. Why not deploy those dollars in 2023 diet season when you guys have a stronger track record of generating strong return on that spend?

Hey Spencer, thanks for the question. So look, we've spent a lot of time diagnosing subscriber trends. And the cultural landscape is difficult post COVID. People are shifting behaviors, but it's our responsibility to ensure that we are relevant in a changing dynamic. So we know that weight loss – the need for weight loss is higher than ever before. This is a big market and our penetration is relatively small. It's proven that Weight Watchers is 2 times more effective for weight loss than doing it yourself and we haven't said that enough because over the past few years, we've hid behind wellness versus being prideful about what set us apart. We're the Number 1 doctor recommended program for weight management. And we didn't do ourselves any favors by moving away from a clear weight loss message. So that all being said, we believe there are a couple contributing factors to the performance. We were down $15 million in marketing in the first half, $5 million of that was the second quarter. We pulled back on marketing in Europe given the macro environment. We just didn't think we could capture enough mind share for the money. And that's why we're redeploying that spend to the second half. As mentioned, PersonalPoints could have performed better for us, both from a program and a marketing perspective. We know NPS and engagement was lower and ultimately Q2 recruitment relates back to word of mouth from Q1 list. And then finally, despite simplifying the message, the spring campaign didn't break through and improve the trajectory of sign-up. So what that means is that it's – the cultural landscape is shifting. We didn't move with it, and now we're doing all the right things to turn the tide, and I'm confident we're on a path to grow by improving the program simplicity, focusing on those critical product pillars, delivering a marketing message that makes us undeniable, and to more specifically to your question is we've historically leaned on marketing to do the heavy lifting of recruitment, and we're focused on a strong product backlog including program enhancements that's going to support and take the lift off of the shoulders of marketing. But we're on this rolling process. And so we need to cut through and the fall is the time for us to start that narrative so that we can build on it in the winter season. So that's our focus at the moment. And I'm already seeing data on AB test that we haven't even rolled out yet that we're on the right path. So I'm really confident.

Okay. That's helpful. And then with the decelerating subscriber trends, do you think there is an opportunity to further pull cost out of the business, whether it's on operating costs or on advertising and optimizing that spend further?

Hey Spencer, it's Amy. I think actually, we got ahead of that cost curve. And so I've been pretty pleased. I think we mentioned on the call that we actually increased – our estimate for the restructuring charge has actually increased to $27 million. We took $19 million of the restructuring charge in Q2. But importantly, we've updated or increased our estimate of annualized savings on that. So last time, the – I think it was $16 million to $22 million we expected, we were going to deliver $30 [ph] million of annual savings. We've taken it to $27 million. We think we're going to be able to deliver $35 million. And so I'm quite pleased that we got ahead of that out of the gate here. And I think we'll see the – obviously, see the benefit of the full year impact of that going into 2023. And so I mean, related to the restructuring itself, we talked to you guys back in early May; we were just starting to execute on the plan. And as we got into the details, looking for cost synergies, we did think there was more there. So we went ahead and increased our SMS.

Okay. Fair enough. Thank you.

And our next question will come from Stephanie Wissink with Jefferies. Please go ahead.

Hey everyone. It's Chris [indiscernible] for Steph. So you talked about a focus on stabilizing subscribers in the back half of the year. But then you followed that up with kind of expectations for steeper declines in the back half more so than is typical, right? The two questions, I guess, is could you help me kind of reconcile that commentary? And then, two, what kind of approach do you take to stabilizing subscribers specifically? I just asked because we've noticed some of the deeper discounts coming through on some of the longer sign-ups. So is that part of the strategy here? And should we expect lower revenue per subscriber, I guess, in the back half of the year, if that is the case.

