WW International Inc (WW) 2018 Q4 法說會逐字稿

Good day, and welcome to the WW Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Corey Kinger.

Please go ahead.

Thank you, Sean, and thank you, everyone, for joining us today for WW's fourth quarter and full year 2018 conference call.

At about 4:00 or 5:00 p.m.

Eastern Time today, we issued a press release reporting our fourth quarter and full year 2018 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.

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 the 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 Mindy Grossman, President and CEO; and Nick Hotchkin, CFO.

I will now turn the call over to Mindy.

Thanks, Corey.

Good afternoon, everyone.

I'm glad to be speaking with you today.

After an outstanding year for WW in 2018, our start to 2019 and winter recruitment performance has been very disappointing as reflected in the financial outlook we're providing today.

Our winter campaign, while it did help drive positive perception and relevancy of the WW brand through its message of the why of WW and the livability of Freestyle, was not as effective at driving positive recruitment growth, especially when lapping the phenomenal success of the original launch of the WW Freestyle program in the prior year period.

In addition, given the particularly competitive winter diet environment, the campaign did not drive recruitment of our significant universe of lapsed members.

Our journey won't be linear, but in no way do these results diminish our confidence in our long-term strategy to focus on providing an ecosystem of holistic wellness solutions in addition to our best-in-class weight management program supported by the modern WW brand.

There's a global paradigm shift underway in how people think about sustainable healthy habits and weight loss.

Modernizing our brands, diversifying our audience and expanding our offerings to include more resources to support our members on their journeys are all imperative for the future of the company.

Every January, we conduct a consumer perception study to track how consumers identify with our brand.

In January 2019, we saw significant improvements on our brand equity compared to prior years, with notable gains in the number of prospective members identifying WW as a modern relevant program that can fit their lifestyles.

And perhaps most importantly, more people are agreeing that WW is a livable lifestyle, not a short-term diet.

These findings, notwithstanding our current urgency to improve marketing efficacy and performance, reinforce our confidence that we're on the right track for the brand's long-term potential.

But to be clear, we have work to do and have an intense focus on improving our current recruitment performance to be able to get back to the type of growth trajectory we have delivered in the past.

I will discuss our winter season performance and 2019 priority area shortly, but first I want to review our 2018 performance.

2018 was an exceptional year for WW across every metric.

The tremendous response to WW Freestyle drove positive member recruitment in every quarter of the year.

On a global basis, average retention continues to be well over 9 months in both digital and Studio + Digital, reflecting the value that members are finding in WW.

We exited 2018 with 3.9 million subscribers worldwide, a record level for year-end and reflecting an increase of 22% or more than 700,000 subscribers over the prior year, with growth across all of our major markets.

On a year-over-year and constant currency basis, revenue was up 15%, gross margin expanded 420 basis points and adjusted operating income increased 37%, demonstrating the power of our high-margin business model.

And we accomplished a great deal in 2018, including: reaching millions of members with the launch of WW Freestyle, our most flexible and livable program ever; launching FitPoints 2.0 based on the latest science, which give members a more personalized approach to activity; in addition, we launched our partnership with Aaptiv to incorporate unique audio fitness content into our digital experience; we launched content across our platforms with a focus on mindset and mindfulness; we also launched a partnership with Headspace to provide our members with proprietary content modules in our app and we're pleased with members' positive feedback and early engagement.

We launched WellnessWins, our personal rewards and loyalty program.

WellnessWins is now available in the majority of our geographic market, having launched in the U.S. in October and Continental Europe and the U.K. in January.

Early response is encouraging and we believe this will have a positive impact on retention in 2019.

We personalized our Connect platform with the launch of Connect Groups, further strengthening our overall community within the app by helping people find other members like them.

We relaunched our brand as WW, Wellness that Works, honoring our legacy as the world's leading commercial weight loss program, while broadening the role we play in helping our members live healthier lives.

And ahead of January 2019, we launched all elements of the WW Healthy Kitchen by partnering with Blue Apron to curate a line of WW Freestyle-inspired healthy and delicious meal kit recipes that can be delivered to your home.

Globally, we launched an entirely new line of WW products that represent a healthy eating brand, removing all artificial sweeteners, flavors, colors and preservatives, with a new look and branding in all our direct channels and which are now also available in our recently launched WW Amazon marketplace.

We launched our first WW Freestyle Café in Barclays Center and expanded our WW Fresh offerings around the globe.

We're truly developing a wellness and weight loss ecosystem that now encompasses nutrition, activity, mindset, motivation and community with products and experience that can support our members' journey.

The advances we've made in 2018 in building out our offerings in these areas has been significant.

However, having highlighted all of these efforts and accomplishments, we clearly have work to do given the difficult start to 2019.

We have responded quickly in an effort to improve performance across the business and are taking the approach of extreme prioritization and focus.

There are 5 key priorities, each aligns with our key objectives of recruitment, retention and elevating the brand.

They are marketing execution, studio performance, 2020 innovation, personalization and creating wellness events and experience.

Let me first discuss the first 2 priorities as they are particular areas of urgency and immediate action.

Marketing execution.

Our winter advertising did not drive consumers, particularly our former members, to action in the way we hoped.

To improve performance, we quickly conducted research and identified key areas to optimize, including reinforcing WW as the new Weight Watchers.

We also adjusted and had new creative in market within weeks.

These actions improved the trend, but we have more to do to ensure our marketing leads to action among both our core audiences and new.

We immediately optimized and revamped all our assets across every channel.

Notable actions: We redesigned a new WW Freestyle spot with a voiceover from Oprah Winfrey, reinforcing WW as the new Weight Watchers.

We created new testimonial spots for both TV and digital featuring our members and their stories; created all new assets for digital and social targets, specifically for lapsed members; improved and simplified branding across all our TV and digital assets with elevated Weight Watchers attribution and WW awareness throughout as well as clear call to action; increased visibility of weight loss results were rather creative, including showcasing our recently announced #1 U.S. News & World Report ranking; introduced new radio spots in both the U.S. and the U.K.; added more urgency and action drivers; and reallocated spend across channels to better maximize our efforts and offers.

