Good day, and welcome to the WW International Incorporated First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

Thank you, everyone, for joining us today for WW International's first quarter 2023 conference call. At about 04:05 p.m. Eastern Time today, we issued a press release reporting our first quarter 2023 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 Investors 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 Heather Stark, CFO. I will now turn the call over to Sima.

Thanks, Corey. Good afternoon, everyone. Thank you for joining us today. 2023 is shaping up to be a pivotal and transformative year for Weight Watchers, one where our key initiatives and decisive actions will shape the future of our product experience, operating model, our financial trajectory and most importantly, the member lives we positively impact. As we enter our 60th anniversary and plan for upcoming celebrations with our members, I've been reflecting upon the incredible history of the company and looking back at photos of our founder, Jean Nidetch and crowds of members at prey, Madison Square Garden and workshops. We Let her started a movement 60 years ago, and that excitement stemmed from a strong sense of community has been the foundation of our longevity. The in-person human connection found in our workshop is what Weight Watchers has been known for. Then the evolution to digital expanded our subscriber base and sustain the company through the pandemic. 80% of our members now access Weight Watchers via a mobile-first experience. Our digital experience can be so much more. It can bring people together in new ways, expand our reach and provide members with immediate support and inspiration and it can enhance the in-person experience, better enabling connectivity between members and members and coaches. The Weight Watchers that our members know and love is our gold standard with a program that works, millions of members, 60 years of experience and ranking as US News and World Report, number one best diet for weight loss the last 13 years in a row. We have earned trust in a space where new entrants come and go. We are turning that solid foundation into best-in-class experiences for the future, including building new science-backed pathways such as clinical. Turning to our first quarter results. We…

Thanks, Sima. I'm honored to be taking on the Chief Financial Officer role at Weight Watchers. It's rare to work at a company that positively impacts the lives of millions in such a personal and important way. I look forward to continuing to work with Sima and the rest of our leadership team and being part of the next stage of this company's transformation. Turning to our first quarter results. We ended Q1 with four million subscribers with both sign-ups and cancel slightly outperforming our forecast in the quarter. As Sima mentioned, this is a quarter-over-quarter increase of nearly 500,000 subscribers, which is a step-up of approximately $100,000 more than the step-up of nearly $400,000 in the year ago first quarter. Revenue totaled $242 million, which is slightly above our forecast, but down 19% year-over-year or 17% on a constant currency basis versus the prior year period, primarily due to the lower subscriber levels entering the year, as well as the planned scale down of our consumer products business. Adjusted gross margin of 57.1% for the quarter was down 335 basis points from the prior year, with overdrive on cost savings, resulting in a beat versus our guidance. The year-over-year decline was primarily due to a revenue mix shift from our higher margin digital business, deleverage, as well as the accounting for subscription and consumer product promotional bundles in the quarter. Marketing expenses of $88 million were down 18% year-over-year, reflecting lower spend on TV advertising and lower nonworking spends as we optimize our performance marketing approach and drive member acquisition with strong LTV to CAC, subscription lifetime value to customer acquisition cost efficiency. Adjusted G&A of $56 million was down 12% versus the prior year, reflecting savings from our restructuring actions and overall expense discipline, partially offset by $3…

Thanks, Heather. We have significant opportunities for expanding our reach and returning Weight Watchers to growth. To achieve that, we are focused on a narrow list of priorities in order to best execute on the initiatives that will deliver the greatest impact. Across the organization, we are focused on four key areas: one, reinvigorating our principal business and hitting our end-of-period subscriber targets for the year, which will be achieved through our more efficient acquisition funnel and increased member engagement for both digital and workshop members alike. Two, compounding our head start in the clinical space by continuing to drive efficient member acquisition to sequence increasing brand awareness and expanding member retention; three, leveraging our expertise and enhancing our capabilities to be the partner of choice for self-insured employers and health system payers in delivering end-to-end behavioral and clinical weight management solutions setting a new standard of care in this space. And four building community experiences, both in real life and in digital that will broaden our reach, increase engagement and satisfaction for both behavioral and clinical pathways. In summary, our team's hard work, innovative thinking and strong execution is paying off and I am confident that we are turning the corner and getting Weight Watchers back on a growth trajectory with a leaner, more agile organization, we are improving our operating model to drive profitable growth. Thanks for joining us today, and we are now happy to take your questions.