Hey Chris, it's Amy. I will start that one. On the sequential decline, so just to clarify that comment. Last time at the midpoint of the range, we guided that end-of-period subscribers in Q1 to end of the year, which is something we watch very closely, that slope of this decline, was going to be about 16%. And that was – that actually was pretty much – pretty significantly higher than our historical trend, roughly right in the trailing five years prior to that, it was down about 12%. So I felt like we got the guide on end-of-period subs pretty close. But candidly, what we saw was additional pressure on digital sign-ups in the quarter. So in Q2, digital sign-ups on a year-over-year basis worsened more than I expected than the same number quarter-over-quarter in Q2. And what we're seeing really is it's that we're not filling up the bucket on sign-ups as fast as we have been. So it's really – in other words, it's really a sign-up trend issue. It's not a cancellation issue for clarity. And so this is just all about sign-up performance. I thought we found the bottom to hit a down 16% and the period both from Q1 trend, and we're trending a little bit worse than that. From a trending performance, what we've talked about is stabilizing those trends, getting ourselves on the right path so that we can get back to sign-up growth in 2023.

Yes. And I mean, on the discounting of the promotional pricing, I would just add that, I mean, nothing has really changed. We're always testing and learning from new and different pricing and promotion strategies.

Yes. That's super helpful, both of you. I guess has kind of the discounted costs kind of resulted in any learning’s thus far in terms of kind of price and new customer, new subscriber sign-ups?

Yes. So from a discounting perspective, our behavior hasn't changed very much. In fact, on a – you guys know I look at revenue per page week. On – if I look apples-to-apples on a year-over-year basis in digital, we're actually up 2%. And so we've been taking price – base price increases to offset some of the impact of the discounting. So net-net-net, we're actually a little ahead. From my perspective, we still continue to see urgency and discounting in the market moving sign-ups. And we've got – we've obviously talked a lot internally about how to get past that, but we still see it as pretty effective in the marketplace. But overall, we're not losing rate. And we're still expanding margin on a quarter-by-quarter basis.

Yes. And I'll just add to that, that the average discount price between one-to-six months is roughly the same as most of our competitors. And I mean, ultimately, we need to compete on value, not on price. And that takes some time as we deliver our new product road map. But it's something we're focused on as we continue to test various pricing strategies.

Okay. Great. That's super helpful. And maybe just last one for me, just moving away from subs. But you talked about kind of a weaker spring campaign and then kind of moving into a fall campaign. So should we be expecting any changes to the approach in how you kind of market versus what you've done historically or at least versus the spring? Thanks.

Yes. I mean we – I think I mentioned at the top that we – I don't think we did ourselves any favors by moving away from a clear weight loss message, and we're going to be leading more unapologetically about weight loss. So we're looking forward to that. And when we're looking at the fall, for instance, we need to start building that narrative. It just doesn't happen overnight. You have to start positioning ourselves for change in building that mind share with the consumer into the winter. So you'll also see us testing and learning on that front as well. But I'm really excited about it because ultimately, we've been rooted in science. We're one of the few programs that fulfills all of the criteria that expert panels deem necessary in order for behavioral lifestyle weight loss interventions to be effective, and I just think we need to shot that from the roof.

And our next question will come from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Hey, guys. Thanks for taking my question. I wanted to ask about the membership shortfall that you experienced in the second quarter. If I'm understanding your comments correctly, it sounds like that was mostly from a reduction in new members coming into the program. It seems like that would be a pretty big shortfall, 100,000 just in the months of May and June considering those are typically pretty small recruiting months. I mean has there been any change to your existing member's retention? Any kind of drop-off on membership that you wouldn't be normally seeing as kind of part of the normal membership curve? Just trying to reconcile that fairly big shortfall during a period that normally you wouldn't have a ton of people coming into the brand anyway.

Yes. Yes, I understand. So a couple of things. One, it's mostly coming from digital. So if I look at in period subs at the end, and bear in mind also, there's some noise in here related to D360. But – and just to clarify, trying to go through that on the call because it's kind of complicated in the quarter. So we did sunset D360 push those subscribers into Workshops. And so Workshops balance has about 127,000 more subs and digital has less compared to previously reported. So I'm going to talk to it on a restated basis here for a second. So Digital in the period subs at the end of Q2 were down 13%, restated Workshop subs were down 6%. And I understand where you're coming from. I think that Digital certainly came in, the performance sequentially declined on a year-over-year basis from Q1 to Q2, and it was at a much higher pace from a sign-up perspective than we expected. And so there were a lot of moving pieces for sure in this market, really felt like in the guide, in the forecast that we found in the bottom. And so I think some of this is just, hey, did we factor in everything that we – did we get into the guide all of the moving pieces, right? And so the other part of this, Alex, is that we also, within the quarter, so we expected to spend about $5 million more in marketing than we actually spent. It all came out of Europe. And so Europe, given some of the macro headwinds they were facing, didn't feel like they were going to be able to get the share of mindset with everything that was sort of going on in the region and really stepped on the brakes. And I think that is – so while we got the cost efficiency benefit of $5 million of marketing, recruits or sign-ups sort of were that much lower than we had anticipated. So yes, I agree that 100 was a pretty good guide miss. But given a reduction of $5 million of marketing, I think we just hadn't found the bottom. I mean, Sima?