As these changes were rolled out across TV, digital, social and eCRM, together they helped to sequentially improve the trend.

However, current member recruitment still remains between the significant 2018 levels.

Globally, we're also activating our ambassadors around the world to drive brand visibility and elevate our social engagement.

In January, Kate Hudson went on a media tour, appearing live on the TODAY Show to discuss her role as a new WW global ambassador, was interviewed by a number of other national broadcast and lifestyle publications about her why for joining WW.

As she discussed earlier in her FaceTime with Oprah, what she really loves about WW is the community and the livability, especially as a new mom.

In the U.K. and Continental Europe, we launched a major social campaign via a viral video campaign with Robbie Williams, For Every Robbie, showcasing how healthy living is not just for the elite but for everybody, including every Robbie.

To date, the video has generated almost 6 million views, likes, comments and shares around the world.

And in the U.S., just a few weeks ago, DJ Khaled shared his 43-pound weight loss on the program.

His weight loss goalpost is the most liked WW Instagram post in the last year.

Kevin Smith also shared his more than 50-pound weight loss on WW in December.

And in February, as part of American Heart Month, together with Kevin, we launched a social company to drive awareness, engagement and visibility.

As we move forward, each of our global markets will apply the learnings from winter and take further steps to improve our marketing with a goal to make WW the first choice for consumers who want to lose weight and get healthier.

In addition to ensuring all assets have a clear call to action and our results-oriented messaging, we're also focusing on optimizing our media mix and elevating our social assets while reducing nonworking expense levels.

In our spring marketing, our ambassadors will be featured in a multi-platform campaign in most major markets.

Oprah will play a central role in our marketing campaigns in the U.S., Canada and Australia, bringing to life a clear message on how WW is the program for everyone who wants to lose weight and get healthier.

In international markets, the campaign will also feature our local celebrity ambassadors who will also be sharing their stories about how WW is the program that works for them.

The campaign will also include an elevated and robust calendar of social and PR activity with rolling activations of our ambassadors, including Kate Hudson, Robbie Williams, Hélène Ségara, DJ Khaled, Kevin Smith as well as our local market and chef ambassadors, driving further visibility and amplification.

Second, our studio performance.

In addition to being a profitable business for WW, Studio + Digital is a key differentiator in providing the in-person community and inspiration that many people look for in their wellness journeys.

And I'm very focused personally on the work that we're doing here around the globe.

To better maximize the studio experience, we've been consolidating underperforming meetings to have a more robust workshop experience than the ones that we have.

We continue to explore new ways to engage with our coaches and guides that further energize our studio teams.

In late January, we held open houses at our studio locations worldwide for current and prospective members to learn about all the new features and benefits of the WW member experience, to try our new products and receive special joining offers and prizes.

We saw good results and we're working to build on that success with future events and experiences.

The open houses were also a great opportunity to activate our Invite a Friend referral program, providing an in-person connection to encourage members to participate.

Our work on modernizing and evolving our in-person experience is an ongoing focus that I mentioned I'm particularly involved with.

As we spoke about in November, as we optimize our studio network, we are actively pursuing strategic partnerships where we have the shared passion to empower families and communities to live healthier lives.

A great example of this is our recently announced upcoming pilot with Kohl's, which, later this year, we will open a 1,600 square foot WW Studio pilot inside the Kohl's flagship store in the Chicago market.

So let me reiterate and be very clear, our teams, and no one more so than I am, are acutely focused on driving these immediate priorities and improvements across our business to improve recruitment and drive revenue throughout the year.

I will now hand the call over to Nick to discuss our financial performance and outlook then I'll come back to discuss our remaining 3 priorities and how they will help fuel the business over the longer term.

Thanks, Mindy.

As Mindy mentioned, 2018 was an exceptional year for WW as evidenced by strong year-over-year subscriber growth, double-digit revenue growth and impressive flow-through to operating margin.

We ended the year with 3.9 million subscribers, up 22% from the end of 2017, with double-digit growth in all major geographic markets.

While this is a solid achievement, it did fall short of our expectations as recruitment growth turned negative year-over-year in December as we lapped the launch of WW Freestyle.

For the full year 2018, total revenue was $1.5 billion, up 15% year-over-year on a constant currency basis.

Gross margin rate was 57%, up 420 basis points year-over-year on constant currency.

And operating income of $389 million increased 37% on a constant currency basis after adjusting 2017 results for our $13 million Brazil impairment.

We delivered Q4 GAAP EPS of $0.63, which included an aggregate positive impact from onetime items of $0.17, reflecting the benefit of a lower tax rate in the quarter.

GAAP EPS for the year was $3.19, which included an aggregate positive impact from onetime items of $0.48.

For full year 2017, GAAP EPS was $2.40, which included an aggregate positive impact from onetime items of $0.75.

At year-end, our cash balance was $237 million and our revolver was undrawn.

EBITDAS was $451 million in 2018, up from $337 million in the prior year.

Turning to 2019.

I'd like to spend a few minutes discussing our key top line assumptions around recruitment, retention, new channels and partnerships.

As discussed, recruitment so far this year has been well below prior year as we have lapped the successful launch of WW Freestyle in 2018 and in addition, our marketing hasn't driven recruitment growth.

Trends in Studio + Digital in particular have been significantly weaker year-over-year and with the higher price point of this product, the impact was quickly seen in our revenue performance.

Recruitment is down across our major geographic markets.

Our 2019 revenue forecast anticipates some improvements in recruitment trends from current levels with our spring campaign as we incorporate learnings from winter and some improvement in the back half of the year as we lap easier comparisons.

Despite these expected improvements, we expect recruitment to be negative for the year as a whole for both digital and Studio + Digital.

On a global basis, average retention continues to be well over 9 months in both digital and Studio + Digital, reflecting the value our members are finding in WW.

We continue to expect average retention will be over 10 months later in 2019, helped by member engagement with WellnessWins, our first rewards and loyalty program.

New recruitment channels such as Invite a Friend and in-app purchase are working well as recruitment drivers and they're effective at attracting first-time members.

So far in 2019, about 15% of our global recruits are from these 2 channels.