We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Jason English from Goldman Sachs. Please go ahead.

Good afternoon, folks. Thanks for swipe me in and congrats on finding some stability on the core subscriber base B2C. On Sequence, your guidance implies you expect to have about 100,000 subs at year-end minus. A couple of questions. Last time you gave us an update, there were 4,000 on it. Where do we stand today, whether that be people who have already paid the 99 or just people who have come in and entered the program. What gives you confidence that you can build to that 100? And what's the cadence of activation? When should we start to see or expect to see you bring the marketing campaign and activate and start promoting this to try to get the on-ramp going. A – Heather Stark: Hi, Jason, and thanks for your question. This is Heather. Sequence. Yes, ramping up through the year. So as we said in the comments, we closed the acquisition with 27,000 active subscribers. We are measuring subscribers as a different pace than a typical Weight Watcher subscriber where you are sign-up and an active subscriber rate on day one. So those 27,000 are people who have come in and qualified for treatment and accepted treatment and moved into the $99 a month monthly subscription plan. So there's a bit of a lag there between when someone enters the sign-up flow and actually becomes a subscriber which is a little different, as I said. So in terms of scaling, we're confident that the 2023 expectations that we have will land us in that range of growth, and we recognize that there's a good scalable space in this business and expect to hit the subscriber base that we're targeting.

And Jason, hey, it's Sima. I just wanted to add to that regarding marketing activation. So as you know, Sequence has built up their subscription base primarily on word of mouth. And we're seeing that they are continuing to scale through that channel. And then, on top of that, we have the opportunity to tap into the Weight Watchers lapse membership base to really cross promote. For those, obviously, where it's medically appropriate. And that being said, we did push our marketing budget to the second half of the year. And we're going to be driving that top of funnel across our businesses as a whole. There are -- one of the thesis here was that there would be TAC efficiencies. And we believe that will be true. And so, we're going to be looking at where we have the most leverage, whether it's through clinical or our behavioral pathway.

Okay. One more question, then I'll pass it on, although I realize I cheated up front with a three-part question. So you had some interesting comments to make on insurance coverage. I was wondering if you have any sense of numbers you can put around that. Like, what percentage of the population even better? Are your current lapsed users would be covered on this program, just carte blanche with no caveats. And then, how does that percentage change when we bring in the caveat of it must be a company that's some sort of behavioral modification pro

So insurance coverage isn't something that we previously really pulled our members regarding but we know they typically have to spend and above-average household income. So most do have health insurance through an employer. I think that's a fair assumption. And the benefit of Sequence here is that they put the insurance process on tech rail such that it makes navigating the preauthorization process so much easier, which helps with access, obviously. And on top of that, I think we're just -- have enough an opportunity to be an indispensable partner to not only members who need help navigating the insurance process, but also employers who are looking to figure out how to provide these critical medications to their population. And we're hearing from our B2B population that they're interested in step therapy plans. And so that's an engagement model that we're designing and navigating through. And I think more to come on that.

Yes, makes sense. Exciting stuff. I'll pass it on.

Thank you.

The next question comes from Linda Bolton-Weiser from D.A. Davidson. Please, go ahead.

Yes. Hi. So based on your comments, it sounds like you're going to start this cross-promotional opportunity by tapping into your former members in the second half of the year. Is there any way to quantify how much of the marketing budget would be put towards that versus the Weight Watchers advertising, because at this point, they're not integrated, right? So it's still two separate endeavors. So is there any way to quantify the spending you would put towards the sequence side?

The CAC efficiencies are what we're going to be keeping an eye on. So the opportunity here is going to really be driven by the product and where we have leverage. So where we're seeing efficient LTV tax, that's where we will spend. And being able to go to market with a portfolio of options, I think is what really differentiates us and sets us apart. So we're not specifying any specific part of our budget. But what I feel confident about is that we have around $160 million still earmarked for the rest of the year to drive our top of funnel. And no other companies in the space are going to be near us in terms of the ability to go out and really speak to a D2C platform such as ours.

