WW - WW International: Telehealth Deal Is The Strategy Pivot Company Needed

2023-03-08 04:54:03 ET

Summary

• WW's announcement of an acquisition entering the telehealth segment with a focus on weight loss drugs may be a game changer.
• The deal with "Sequence" works as a good strategy reset to revitalize growth following a period of declining membership and widening losses.
• Expect shares to remain volatile, but we are bullish on the improved long-term outlook.

WW International, Inc. ( WW ) just reported its latest quarterly result, closing the books on one of the company's worst years in its history. The number of subscribers across digital plans and live workshops is down sharply, which has translated into widening losses. Indeed, WW stock is down more than 80% from a high in 2021 during a brief pandemic boom.

We last covered the stock back in early 2022, calling it a make-or-break year for the company to kickstart a turnaround. Our thinking at the time was that WW would need some bold strategy initiative to remain relevant, or else continue its generational decline.

Fast forward, the update today covers what may just be that big development. Alongside Q4 earnings, WW has announced the acquisition of "Sequence" a specialty Telehealth provider , focusing on prescription weight loss treatments. The idea here is to complement WW's more holistic wellness approach while leveraging its customer base into a new growth driver.

In many ways, this deal can be seen as the "shot in the arm" WW needed to help regain some positive operating and financial momentum. Through a reset of expectations, we believe there is an upside for the stock with an improved long-term outlook.

WW Earnings Recap

WW reported Q4 earnings with a GAAP EPS loss of -$0.46, which was $0.35 below estimates, and also reversing a positive result of $0.42 in Q4 2021. Revenue of $224 million, down by -19% y/y, wasn't much of a surprise considering trends in the recent quarters. For the full-year 2022, net revenues were down by -14%, while the adjusted operating income at $154 million declined from $216 million in 2021.

The story here has been the weakness in the subscriber trends . WW ended Q4 with 3.5 million paid customers, down -14.9% y/y. That figure is also down 30% from a peak in 2021. It was in 2018 when the company formally changed its name from the legacy "Weight Watchers" and the latest digital subscribers level at 2.8 million is now down -30% from its peak in 2021.

Management is citing customer engagement with strong satisfaction among loyal members and progress in improving the brand experience. Still, it's hard to sugarcoat these trends.

There is a sense that the challenging macro backdrop hasn't helped, but our explanation for the generalized decline can be traced to the emergence of new alternative wellness and dieting advice consumers have access to on social media and other tech outlets. In other words, the differentiation WW may have had in prior decades has been lost without the community aspect of the legacy workshops model.

In terms of guidance, the company is targeting a Q1 revenue of around $235 million, implying further weakness in the subscriber trends. If the revenue figure is confirmed, this would represent a decline of -21% y/y. Notably, management's target is also below the prior consensus estimate for the quarter which was at $299 million. Beyond Q1, the company is not providing guidance given the Sequence deal is expected to close in Q2.

WW Enters Telehealth

Shares of WW surged by more than 40% on the Q4 earnings announcement largely based on the telehealth transaction seen as a game changer. WW is acquiring Sequence for a net consideration of $106 million inclusive of Sequence's balance sheet cash. For context, WW ended the quarter with $178 million in cash against approximately $1.5 billion in total debt.

Sequence is a " digital health platform " for clinical weight management. The company currently has 24k active members paying approximately $99 per month for a subscription that includes an initial video or chat consultation with a physician and the monthly program that manages the care. The financials here are expected to be accretive to WW by Q4 2023.

WW management explains that the expected synergy is to pair the proven WeightWatchers nutrition program with the growing scientific evidence that prescription medications may be necessary for some segments of the population that are chronically obese. It's possible that Sequence through WW establishes itself as the leader in this high-growth category.

Notably, the main FDA-approved prescriptions offered through Sequence between Wegovy "semaglutide" and Saxenda "liraglutide" from Novo Nordisk A/S (NVO) are eligible for regular insurance coverage. Members essentially go through Sequence to navigate the reimbursement process following the approval. Eli Lilly and Co. (LLY) expects its Mounjaro "tirzepatide" could be approved later this year.

Recognizing not all of WW's current 3.5 million subscribers will qualify or be interested in the telehealth prescription medications option, the potential to convert even a fraction of that customer base highlights the upside potential.

To place some figures in context, assuming just 2.5% of the current 3.5 million WW subscribers convert to telehealth members, that baseline of 87.5k incremental customers on the Sequence platform paying $99 a month would translate into upward of $100 million top-line annual revenue for WW going forward.

We can also expect a new marketing campaign and growing brand awareness for Sequence to act as a favorable operational boost to core WW subscription offerings. While details of how the two programs will be integrated are yet to be disclosed, we can imagine some sort of bundling effort where telehealth patients gain access to the WW digital platform as part of the value proposition. There is also organic growth from new customers outside both platforms.

Overall, our take is the deal is positive for WW as an evolution of its total offerings to stay relevant with current market trends. While this deal would have appeared odd just a few years back, the timing works out especially considering Sequence has a platform live on the market that is essentially turnkey to scale into WW's ecosystem.

WW Stock Price Forecast

We're bullish on WW based on these new developments and expect the current momentum to carry forward even following this initial surge in the stock price. Even as shares are up a spectacular 100% from the 2022 low, keep in mind that at $5.50, WW is simply back to a level it was trading at around 6 months ago. There is a strong case to be made that WW's outlook now with telehealth is stronger than at any time over the past year.

The next step will be to get some updates from management over the next few quarters regarding financial targets and projections on membership growth. The disclosure of plans in regard to how both platforms will be integrated and can work as new catalysts for the stock.

Getting into 2024, it will be important for WW to confirm a broader operational and financial turnaround by stabilizing WW subscriber numbers and accelerating growth on the telehealth front. At the same time, let's ground our expectations recognizing the stock remains speculative with negative earnings and a recurring cash flow bleed as weighing on fundamentals.

The caution we have is that shares will likely remain volatile as even a bullish scenario would not be a straight line higher. On the downside, it will be important for the stock to hold the "gap breakout" around $5.00 as an important area of technical support.

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