And as these channels grow, we are focused on optimizing their economics.

We are excited by our new partnerships such as Blue Apron, Amazon and Kohl's in the U.S.A.

as well as other partnerships globally for their ability to elevate our brand.

However, since they're all in the early stages, we do not expect these new revenue partnership channels to be significant revenue contributors in 2019.

Putting these together, we expect full year 2019 revenue to be approximately $1.4 billion.

This guidance assumes a continued mix shift towards digital subscriptions and this revenue guidance also assumes an estimated foreign exchange negative impact of $10 million.

Overall, we continue to expect subscription revenues to be about 85% of our total revenues in 2019.

We expect similar trends across all geographic segments with full year revenue down in the mid-single digits on a constant currency basis across the geographies.

Our full year GAAP EPS guidance is a range of $1.25 to $1.50.

This guidance assumes 70 million shares outstanding for the full year.

To better align profitability and cash generation with expected revenue levels, we have launched a comprehensive cost savings initiative across all expense lines, and we're intensely focused on identifying savings opportunities.

The benefit from our cost actions will largely be seen in our P&L starting in Q2.

And while we will continue to invest in technology, data and analytics and digital product, we are applying a very high level of scrutiny to all of our costs.

For the remained of my comments, I'll speak to the midpoint of our full year EPS range and on a constant currency basis.

We expect gross margin rate to decrease by about 300 basis points in 2019, primarily driven by lower volumes.

Marketing expense in 2019 is expected to be about $250 million, reflecting relatively flat absolute dollar spend year-over-year in quarters 2 through 4. G&A expense in 2019 is expected to be about $250 million, reflecting lower absolute dollar spending year-over-year in Q2 through Q4.

Below the line, we expect full year interest expense to be about $140 million.

Recall, our 2018 tax rate was 8%, which benefited 2018 EPS by about $0.50.

In 2019, we expect a more normalized tax rate of 25%.

And for the full year, we expect EBITDAS of approximately $360 million.

Now let me turn to Q1.

While we do not give quarterly EPS guidance, we are providing more visibility than usual today to help with Q1 modeling.

As a reminder, approximately 40% of our annual recruits join us in Q1.

And therefore, while we expect our business recovery and cost structure actions to have a positive impact over the course of the year, it is difficult to recover from this soft start.

In Q1, we expect revenue to be down by over 10% year-over-year on a constant currency basis or by roughly $40 million.

This is despite starting the year with a higher subscriber level.

Recall, we started the year with approximately 700,000 more subscribers and this represented an approximately $75 million revenue tailwind for the full year, of which approximately $30 million benefits Q1.

However, our negative Q1 recruitment performance, combined with lower product sales due to weak studio business trends, have more than offset this initial revenue tailwind.

The subscriber trend over the course of the year is expected to be consistent with our normal seasonality where Q1 is our peak end-of-period subscriber level and year-end is our low point.

We expect Q1 end-of-period subscribers to be down slightly year-over-year.

Note that Q1 is also our biggest quarter of marketing spend.

We expect Q1 marketing expense to be approximately $120 million or about $20 million higher marketing expense than last year.

This increased marketing spend, combined with lower revenue, will lead to Q1 operating income being down by about $50 million versus last year.

Turning to the balance sheet.

We ended 2018 with a net debt-to-EBITDAS ratio of 3.3x, within our target range of below 3.5x leverage.

This remains our long-term leverage target level, but with our EBITDAS expected to be lower in 2019, leverage is expected to tick higher to about 4x by year-end.

For the year, we expect CapEx, primarily driven by tech spend, capitalized software and some studio network improvements to be in the $60 million range, and D&A is expected to be about $50 million.

In summary, we are very disappointed by our recruitment performance and we're taking swift action to align costs with anticipated revenue levels.

With this 2019 performance, our pathway to be a $2 billion revenue company will take longer than we had expected.

And while that's -- we'll take longer than expected to achieve our growth objectives, we remain confident that our strategy to focus on providing holistic wellness solutions in addition to our best-in-class weight management program is the right path to create long-term sustainable growth.

With that, I would like to turn it back to Mindy.

Thanks, Nick.

This is a transformative journey and one that isn't linear and there are bumps along the way, and we acknowledge that the results we saw in January were a hard bump.

As we said, we've already begun taking action to improve performance and in the coming weeks, we will be realigning resources across our global organization to ensure we have the right talent and a clear agile structure in order to drive future growth.

With that, I'm pleased to announce that Kim Seymour is joining WW as our Chief People Officer and will partner with me to ensure that we have the right organization for the future, including the transformation of our Studio business.

Most recently with American Express as Senior Vice President and HR Business Partner, where she supported the former Vice Chairman, now CEO, the CFO and 2 different lines of business, Kim has demonstrated the ability to architect transformation, forge connections, deliver insights and link talent to strategy.

She spent the last several years partnering with leaders on the vital transformation of technology, digital and servicing capabilities in American Express with a focus on enterprise solutions, collaborative leadership and process excellence.

Throughout her 20-year career, her focus has been on being a trusted adviser and thought partner and on building world-class teams, ensuring that the people side of the business equation enables strategic growth plans, and I look forward to working closely with her.

In addition to our continuing key priorities on both the marketing and studio fronts, we have to ensure that we have the capabilities and strategies to take the company forward.

These key priorities include 2020 innovation, personalization and creating wellness events and experiences.

We are actively at work on each of these areas which are important drivers of future growth as we continue to evolve the WW experience for our members to drive recruitment and retention.

For our 2020 innovation, we believe in ongoing innovation informed by science.

We also know that newness in our program appeals not only to those who've not tried WW before, but also to former members who have an affinity for the brand and know that WW works.

As we clearly saw with the launch of Freestyle, having something that is clinically proven to help people not only lose weight, but enhance their overall wellness can create excitement, which clearly drives interest and action.

While we're not going to provide details today on what we will be introducing for 2020, we have been working for over a year on our next evolution of innovation, leveraging the latest in food science, behavioral science and consumer preferences to make WW even better for our members.

And in personalization.

One of the bold moves we previously outlined was our intent to personalize all that we do.

