Earnings Call: Q2 2020

Aug 4, 2020

Thank you for your patience. Good day, and welcome to the WW International Second Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Corey Kinger, Vice President, Investor Relations. Please go ahead. Thank you to everyone for joining us today for WW International Second Quarter 2020 Conference Call. At about 4 o'clock p. M. Eastern Time today, we issued a press release reporting our Q2 2020 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. Www.com. Supplement 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 Mindy Grossman, President and CEO and Nick Hodgkin, CFO, Operating Officer, North America and President, Emerging Markets. I will now turn the call over to Mindy. Thanks, Corey. Good afternoon, everyone. Thank you for joining our call today. I hope that all of you, along with your family, your friends are safe and healthy. We began our strategic shift to a purpose driven and deeply impactful technology experience company long before March of 2020. However, there is no doubt that our digital transformation has accelerated with the onset of COVID-nineteen. Our digital first strategy is both obvious and evident in our strong second quarter results. As we indicated in our mid June update, digital member trends have had strong momentum and with their favorable margins are the key drivers of our future growth and profitability. Although 2020 has certainly been a year of unique and unprecedented challenges for us all, it has also served to reinforce our belief in our strategy, the resilience of our business model and the relevance of our global brand, as well as a significant opportunity we have for WW to positively impact people's lives. The recent trends in our business demonstrate that consumers are looking for a science based, affordable and proven wellness and weight loss program that is both digitally enabled and provides a real human connection. Our second quarter results underscore the relevance and importance of our value proposition in today's environment as the trusted leader in weight loss and wellness. I am proud and thankful for our talented, dedicated and passionate employees who put WW members first in everything they do and who have been instrumental both in navigating the here and now and also positioning WW for the years ahead. We ended Q2 with 5,000,000 subscribers, up 9% year over year and a record level for the end of Q2 and execution in terms of delivering our message and value proposition to audiences in a way that is both clear and relevant to their needs and across all channels, digital, social, PR and of course TV. Due to the resonance of our marketing, we extended our U. S. Spring TV campaign into the summer, running both through June July with good results. Our brand, message and value proposition were then further amplified by the 4 week virtual experience with Oprah, which resonated with audiences around the world. Member recruitment trends for digital gained momentum globally over the course of the quarter, bringing digital subscribers to 3,900,000, up an impressive 23% year over year. Given the dynamic growth of our digital subscribers in Q2, now about 80% of our members are digital only and about 20% are studio plus digital. With this shift, we are also seeing a demographic change with 51% of members joining in Q2 being below the age of 45. In the Q2, on a constant currency basis, digital revenues were up 15%. This strength was offset by the declines in studio fees and product sales due to studio closures as a result of COVID. In total, revenues were $334,000,000 down 9% on constant currency. Notably, adjusted gross margin was 60% in Q2, up nearly 200 basis points year over year due to the benefit of an increased mix of digital subscribers combined with effective cost management as we reduce our studio footprint. This is the highest adjusted gross margin we have seen in the past 8 years. Adjusted operating income margin was 28%, flat year over year. This strong operating and financial performance demonstrates the resilience of our business model and provides a solid foundation as we continue to manage through the current environment and position WW for the long term. On our last earnings call, I highlighted many of the digital features and enhancements we have launched to better serve members and deliver a robust experience. I'm happy to say that these new innovations have resulted in an increase in overall trends, which as you know are a key driver of retention and ultimately member success. For example, new features such as our water tracker have been enthusiastically received with over 2,000,000 WW members tracking hydration, and we recently enhanced our sleep tracker to sync with connected devices, making it easier for members to monitor their progress and improve their sleep habits. In addition, the integration of FitOn, a video fitness platform, not only bolsters portfolio fitness content, but provides members with workouts they could do at home, all while seamlessly syncing to fit points. Since its recent launch, our members completed over 500,000 fit on workouts and spent over 7,500,000 minutes working out. For added gamification, we recently launched a Fit On Fans Connect Challenge, a 3 week partnership with Fit On trainers that encourage members to try different type of Fit On workouts. This grew the Fit On Fans Group engagement exponentially. We will continue rolling Fit On! Out globally over the balance of the year. As we accelerate our digital transformation, we are increasing our focus on producing original creative content for our members that incorporates our unique expertise in behavior change science and community building to drive engagement, accountability and results. Our 4 week Oprah's Your Life in Focus, a vision forward virtual experience was truly a first of its kind, bringing people together virtually from all around the world in a live interactive experience. And with 3,500,000 views, it came at a time when the world needed it most. The virtual experience generated 30,000,000,000 media impressions and drove significant social media conversation. In addition to hearing from Oprah herself, listeners heard from a variety of inspirational and diverse special guests from celebrities such as Kate Hudson and Dwayne The Rock Johnson to wellness experts such as life coach Jay Shetty, relationship expert Esther Perel, as well as numerous WW members about their perspectives, challenges, victories and experiences. Each week included an online