Right. And then can you give us some rough estimation as to how long it may take to integrate the two platforms and come up with your integrated marketing message and kind of work that through. Is that like a year from now, or is there any rough time frame for that?

Yes. We're not really ready to talk too much about that at this point, Linda. I mean we -- I want to be more thoughtful and given we just closed a couple of weeks ago, we need time to co-create with our new colleagues on how we do this well and how we do this quickly. But as I noticed, one of the core objectives here for -- focus of our company is taking advantage of the head start that we have in the clinical phase. So you can imagine that it is absolutely a priority and top of mind for us. And the nice thing is I will add there is that we just complement very well in terms of the things that we are doing really well and the things that sequence are doing really well. There is a really good match up there that I think we look forward to talking and sharing more about in the next new calls?

Yes. That sounds great. And just one final question. I know that historically, there was some partnership that Weight Watchers did with offering the drug Contrave, I think that's what was called I don't know the context of that, and I don't know why it was never too successful, or do you have any history on that and why that wasn't any big deal with that drug offering?

Linda, I'm going to be honest. I don't have too much context there to share with you on that front. But what I can notice, I think that we can all agree that these new next-generation medications are unlike anything that have come before it, and the landscape has really shifted.

Yes. Thank you. I really appreciate it.

Thank you.

Our next question comes from Michael Lasser from UBS. Please go ahead.

Hi. This is Henry Carr on behalf of Michael Lasser. Thanks a lot for taking our questions tonight. If and when sequence helps us drive find an affordable GLP-1 solution, what's stopping them from taking that to their primary care provider. In other words, why I stick around what a solution is found.

Thanks, Henry. So the process with a weight -- these chronic weight loss medications is that it takes a high support share team around it. You need to titrate your dosages along your weight loss journey. And that's really different than, for instance, getting an EV medication in the script that you can get and walk away from. So there is a level of support that is needed that is different than other types of medication. Also the preauthorization process you're going to continue to need that throughout the journey as these dosages are changed and titrate. What's fascinating is that we actually saw the highest retention during the time when Mounjaro was coupon the most. People were clearly finding value in the program, not just in insurance.

Thank you. That's really helpful. And just as a follow-up, when and if these drugs come up, the FDA short by list and they're more accessible. Does that erode the value proposition of the Sequence subscription? In other words, if these drugs become cheaper and more accessible in two to three years as generic versions come to market, how would you look to protect the Sequence’s subscriber base?

It's an interesting point that you brought up and I want to get too into the weeds here as I'm not a scientist, but I can tell you that because these are biologics, not the same sort of discounting when it comes to generics. But that being said, we are in the business, the subscription business, not the prescription business, and what we are offering in the Car-T model, and that's what we've heard and where the NPS is so high such that Sequence has been able to build its business by word of mouth, that they're going to -- they're going through a telehealth platform in order to be able to not only acquire these medications when medically appropriate, but then to be able to, alongside of that, get the fitness, nutrition, coaching alongside the medication to be able to have the same type of simple UX that you might even find in, for instance, consumer messaging apps. And then obviously, and this is where the thesis for us acquiring this business, which makes so much sense is you want to build ongoing healthy habits above and beyond being able to take the medications. And I think it's worth noting, too, that there are new drugs in development. So this is the start of what we're starting to see around these medications where there's already talk about, you say, medications coming in pill form. Right now, they're all the injectables. So, it's still a very nascent market, and there's a lot of evolution to come.

Super helpful. Thank you so much.

Our next question comes from Lauren Schenk from Morgan Stanley. Please go ahead.

Hey. It's Nathan Feather on for Lauren. Exciting to see the step up in net adds despite the lower marketing year-over-year. I guess can you dig in a bit more on what you believe is working on the marketing side, and how you can leverage that learning through the year? And then a second one, can you talk to any early trends in sequence in the acquisition? I mean it certainly seems to get a lot of media attention. I'm not sure if that translates to finance. Thank you.