We are looking at every step and aspect of the member journey to bring this to life.

This encompasses every member touch point, sign up, on-boarding, finding a workshop and coach and all of the communications along their journey.

We're working on delivering more personalized communication to members with content that is for them.

With our expanded team and talent in data science and analytics, member loyalty and content, we're in a strong position to better meet people where they are and make their WW experience that much more compelling.

We're also leveraging artificial intelligence to make tracking in the app even easier.

WW voice integration is now available with Siri and Google Assistant, allowing members to easily search SmartPoint values and track food, get updates on their daily SmartPoints allotment and quickly add SmartPoints to their tracker.

Integration with Amazon Alexa is coming soon and we'll be iterating on this throughout the year.

And finally, creating wellness events and experience.

From my first conversations with Oprah Winfrey and the board almost 2 years ago, we were aligned on a shared vision to evolve our business into a global healthy living brand.

Our opportunity to have an impact in such an important space for our society validates our vision.

Today, we are excited to announce that Oprah and WW are working on an initiative to galvanize and bring communities together through a series of digital and live events and experience to accelerate WW's impact and reach new and diverse audiences.

We will announce more details in the coming months, but anticipate the initiative will kick off later this year.

I am thrilled that Amy Weinblum, Oprah's long-term Chief of Staff, has joined WW as Chief Business Development Officer and will be leading the team to bring this initiative to life.

Amy joins WW after 8 years as Oprah's trusted adviser across her many businesses, including our business.

Most recently, Amy oversaw Oprah's partnership with Apple to create original content for their platform.

Amy also served as executive producer of "An Evening with Oprah", the successful arena show tours across Canada, Australia and New Zealand.

With these 5 key priorities, we are focused on improving our short-term results, addressing current challenges and positively impacting our long-term business performance.

I also want to reiterate that we are confident in our overall strategic direction to drive long-term growth and value for our business and our brand.

As we continue to improve our brand perception and relevance, broaden our ecosystem to attract and engage with new audience who may not have considered the Weight Watchers of yesterday and reinforce our leadership built on the power of both science-based programs and inspired communities, I want to reinforce that, one, we will always be the leader in commercial weight management.

Two, the shift to WW reflects the realization that we can and should leverage our expertise in science-based behavior to play a bigger role in people's lives.

As consumers become more focused on improving their overall health and wellness, we're uniquely positioned to help them build healthy habits in addition to managing their weight.

Third, modernizing and repositioning a brand like Weight Watchers is a journey.

We will continue to be very thoughtful as we position WW and Wellness that Works as the new articulation of Weight Watchers.

Our marketing efforts will reinforce these learnings.

Fourth, while maintaining our leadership globally in weight management, we'll continue to build out an ecosystem of wellness offerings that will make WW more relevant to a broad universe of consumers and effective at meeting consumers' needs over the long-term.

Retention continues to move in the right direction, which reflects the value we're providing to our existing members.

On a global basis, average retention continues to be well over 9 months and we expect that to increase over the course of '19.

And finally, community will always be at our core.

In summary, we are taking every possible action to improve the trajectory of the business and remain focused on our mission to not only be the world's leader in weight loss, but also the world's partner in wellness.

And quickly, before we turn to Q&A, I would like to welcome Julie Bornstein and Tracey Brown to our Board of Directors and to thank Philippe Amouyal and Cynthia Elkins for their many contributions over their respective tenures.

Julie is the CEO of a new venture-backed company she founded.

She was previously the COO of Stitch Fix and the Chief Digital Officer at Sephora.

Tracey Brown was recently named the CEO of the American Diabetes Association.

And prior to this, she held several senior roles at Sam's Club.

Most recently, she was a Senior Vice President of Operations and Chief Experience Officer.

I look forward to working with both Julie and Tracey and benefiting from their experience and expertise.

And as we continue to become the world's partner in wellness, I'm confident that both Julie and Tracey will be instrumental in helping to guide the company through this transformation.

Thanks for joining us on the call today.

And with that, we'll now turn the call to the operator for Q&A.

(Operator Instructions) Our first question comes from Alex Fuhrman with the Craig-Hallum Capital Group.

A couple of things that come to mind.

One is you referenced some fairly optimistic statistics about some of your current customers.

And I'm just trying to understand, I guess, the divergence between the difficulties with recruiting.

And then it sounds like -- if I was understanding your prepared remarks correctly, it sounds like from some of your internal surveys of customers, brand perception is actually up from last year and you're continuing to expect paid length of stay to increase to more than 10 months in 2019.

So I guess, is there a simple explanation for how new member recruiting and the satisfaction of your existing members on the program could have taken such a dramatic divergence there?

Yes.

Let me talk to that, Alex.

So let me bucket this into what were external factors and, let's call it, what were self-inflicted factors.

And the combination of that became the perfect storm as we went into 2019.

So number one, we were anniversarying what was truly a Freestyle phenomenon.

Largest recruiting efforts in the company's history, most successful program.

And clearly, we had plans in place to do that, but the enormity of that was significant.

The second is we're in a very competitive environment.

So we have keto becoming a cultural meme.

And these things happen very so often.

And we are not going to change our DNA.

We've lived through this for 57 years and we're not going to play a game and we never have.

We're going to be science-informed and we're sustainable for the long-term, but that does affect lapsed member recruitment when we are not lapping something new.

And then the third piece was our marketing as a whole, which was very geared to both attracting new members as well as lapsed members.

We came out with a significant, emphatic and Freestyle campaign.

And again, as much as it was great that it gave us relevance in performance, we need recruitment and it did not do what we needed it to do.

And if I was going to assess what the what was, it wasn't granular enough.

I think it needed to be more weight loss-focused, especially in the January season, and more aggressive bridge from Weight Watchers to WW needs to be more overt.

So that was self-inflicted.

Now, what we did very quickly were make changes that are having positive impact, but given the magnitude of January recruitment, it's a significant headwind.

So that was very much about recruitment.

On the flip side, what you're talking about, the reason we are seeing retention is that we are providing our members with a huge amount of assets if you just look at what we launched over the past year, and we'll continue to do that.