Yes. I mean I just want to add to that, that we talked about PersonalPoints could have performed better for us. And Q1, we saw, looking back at our engagement metrics, that – even though it delivers at the same level in terms of nutritional and science efficacy, it's a complicated program. And so if you aren't as activated, then you're not spreading the word, and that impacted us in Q2. And the good news is we can fix that. We're already working on a thesis around the path forward. And I think that certainly, we're able to rectify and improve that engagement. So we're looking forward to doing that and continuing to evolve the program. So again, I mean, we're not saying it didn't work, but it could have been a lot better, and we know what we need to do to improve it.

Okay. That makes a lot of sense. Thank you both.

And our next question will come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Yes. Hello. Sima, on the last call, you talked and you referred to IRL, and you talked about how important strategically it is that in-person kind of workshop experience, almost saying that you didn't think it could be replicated in the digital world. And today, I don't know, maybe I'm imagining it, but it sounds like you're changing that a little bit by now saying that you need to find a way to bring that experience to digital. So can you clarify your thinking? And also, you had alluded to maybe the idea of a one product, one price offering, that all subscribers should have access to a workshop type experience. Can you let us know what you're thinking currently on that? Thanks.

Sure, sure. So let me clarify, when I am talking about IRL experiences, I'm definitely saying that alluding to the workshop experience is about a peer-to-peer experience. It's the coaches they are facilitating but people are on a journey together. They're coming for the weight loss, but they're staying there because of the belonging, because of the connection because people are supporting each other through their weight-loss journey. That's the part that I'm saying is missing from Digital. Digital ends up being a very lonely experience. And remember, we're coming out of two years of COVID, where people feel lonelier than ever, and weight loss is an emotional problem. In order to solve it, you needed emotional solution that's only something that other humans can provide. So just as a reminder, I've been a part of this program since 2014. I came in with a clear vision of where I think we should go and what's going to catalyze the future of this product. I spent decades building sticky social and gaming experiences that do just that bring empathy to online experiences. So what I'm saying that we need to bring more of that magic online. I'm not saying it literally. I mean it figuratively that we can build better community. You come for the weight loss that you stay for the community. Does that answer your question?

Yes, absolutely. And what about the idea that maybe you have to simplify even further to one product offering?

Yes. We are testing a lot of different pricing strategies. I think that we can simplify how we show up on the guest side and more on that front, nothing to report at this time.

Okay. And then when you were talking about – you kind of referred to a strong program backlog. Is that referring to – like I'm just curious your thoughts on the cadence of new program innovation. So we've been kind of every other year that there's been a major launch. Are you kind of rethinking that? Or do you expect that cadence to be the same kind of going forward?

No, I said product backlog. So just to be clear, I mean, features that we will be shipping within the product that help modernize our UI and basically help deliver a better app experience. The program innovation, look, I think that the program has done the humans work for us over the past years. And what we really need to do is get into a place where we have a more evergreen approach. But – and we're seeing that right now. We're not going to wait two years to solve issues that we see in this program at the moment. We're going to roll them out, and we're going to evolve and continue to improve that program. But just to be clear about when I was talking about the backlog, I was referring to our product road map. And by product, I mean the mobile app experience.

Okay. Great. Thank you so much.

Thanks Linda.

And our next question will come from Lauren Schenk with Morgan Stanley. Please go ahead.

Hey, this is Nathan Feather on for Lauren. You noted pulling back on marketing and you've given the kind of weaker macro backdrop there. How would you think about the trajectory of subscribers if the U.S. consumer started acting a little bit more like the EU consumer? And then a second quick one on Kurbo. Can you just talk a little about what did it work there and then how we should think about the financial impact throughout the year? Thanks.