So in terms of marketing, if I heard your question correctly, in terms of what's working well. In Q1, we spent $20 million less than in the prior year, so 18% less, and year-over-year, our Q1 LTV CAC improved by about 14%. So we can clearly see this read through in our performance trends. And as Sima and I both referenced in the call, we see the step-up in our active space, from Q4 into our first quarter end. If you go from Q4 2022 into Q1 2023 ending subscribers, we saw a step-up of 13% in our end-of-period subs versus 9% in the prior year. And we did that on $20 million less of marketing spend. So it's reading through in terms of working And your second question, I mean, you're going to have to repeat your second question, Nathan, we didn't heard it.

Can you just talk to any early trends with Sequence since the acquisition? It certainly seemed to get a lot of attention in the media, but just wondering if that translated to kind of initial sign-ups and interest.

Definitely. So we're not speaking, specifically to sign-ups or to Sequence in isolation at this point. But we did see a – a huge step-up in interest in Sequence rate at the point of announcing the acquisition. And an actual step change in their subscriber volume from the point of that announcement. So yes, definitely increased interest and increased subscriber interest in activation.

Great. Thank you.

I just want to add on the marketing point, though, real quick is that -- and I think it's worth noting is that it's really less about accretive that we're deploying, and it's more about the ways in which we are buying and valuing media, going back to building a data informed culture and that we were able to then couple that with key brand moments, which are driving immediate response and really putting us back into the consideration set for so many. So -- and I would also add that the initial attention on the acquisition and Weight Watchers, recognizing the chronic condition around living with overweight and obesity has been positively viewed by the market. So not only is it impacting Sequence sign-ups, but also our core business as well. So that's nice to see. And also important, why we continue to help really drive the conversation around Weight Health, the Sequence is – Sequence is still a very nascent brand, and it did provide this boost to brand awareness, but the association to Weight Watchers, a brand with 60 years of parentage or trust is helping to drive trust for the clinical pathway as well.

Our last question comes from Alex Fuhrman from Craig-Hallum. Please go ahead.

Hey, guys. Thanks very much for taking my question and congratulations on closing the Sequence acquisition. I wanted to ask about advertising and customer acquisition in the telehealth space. I think Weight Watchers, of course, has a great reputation in the category. You have a lot of competitors in the telehealth space there that are advertising of GLP-1, very aggressively in a way that I imagine Weight Watchers never really would. But can you talk a little bit about how you're able to kind of get through to customers? Is it mostly about marketing the people in your kind of own ecosystem in terms of members and former members and curious what you're seeing. I know it's early days, but in terms of customer acquisition costs on the sequence side of the business?

Thanks, Alex. So this is when 60 years of brand equity comes to play. We're talking about our LTV tech and the efficiencies that we can drive by locking in on a brand that people know and trust and recognized. And so yes, you're right. We think we could do this more efficiently. And I think that there are also synergies and our ability to retarget across our database as well as to former members. And that ultimately, the same thing that I said before about our core business applies to the telehealth business, which is that the product needs to market itself. And this product has incredibly high NPS, both for consumers and the clinicians because remember, both the supply and demand side here are important for a best-in-class experience. And what we are seeing is that people are telling other people that sequence is a great product that it makes the insurance process easy that it's like a carotene in your pocket, and on top of that, when we combine with the behavior change program that we anticipate bringing to market, we're going to have a real differentiated offering, and I'm very bullish on what that means for our ability to drive the top of tunnels.

Okay. Thank you. That's very helpful. Appreciate that.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Sima Sistani for any closing remarks.

Thanks, Al. I am so confident that we are approaching an inflection point in our business we will return the company to a growth trajectory in 2023. As I said earlier, our key initiatives and decisive actions are shaping the future of our product experience, operating model our financial trajectory and the lives we positively impact. Thank you for joining us today. I'm looking forward to speaking with many of you at upcoming conferences, including BofA Healthcare Conference and the Goldman Sachs Consumer Staples Conference and keeping you updated on the initiatives we have underway.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.