And we want to continue growing retention, but in our business, we have to recruit and that clearly is our focus certainly for the balance of the year, to refine and accelerate our marketing efforts.

I talked a bit about our spring campaign, launching our wellness events, tours and experiences.

And then certainly, really gearing up to prepare for the launch of our 2020 innovation and that is what the teams are focused on.

And clearly, we are not pleased at all with our performance and what we are speaking about today and we're going to make every effort to improve upon that throughout the year.

Alex, just to comment on something you said as you asked your question.

The mix of first-time WW members and people who have done WW before, this year is about the same as last year.

So while we have a specific issue connecting with lapsed members, just want to clarify that year-over-year member recruitment is currently down for first-time WW users also.

Okay, that's helpful.

And I guess, just as a kind of follow-up question.

I mean -- I guess, it sounds like if I'm interpreting your comments correctly, I mean, it sounds like maybe there was a messaging shortfall with the new brand name to WW.

I mean, have you seen any evidence internally or based on business trends, that suggests that, that really is the right direction to go with the name change to WW?

And I guess, kind of where I'm getting at in what I'm trying to ask here is it seems like across all of your different marketing channels, you haven't fully dropped the Weight Watchers brand name.

You're still referencing it often in parentheses, Weight Watchers Reimagined.

As you think about different possibilities as 2019 unfolds, is there potentially a scenario where you just kind of start using the Weight Watchers brand name more and more again and just kind of move back in that direction?

Or is it pretty much 100% that you're going to be moving to WW full-time?

Yes.

Alex, we believe the move to WW and Wellness Works (sic) [Wellness that Works] for the long-term relevance and performance of the brand is the right thing to do.

We always expected to have a bridge between Weight Watchers and WW and Wellness that Works.

And obviously, you're seeing it out in the environment.

What we didn't do, in particular, our broadcast messaging, was make that bridge more overt.

So what we did, for example, we added the Oprah voiceovers that said, "WW is the new Weight Watchers." And just like anything else, we have to reinforce that for our new members so they really understand that there is a bridge.

But very important for our former members.

But we believe the direction of what we have to represent for the brand for the next years ahead and to have the relevance we need specifically based on what people's perceptions of healthy are today -- and I've said this before, we're not giving up our leadership in healthy weight loss, but we have to lead with what did people want from healthier lives.

And we know that.

We believe that.

We just need to create the appropriate bridge.

Our next question comes from Edward Yruma with KeyBanc Capital Markets.

This is Sarah McCann, on for Ed.

So when you said that you'll be optimizing for the economics around the Invite a Friend program this year, can you give us some more color on how you expect to do that?

And anymore color on the puts and takes of the impact that Invite a Friend will have on the trajectory for 2019.

Yes.

Look, these new revenue channels, Invite a Friend and the ability to go buy a monthly subscription to WW in the app store, working well for us, 15% of our global recruit so far in these channels.

And in terms of optimizing economics, specifically for Invite a Friend, we switched to a specific landing page to improve our economics for that activity versus everybody getting the full offer that is available at the time.

So basically looking at the incentives that are needed to drive that program, and that's working well for us.

Great.

And just as a follow-up.

Can you talk about your efforts to attract kind of different cohort of customers, like new dads or younger customers, and any success that you've seen there so far in 2019?

Yes.

Well, I think as we've gone through 2018 and into 2019, particularly in our digital assets, we've been working on diversification.

That's why you've seen kind of the distinct influencer bases that we've been doing.

We recently, for example -- not only do we have Connect, which is our digital community, we've launched Connect Groups.

So we have young moms, college, men, et cetera.

And we also have specific assets that we've employed, particularly in digital, around new cohorts with a definite focus on life stage.

And we will continue to do that.

We think it's an important element of diversification for the brand in the future because we do have the appeal and it works.

Our next question comes from Kara Anderson with B. Riley FBR.

If I heard correctly, I think you said you're seeing some positive results from the initial launch of WellnessWins.

Just wondering if you can expand on those comments and possibly dive into engagement or usage with respect to the launch of that program.

Yes.

To give you just some perspective, WellnessWins launched in the U.S. in October and it just launched in Canada and Europe, U.K. market.

But what we have seen is, definitively, engagement, increases in tracking and it's gamification.

Throughout the year, we're going to be introducing things like more challenges and ongoing engagement there, because we do believe we're just at the point where we're starting to see redemptions because people had to build up the points and the surprise and delight of what they're getting.

So we've had very good feedback and engagement with the program.

And I think the more we enhance it, it will be even that much more significant.

Yes.

Like, I described '19 as an investment year for WellnessWins with the cost of prizes incorporated in our gross margin guidance.

And then later in the year, our forecast assumes that we start getting those retention benefits based on increased engagement with the program.

Our next question comes from Brian Nagel with Oppenheimer.

So my -- the first question, maybe a bit of a follow-up to the prior questions.

But as we look at the shortfall in recruitment here in early '19, have you been able to dissect the data to really determine if there's a certain group, whether it'd be demographically, geographically, that you fall short of your goals?

So maybe help understand -- with that, we can hope to understand better the true drivers of this, whether it'd be internal, external and whatever.

So there isn't a specific cohort that we're talking about.

At the end of the day, what was self-inflicted on our end were the more aggressive call to action for recruitment across the base.

And that's what we immediately started addressing and started to see improvement, but we need to have that continue.

So it wasn't a one isolated cohort.

And as I said before, seeing what we're seeing in retention, we just have to get the cohorts in and the job is on us to recruit in a more strategic, aggressive call to action way.

Yes.

Look, I think, Brian, we've been forthright about the pictures we're putting in place.

I think we should view it in the context of a phenomenal year for Freestyle last year, so you consider that we ended '17 with 3.2 million people in the brand because of positive recruitment.

That shot up to 4.6 million at the end of Q1 '18.

So 1 million higher than a year before, a 1.4 million subscriber increase from that 3.2 million to 4.6 million.

So we're expecting the business to follow a normal seasonality this year.

So we said that Q1 will be slightly down.