Hey Nathan, it's Amy. Just to be clear, performance in North America and Europe in the quarter was quite similar. So for example, if I look at end-of-period subscribers by segment, right, North America was down 11%. CE was – kind of Europe was down 12%. So just to clarify my comments, Europe actually pulled back on marketing on a year-over-year basis because they didn't think that they were going to get the share of mindset that they felt like they were – that they felt like that investment would have warranted. Well, they still ended up from an end of period perspective kind of roughly in the same place. In North America, it was a little bit. But we actually invested about – I think it was just about $1 million on a year-over-year basis in Q2. And Europe and North America ended up in the same spot from an end-of-period perspective. And so there wasn't – so performance in each market ended up roughly in the same spot. But if you look at segments, for example, operating income in Europe ended up in a better spot on a year-over-year basis than North America did because we pulled back on that marketing. I don't know if that's answer – that's what you're getting at or not. Does that answer that part of your question?

I guess just kind of thinking about to the extent that the performance was the same across the two. How should we think about that macro impact going forward to the extent that if the marketing pulls back and the trajectory is the same, is necessarily a bad thing, right, because of the lower tax. I guess, just trying to think more about – maybe more broadly the macro impact there to the extent the consumer weakens more generally?

Yes. I mean I think that – I think what it told us in Q2 was that we made the right decision in Europe, right, pulling back, ending up in the same spot. I think the flip side to that, right, is that the challenge, the performance challenge was more in the U.S. than it was in Europe. And we've talked about the reasons that – some of the reasons or some of the factors that we think are driving that, I think it hit disproportionately in the U.S., for example. We've talked about some of the macro trends, some of the shifts in consumer sentiment. We've talked about the D360 conversion that certainly made the quarter a little bit noisier than it otherwise would have. And Sima talked about the impact of PersonalPoints, and so that is the trend that we are trying to stabilize in the back half.

Yes. I would just also say, we've now in-house our performance marketing function. And so we have the ability to move nimbly, and that's also part of the reason we're looking at fall because we see an opportunity to spend more efficiently. But moving to the second part of your question on Kurbo. Look, honestly, that's a really small part of our business. So – and I think that there was initially a thesis that we could help Kurbo scale and make a dent in the – with pediatric obesity. But I just think that the synergies in reality were not there. And on a personal note, my mother actually has done pediatric obesity consulting. And this is a cause I care deeply about and kids have unique needs, and I just don't think that we are the best to provide the solution.

It is helpful. Thanks all.

And the next question will come from Sean Dunlop with Morningstar. Please go ahead.

Hi, thanks for taking the question. My first one is just about the long-term profitability of the business. So I recognize it's pretty tough to guide from here. But Amy, maybe you can help us think about a baseline for G&A. So maybe last year's $269 million, mocking up by 3% for inflation, not $20 million after that and then the incremental $15 million for 2023. Is that kind of the way to think about the new base? And I'll pause there I guess.

That was fast and very forward looking. And so I think I'm not in a position to guide on that. Here's what I will say, though. I think in Q2, we were at a run rate of – G&A was at $57 million, right? I think you add some inflation – I think you'd add some inflation to that. And a little bit of the full year impact of the structuring. Savings that haven't hit yet and we're looking at G&A being down in 2023 on a year-over-year basis from what we guided today. Right now, I think I'm not in a great position to nail that down for 2022. I would say over time; however, the goal would be for us to get G&A back under 20% as we exit this year with a really scalable fixed cost structure for when we bring back sign-up growth.

And I'll just add, and I know we keep saying this, but I feel like it's worth repeating. But the need for weight loss is higher than ever before. And we're doing all the right things to turn the tide: improving the program simplicity, focusing on our critical pillars around community, accountability, coaching, pivoting the marketing. And as I said, we've already seen the progress. We're running AV test that we haven't rolled out yet. We're seeing a lift, and it gives me confidence that we're on the right path to growth.