workbook for participants to assess their wellness quotient based on their ability to focus, connect, adapt and commit. The learnings from the wellness assessment exercises from both the virtual experience and the 9 City Arena tour this year are being leveraged into our innovation pipeline as we add new features and content into WW that members value. We see the opportunity to create new differentiated content experience that continue to elevate the WW brand and provide value across our membership offerings, digital only, studio plus digital and coming later this year, a new membership tier for virtual coach led communities. By having content and coaching experiences that are insightful, interactive and engaging, we believe we will have a greater opportunity to attract new members to WW, appeal to younger, more diverse audiences, retain members longer and make a lasting impact on millions of lives. Looking to the fall season, we aim to further our momentum and build our brand presence as we ramp up to winter. Our integrated fall campaign will include TV, both linear streaming, new digital channels and influencer activations to help drive new audiences. Having a wider array of content will also enhance our ability to deliver a more personalized experience for our members, however they wish to engage with WW. Our goal is not to maintain, but to advance WW's position as the trusted leader in weight loss and wellness, delivering a connected digital and deeply human experience for sustainable behavior change. As a reminder, when COVID-nineteen escalated in mid March, we took quick globally coordinated action and paused our in person workshops and implemented virtual workshops around the world, continuing to provide studio members with the support, encouragement and community that is central to their WW experience. While face to face experience will always be a part of WW, we are strategically repositioning our studio business to have a smaller real estate footprint with fewer locations. Nick will provide an update on our studio strategy and progress shortly, but I'm pleased to say that over the past 2 months, we have started resuming a condensed schedule of in person workshops in many areas. Of course, enhanced safety procedures are in place and we will continue to monitor the situation closely at a local level as the health, safety and support of our employees and members is paramount. We will also continue to operate virtual studios to support our members and give them the community and support they need. As you likely read in our press release this afternoon, I am thrilled to announce that Nick Hodgkin has been named Chief Operating Officer of WW, a new role, assuming responsibility for all our global markets as well as our Health Solutions business. Nick has been an invaluable I'm also excited to announce that Amy O'Keefe will be the I'm also excited to announce that Amy O'Keefe will be joining WW as Chief Financial Officer. Her deep expertise in operational finance and her proven track record of driving business growth while maximizing profitability makes her uniquely qualified to join our team. Amy has more than 25 years of financial expertise joining WW after 3 years as CFO of Drive Devilbiss Healthcare, a leading private equity backed medical equipment company based in Port Washington, New York. She previously held CFO positions at Savant Systems and D&M Holdings and held several corporate finance positions with increasing responsibility at Stanley Black and Decker. On behalf of the entire executive team, I look forward to Amy joining us in October. I will now turn the call over to Nick and then I'll come back to discuss our 2020 priorities and key initiatives. Thanks, Mindy. I look forward to continuing to drive our strategy and partnership with you and our global teams in my new role as Chief Operating Officer, and I look forward to welcoming Amy to WW as our new Chief Financial Officer. The past 8 years at WW have been the most rewarding of my career. To see how far the company has come has been incredible and I believe that future opportunities are even greater. As discussed on our last earnings call and provided in our business update announcement on June 15, starting in the middle of April, digital recruitment trends returned to growth on a weekly basis compared to the prior year period. This weekly growth trend accelerated over the course of the quarter and in June surpassed the weekly recruitment growth rates we saw in the Q1 prior to the escalation of COVID-nineteen in mid March. This resumed strength in digital sign ups has offset the continued decline in studio due to COVID-nineteen studio closures. And in Q2, roughly 90% of member sign ups chose our digital offering. Overall, member retention remains above 10 months. And these solid recruitment and retention trends drove our Q2 end subscriber level to an all time high of 5,000,000. Dollars Q2 revenue was $334,000,000 down 9% year over year on a constant currency basis due to the further mix shift towards higher margin, lower priced digital subscriptions. Increased mix of digital subscriptions and the speed of our actions to right size the cost structure for the current environment drove an exceptionally strong adjusted gross margin of 60%, which is adjusted to exclude restructuring charges. As we move to a more digitally enabled business model, over time, our high margin model will be increasingly evident and is a key attribute of our operating and financial flexibility. In fact, of our $195,000,000 in gross profit dollars in Q2, 75% were generated by digital subscriptions. Adjusted operating income margin was strong at 28%. Our GAAP EPS was $0.20 In addition to a higher tax rate in the quarter, Q2 2020 EPS was negatively impacted by a total of $0.47 in one time charges, including a $0.12 per share impact from our organizational restructuring and a $0.35 per share impact from stock option expense associated with the extension of our partnership with Oprah Winfrey through 2025. Excluding these one time items, EPS would have been $0.67 compared to $0.78 in the prior year Q2. As discussed on our last call, our operating and financial objectives for 2020 are maximize recruitment and retention with a focus on subscription lifetime value, ensure we continue to deliver a high quality and engaging member experience across all platforms strategically reposition our studio business and deliver on our $100,000,000 cost savings initiative with reductions underway across cost of