People in the brand year-over-year at the end of Q1 still showing that normal seasonal trajectory of 3.9 million people in the brand at the end of this year, '18, growing to about that same roughly 4.6 million people in the brand at the end of Q1.

So obviously, disappointed with the negative recruitment trends, but still have roughly 4.5 million, 4.6 million or thereabouts people in the brand at the end of this Q1.

Got it.

And then maybe my follow-ups, and this is for you Nick, more on the financial side.

Two questions.

One, as we look at the guidance you laid out for '19 in the sales numbers and the EPS numbers, is -- what's -- is there anything between those numbers?

Meaning that as you -- is there -- are there onetime costs that we should think about that you're trying to drive -- that you're using to try to drive the business?

And then secondarily -- again, I haven't run through my model yet, but you're still solidly profitable.

I assume you're generating cash.

Stock's way down now.

Could there be an opportunity to be buying back -- using your cash to buy back stock here?

Yes.

Let me comment on the guidance further so that I can get to the strong cash position.

In terms of the revenue guidance, last year, we were a shade over $1.5 billion, $1.5 billion, $1.4 billion, guided to about 1,400 or $1.4 billion now, so a decline of $114 million.

$10 million of that is FX, and by the way, most of that hits in the first quarter.

So we make sure we had a start of active tailwind of $75 million.

So that the rest of it is roughly $25 million shortfall in product sales year-over-year, due to a weaker studio business primarily and then about $150 million negative volume impact due to that weak recruitment environment.

So those are the moving parts of the revenue guidance.

On the EPS guidance, the biggest driver, of course, for such a high-margin business is the profitability impact from those lower volumes.

Bear in mind, something to take off the top versus the $3.19 that we posted in '18 is the roughly $0.50 of tax benefits in '18.

So view it as going from $2.70 in '18 to that $1.375 midpoint of the '19 range.

Now the biggest driver of that is the volume drop that I've discussed.

In addition, marketing is up by $25 million year-over-year.

I want to stress, that's money that we spent in Q1 in terms of our cost plan, really tightened our belts and look for efficiencies while doing the right things to drive the business.

And we'll have flat marketing Q2 through Q4, essentially.

So those are the moving parts of the revenue and the EPS guidance.

I mentioned the tax rate.

Remember, the tax rate is going from 8% in '18 to about 25% in '19.

That is with regard to you potentially deploying cash to buy back stock?

We're cash-rich, $237 million at the end of the year, $360 million of EBITDAS forecast.

So we'll generate cash through the year.

We'll consider capital structure options.

To be clear, as we've always said, we're focused on improving our debt position and reducing our leverage, and that's still our clear capital structure priority, in addition to investing in our future growth that we're excited about.

Our next question comes from Greg Badishkanian with Citi.

This is Spencer Hanus on for Greg.

Just one quick question.

You highlighted that you saw increased competitive environment in diet season this year, which is in line with some of the commentary we've seen from one of your other competitors.

Could you just give us some additional color on what's driving this increased level of competition?

So if we look out there and we look at surges and things that come into culture right now, we have a keto surge.

It's a meme, it's not like a company.

It's -- people have keto doughnuts.

And everybody on the diet side looks for the quick fix.

We've been through this before and we know that we are the program that works.

But it also reinforces the fact that it's very important that we become as much of a lifestyle and as much as livability and as much about health as we are about weight loss.

We're not a short-term in and out.

We're about sustainable, long-term, livable results.

But when there's a lot of noise, particularly in January, we have to focus our efforts on our marketing to recruit as hard as we can, but we're always going to make the smart decisions.

We're not going to change our DNA.

We're not going to play a game, we never have, and that's why we've been able to do what we do for 57 years, and hopefully over the next 57 and beyond that.

Great.

And then you talked about how the Invite a Friend program has been a tailwind result recently.

Can you just give us any additional color on the length of stay of these subscribers and how that compares to the overall corporate average?

Yes.

It's too early to say.

I mean -- but we do know that the ripple effect is real.

So when people do our program together, there's an accountability and togetherness there.

So I would expect it more likely to aid retention than not, but it's too early to conclude that from hard data.

Our next question comes from Frank Camma with Sidoti.

You talked a lot about your emphasis on the celebrity side coming up here, but do you think part of that might be that the average consumer might be moving away from celebrity endorsements as such?

We've kind of seen that fade in and out over the years.

So I was wondering...

Yes.

So let me reframe what I mean by celebrity, because we're very, very diligent in who our partners are.

And we do think that within the influencer space and people who connect with other people, particularly in certain segments, is important and we've seen it across, especially social and digital platforms.

But they have to be authentic.

And we have hundreds of ambassadors around the world who came out of our program who have their own social networks.

They are very important to us and they amplify our message.

We have local micro-celebrities.

We've built a chef portfolio that enhances what we do around lifestyle and food.

But anyone that we have decided to partner with really has to have the same vision that we do.

It's not an endorsement.

They have to be focused on inspiring people to lead healthier lives.

And there's a lot of people we could be working with that we're not, and we're being diligent on who we really feel is going to amplify what our message is, what our brand and program is and why it's important to help people's lives.

I think there's a delineation there and that's been very important to us.

And my other question.

Just -- and I might have missed this.

On the quarter itself, the marketing spend in absolute dollars was down.

Is that a timing issue?

Or was that a shift to digital where you saw...

Yes, Q4 wasn't a shift in philosophy, more just a timing issue with exactly when ads aired and when production costs were incurred.

Okay.

So it's in Q1 -- you mentioned a higher cost in Q1 of this year.

Yes.

So that's...

Yes.

That's part of the Q1 higher costs, but not a major driver of that $20 million increase in marketing spend in Q1.

Our next question comes from Vincent Sinisi with Morgan Stanley.

Wanted to ask first on expenses.

If you could give us a bit more help on -- you mentioned cost-cutting initiative being launched.

Kind of where is that coming from?

What are the different buckets?

And then just related to that, you have, of course, numerous initiatives and partnerships.

What types of expenses are kind of associated with some of these things?

And how do you kind of prioritize the array of initiatives?

Yes.

Thanks, Vinnie.