Got it. That's helpful. So I guess quickly for Amy. If we're thinking about this business as clawing back towards sort of high-teens operating margins, maybe low 20% operating margin, is that altogether inappropriate? Or is that about what you're looking at internally? And then maybe for Sima. As we start to think about a lot of the programs that we're rolling out and a lot of the investments that we're making in workshops and marketing and so on. What are sort of the metrics that you're monitoring internally maybe that we should be looking at in terms of saying we're out of the worst of this? Is that going to be lengthening sub time? Is it going to be in a bump in subs beginning of next year? What are you kind of looking for with respect to that?

As it relates to operating margin, I think my overall goal, right, we're in a structure where we've got 60-plus percent. I mean, we were running close to 62% in Q2. So we've got a really strong gross margin that I think is scalable with growth, right? So we've done a lot of work on turning our operating expenses from fixed to variable, particularly with the real estate on the workshop side business. And by the way, workshop gross margin in Q2 was up to 37%, right? So we were kind of 40 both pre-pandemic and we've been climbing back up. And so I think that we're doing all of the right things to take cost out of the business on a timely basis and shift fixed cost to variable costs. So if I had to sort of anticipate out loud about what my goals would be for operating margin, I would love to keep gross margin above 60%. I'd love to get G&A back into the 20% or sub-20% range, right? And I think marketing – we've seen marketing as a percent of sales over the last several years increase pretty significantly with inflation particularly impacting that spend. And so if we had, for example, marketing in the 22%, 23% range, that would get me – like my goal is to get this business back to 20% operating margin. I think the hard part for me to answer is how long is that going to take, right? And so I think that is very doable over time. I need sign-ups to return to growth in order to start returning to earnings growth and getting the leverage on that cost structure.

And I'll pick up on the metrics. So obviously, we're not going to share the details for competitive reasons. But I can say we're looking at regular engagement and weight loss progress during the first month. That's key. Second starts with identifying the moments that matter, those aha moments, I described earlier. And then the much larger and essential step is predictive behaviors, what are the encouragements, the triggers that make members more likely to actively engage. That's – those were the metrics that reveal that we could be doing better on our Points program, for instance. And while we're working on these, we're simultaneously simplifying and enhancing the app experience, watching all those engagement trends closely as we ship those various features. So the end result is going to be weight loss success, and that ultimately leads to more people saying they got – they found success with Weight Watchers, that word of mouth is the critical driver of subs for us. So we're – that's where we're focused on right now.

Very helpful. Thanks so much.

And our next question will come from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you all for taking my question. Do you think anything needs to happen in the external environment, either from a competitive standpoint or an economic standpoint in order for you to reverse the subscriber growth trends?

Hey Michael, no, I don't, actually. I think this is our responsibility, is to break through and to operate in whatever environment we're given. And I would actually say more than anything, it's the cultural landscape that has shifted. And we haven't moved with it. So we need to change the paradigm. We're doing all the right things to turn the time. And I think that – I think, ultimately, we haven't done ourselves any favors by feeding the – and hiding behind wellness over the last few years. And you're going to see us coming out with much more provocative message moving forward.

One that's focused on weight loss presumably?

Exactly.

Okay. Do you think you need to reemphasize the Weight Watchers brand name in order to get subscribers back to where they've been historically because the WW moniker just doesn't resonate as well as Weight Watchers does?

We're embracing Weight Watchers. It's an important part of our heritage and our legacy. WW is still our corporate name and it's there. And I mentioned before, it's our nickname, if you will. But Weight Watchers will – you'll see that much more prominently, yes.

Okay. Thank you very much and good luck.

Thanks Michael.

Thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sima Sistani for any closing remarks.

So we know the need for weight loss is higher than ever. And as I just mentioned, the onus is on us to remind people that health is not a discretionary matter. Since 1963, Weight Watchers has been rooted in science. We are one of the few programs that fulfills all the criteria that expert panels deem necessary in order for behavioral lifestyle weight loss interventions to be effective. I've been on this program since 2014. I came in with a clear vision of where I think it should go, what will catalyze our product and ultimately our business. We're focused on improving program simplicity, enhancing those critical product pillars and delivering a marketing message that makes us undeniable. We have a strong thesis on the path forward. I'm confident we're doing all the right things to return the company to growth, and I just want to thank you all for joining us today. We look forward to keeping you updated throughout the year.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.