Look, I'll touch on the broad cost initiatives.

First, looking at our operating expenses.

As you can imagine, we're looking at the major components of costs, like making sure we've got -- we're running our call center -- contact center as efficiently as we can.

Pricing optimization is part of it.

We're consolidating meetings where we can in existing sites, where that's a cash flow and profit beneficial.

And then given these lower volumes, making sure that our variable field costs reduce in line with that.

In terms of marketing, it's about mix of the marketing, particularly ensuring that our digital spend is efficient.

I think we've got an opportunity in pure banner digital ads, for example.

And it's about looking at the efficiency of the cost of all aspects of our nonworking media, including all of our agencies and production costs.

And so in terms of marketing, while in our guidance you see marketing spend increasing from $226 million in '18 to our guidance of $250 million in '19, bear in mind, as I've said, is that increased spend has been spent in Q1, so the main cost action starts in Q2, where we're rightsizing our marketing spend to be relatively in line for quarters Q2 through Q4, essentially flat with how much we spent last year.

You might ask why aren't we getting marketing back to 2017 levels of $201 million.

At this time, we think that would be counterproductive to where we want to take the business.

Quickly moving to G&A.

It's about looking at making sure we only hire the critical positions that we need, making sure that we've got an effective organizational structure and looking at consultants and outside vendors all across the board.

So G&A at $250 million versus $251 million in '18 shows the impacts of those initiatives.

And as I've said in the prepared remarks, it assumes Q2 through Q4 will be lower than last year.

Again, you might ask, "Look, why aren't we taking G&A down to $211 million, where it was in 2017?" It's because we believe in this growth opportunity that we have for the business and so we've been deliberately invested in areas like tech and digital products, and again, we think it would be counterproductive to take the cost down to those levels.

So those are the moving parts, but we'll continue to manage cost very nimbly throughout the year to ensure that our cost structure is aligned with our revenue environment.

All right, that's helpful.

And maybe just as a follow-up, just going back, of course, to the year-to-date recruitment, and then just kind of the overall thoughts on -- like, Mindy, you had said maybe one of the things with the winter ad campaign was maybe you just needed a little bit more weight loss focus is one of the components there.

So when you kind weigh that with, obviously, the brand change going to WW going forward, I know you guys are still committed that.

I guess, quick question.

I think you've mentioned in the past how -- like some customer research that you've done shows a positive reaction to the brand change.

Has there been anything more recently to kind of just further that confidence?

And then also, is it, in your opinion, how do you weigh kind of the messaging end of it with who may or may not be the influencers within that?

Yes.

I think that's a great question, and that's what we're very focused on.

To your point in how we measure.

Every January, we do a significant, both quantitative and qualitative, study.

And what came back was the highest levels of relevance in brand perception that we've seen in the brand and in the company.

So while that's good, we have our job to do to also recruit and get people in the brand based on that, and that messaging has to be there.

The other thing that we've tried to be clear on is that with this move to healthy -- supporting our members and supporting people to lead healthier lives, we never wanted to abdicate our leadership in weight loss.

So it really is having -- healthy living, and in many cases, through weight loss, because if -- when we do our studies, and if you ask people what they need to do to live a healthier life, over 75% say lose weight.

So we just not -- need to articulate that in an effective manner in what our program is going to do for you, and it will also support your efforts if you want to lose weight.

Yes, we're there.

We're going to be the best.

And if you want to eat healthy, that's there as well.

And I think that message will come across around WW.

It works.

It works for me across the spring campaign, and we certainly are taking all of the learnings and taking it very seriously and making sure we're maximizing our messaging from here forward.

Yes, Vinnie, I just want to come back to your question on partnerships.

I didn't mean to skip over that.

So using, what, 2 of our most visible ones as examples, Blue Apron and WW Fresh, they're essentially royalty streams for us.

So that's why -- while we're thrilled with them and their impacts on our brand, that's why today they're not major revenue drivers for us in 2019 by the same token we don't have major costs associated with putting them into place given the royalty structures.

Our next question comes from Jason English with Goldman Sachs.

A couple of questions.

I guess, I was going to initially start with just the flow-through of EBIT -- the revenue shortfall to EBITDAS.

But I think you've kind of answered that with the investment, so I'm going to sharpen that question a little bit more onto G&A.

You mentioned $250 million sort of holding flat.

I get that the marketing investment is a discretionary investment.

How much of the G&A is truly discretionary?

Or said differently, how much of this $250 million is now more just fixed in nature because of the requisite investments behind the tech and digital capabilities?

Yes.

Look, you know, we've shown that we can nimbly manage our cost structure, Jason.

And we'll continue to do sort of -- if you look at our $250 million of G&A, the largest piece of that are in salaries and benefits for people.

It's approaching $200 million of that total cap.

So it's how we manage our organization, and particularly where we've got expertise to leverage in-house as we do, how we're sure that we're not paying outside for great work we can do inside.

Got it.

That's helpful.

Now when Mindy walked through some of the drivers of the recruitment shortfall, top on the list was anniversary-ing the Freestyle phenom, or phenomenon, I think she said, which clearly, by all measures, was a phenomenal success.

It seems to be a testament to the concept of that product news here in terms of the diet program can really move the needle.

In that context, is there anything new that you're contemplating, thinking about?

I know we're really -- it's a long ways off from the 2020 dieting season, but it's probably not too early to start to think about what sort of news you could bring late next year into the next recruitment cycle.

Yes.

We've been working on our 2020 innovation for over a year.

We have our science teams have been working on that.

And we're excited about where we're going and what we can bring, both from nutrition and science and behavioral science.

And we know that, that definitely recruits.

Now at the same time, we certainly have a focus on driving recruitment through marketing efforts, event efforts, digital efforts, everything that we're going to do for the balance of the year leading up to that, but clearly, that is a very big focus for us.

Good to hear.

Last, a housekeeping question, then I'll pass it on.

The $75 million revenue, carryover revenue benefit, I think earlier in the year you were talking about $0.50 of EPS.

Is it still $0.50 or closer to $0.40, I think is what I just calculated.

But what is that carryover benefit?

And ceteris paribus, and hopefully that's not the case.

Hopefully, you guys get some momentum and find no news.

Is it right to think about that as a headwind that we're effectively carrying into 2020?

Yes.

Look, the $75 million revenue tailwind was essentially roughly consistent with what we've said before.

Bear in mind, impacting our Q1 guidance where I said that Q1, OI will be down about $50 million versus prior, Q1 only benefits from $30 million of that with $75 million as we go through the year.

Look, in terms of the flow-through into 2020, obviously, performance through this year matters.

A big component of that, too, is December performance.

And as we launch our innovations and -- that's really where the magic happens on us.

That's what hurt us in December when recruits turned negative in December.

Obviously, by the time we get into this December with new news, we have an easier comp.

Our next question comes from Michael Lasser with UBS.

In an effort to understand how long the external pressures are going to last, if you look back at a parallel situation, like the emergence of the Atkins diet or low-carb, how long was that a pressure on the business?

I think going that far back is not necessarily the relevant thing we need to look at today.

We're in a different technology environment.

We are a different brand.

We have a different offer.

But we'd be foolish not to be cognizant of what is happening in the external environment and what people are gravitating to for a short fix.

So because of that, we have to be very focused on our messaging of why WW, what we have to offer, why we're here for people and why it works when something else eventually does not.

And there's always going to be competitors.

And we have to be out there with what we have to offer for people.

And your expectation that recruitment trends are going to improve over the course of the next couple of quarters, where do you see the risk associated with that expectation?

What might last longer than -- or what might kind of downsize that?

Look, I think the next big data point for us is spring.

And we've talked today about our plans for the spring campaign.

And by the time of our first quarter call, we'll have some early read on that spring campaign.

So the recruitment trajectory, we do assume it improves based on the plans we have for spring and then easier comps in the back half of the year.

That's why we are so focused on having a great spring campaign.

Our next question comes from RJ Hottovy from Morningstar Research.

Just one for me.

Nick and Mindy, could you talk about some of the trends in the Studio + Digital side?

And in particular, I wanted to dive into the comment about higher pricing maybe being a part of the softness in that business.

Obviously, you spoke about a number of corrective measures on the marketing and innovation side.

But can you talk about potentially your plans on pricing and any modifications that you might make for 2019?

Yes, RJ this is Nick.

Look, the studio and digital businesses has been challenged this winter, so we'll say that Q1, revenue will be down by over 10%, studio and digital as the key driver of that, down a little bit more than that.

And so we're very focused on that.

I don't think compared to pricing of our Studio + Digital offering versus the cost of our digital subscription offering is a key factor though.

We always do a lot of price testing throughout the year.

And in terms of our price strategy, it continues to be adding value and the features for the price we charge to our members.

So we haven't raised prices and our guidance doesn't assume that we will do so across digital or studio and digital.

Our next question comes from Olivia Tong with Bank of America.

In terms of the people who are doing keto or choosing other programs, what are you planning to do in 2019 to either convince them that, that's not necessarily the best methodology or to convince those who have decided to use other apps or other programs for their weight loss to come back to WW?

Look, it's clear that our messaging has to be why us and why this is the longer-term sustainable program that works.

And you'll see some of that even in our current messaging about what we do versus you don't deprive yourself of anything.

You can go out, you can eat anything you want.

You'll see quite a bit of food in our social ads, et cetera, including pizza, right, because we've always been about the livability of the program versus other programs.

And you will continue to see us differentiate, absolutely.

Got it.

And I know the $2 billion target has been shelved for 2020.

But do you think this is still a viable target in the medium term?

Or is that not even the right way to think about it for now?

Look, we believe in the long-term growth potential of this business, but we really had to be transparent about what we thought we could accomplish by 2020.

But our goals of what we want to achieve are definitely still what we believe we have the potential for.

Our final question comes from Christina Brathwaite with JPMorgan.

I guess I just wanted to circle back to something a little bit different, on the mobile app.

If you look at some of the reviews in the Apple Store, for example, it looks like you saw sort of a ramp-up in complaints starting around the end of last year.

I don't know if there is an issue with the functionality of the app or a lot of glitches there that maybe caused some issues with turnover in recruitment.

But any color around whether there's some sort of app update that happened that you've identified and you're fixing -- working a fix on the issue that maybe can help things improve from here?

That would be really helpful.

Yes.

We're really proud of our app and what we've done consistently and the 4.8 rating.

But as I outlined before, we enhanced what we had to offer within our app in a significant way over the course of 2018.

And so where we've identified any issues, we've quickly responded to them and whether that's iOS or Android, and I think you'll see that.

But there is nothing functionally or structurally that is an issue.

And I think you're seeing it in our retention, where people have more engagement than they ever have before.

So like anything else, we quickly respond to what we're hearing and what we're seeing.

And we'll continue to do so.

Okay.

That makes sense.

And then I guess, I'm just surprised.

I understand the focus around cost savings as you go through the year.

But I'm just surprised by the guidance that marketing would still be flat in 4Q following the cut that you had in 4Q this year if you're launching a new program for 2020.

So should that imply that the new diet program is actually going to be a '20 January launch instead of the typical December fall kind of time line?

We're still working on our plans.

And with any new program launch or innovation launch, we obviously start that earlier than going into the January time period, which we will continue to do it again.

And we've taken some of that into account, but we're constantly relooking at our marketing strategies.

Yes.

Look, and I wanted to reiterate, in case I wasn't clear in my remarks.

So we're saying flat for the remainder of the year, for the 3 quarters, Q2, Q3 and Q4 combined.

So I guess that implies about $130 million to spend this year in those 3 quarters.

That's about the same as we spent last year on those same 3 quarters.

And it's about $15 million higher than what we spent in 2017 on those 3 quarters.

So it's maintaining the level of marketing spend we believe we need to drive the business and to launch our new innovation in December.

But of course, we'll continue to manage that spend dynamically.

This concludes our question-and-answer session.

I would like to turn the call back over to Mindy Grossman for any closing remarks.

Well, thanks, everyone, for being with us today, and we look forward to speaking with you in the future.

The conference has now concluded.

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