revenues, marketing and G and A continue to focus on e commerce continue to invest in our product and tech capabilities to take advantage of future opportunities and finally, maintain strong liquidity and financial flexibility. I am pleased to say that we have been delivering on each of these initiatives, strengthening WW for both the immediate and longer term. While we are strong believers in face to face coaching, the changes to our studio business are likely to be long lasting. We will continue to nimbly manage the studio cost structure given the significant decline in studio revenue. Looking at our USA real estate, at the start of the year, we had nearly 800 leases for WW Branded Studios. We are consolidating many of our workshops into these WW branded locations where we have more control over health and safety. We also have already permanently closed more than 100 branded studios, bringing the U. S. Studio base to about 650 locations today. Looking ahead, we are focused on maximizing the smaller footprint to be the cornerstone of our in person workshop and retail experience. At the start of the year, we also had about 2,300 third party locations with month to month rental arrangements. Given the current COVID environment, these locations have been closed since mid March and will be reopened only on a very selective basis. Looking into 2021, we have 189 studio leases up for renewal and the average lease length of our 650 WW Studios is only 26 months, so we have ample real estate flexibility. Virtual workshops continue to be extremely well received by members, with many expressing a strong desire for them to continue post COVID as members enjoy the convenience. These virtual workshops also provide greater access to our coaches, particularly in areas where we don't have a studio location. Therefore, we plan to continue offering workshops virtually in addition to exploring strategic partner locations to serve an even broader member base. Looking ahead to fall, we will maintain a global creative strategy localized for individual market needs. In addition to showing up in digital, social and via influencer activations, we will return to TV across all major markets. To evaluate marketing efficiency, we look at subscription lifetime value and customer acquisition cost. While there are seasonal fluctuations on a full year basis in the U. S, our LTV to CAC ratio has been about 5:one. As mentioned earlier, we've had success in driving member sign ups with compelling longer tenured plans. In the U. S, nearly 50% of our member sign ups so far in 2020 chose a 6 month or greater initial plan. Approximately 30% chose a 3 month initial commitment and about 20% started on a month to month plan, which includes members joining in app via the Apple Store. Since we've introduced a 2 week free trial in the App Store, our conversion rate on these trials has been impressive. In app purchase sign ups accounted for 8% of our total U. S. Sign ups in Q2 and we'll continue experimenting with free trial and other marketing channels as we look to attract first time members to WW as well as repeat members. It is important to note that during the free trial period, these trials are not counted as either sign ups or subscribers. Only upon conversion to a paid subscription are they counted as a sign up and a subscriber. Looking ahead, we are confident in our digital transformation and our ability to drive long term growth through digitally enabled innovation. In July, which is a seasonally low volume period, digital finance continued to trend nicely positive year over year, which is encouraging as we approach our fall recruitment season. Given the continued macro uncertainty, we are not providing detailed subscriber revenue or EPS guidance at this time, but we would like to provide you with a few directional assumptions for your modeling. We expect our Q3 year over year revenue trends for digital, studio and product sales to be relatively similar to the trends experienced in Q2, with strong growth in digital offset by declines in studio related revenues due to the reduced availability of in person workshops. As we resume in person workshops while rightsizing our studio cost structure, we expect our overall gross margin to be in the mid-fifty percent range. Importantly, however, as we continue to move to a more digital subscriber base, we expect to deliver margin expansion over the longer term. Full year interest expense is expected to be approximately 120,000,000 And the Treasury Department recently released final regulations around GILTI now permitting companies to elect to exclude foreign income already subject to a high effective tax rate. We now expect our full year 2020 tax rate will be approximately 20%. We are a highly cash generative business with strong liquidity. We have a covenant light debt structure and our term loan and bond maturity dates are not until November 2024 December 2025 respectively. Our cash balance at the end of Q2 was $150,000,000 and our revolver was undrawn. We expect our cash balance to increase during 2020. We ended the quarter with a 4 times net debt to EBITDAAS leverage ratio or 3x levered on a 1st lien debt basis. As previously announced in June, we amended our revolving credit facility, increasing the commitments to $175,000,000 from $150,000,000 and raising the consolidated 1st lien leverage ratio to up to 5 times together providing for significantly more flexible access to liquidity. Reducing our leverage continues to be our overall capital structure priority. And in addition to investing in technology and digital product resources and talent, we will continue to evaluate potential tuck in acquisitions of technology companies that can augment our capabilities. We may also continue to buy back our WW franchises as you have seen in recent years. In summary, we believe we are focused on the right priorities to maximize our current offerings while also innovating to drive future growth. And with that, I would like to turn it back to Mindy. Thanks, Nick. Before I discuss our priorities and upcoming milestones for the remainder of 2020, I first want to address Black Lives Matter and the critical need for diversity and inclusion at WW and in our society. We have made it a priority to cultivate a wellness community of diversity and inclusion. And while we are proud of the progress we have made over the past few years with our board, our leadership team and our member base, we are greatly accelerating our efforts and are taking further actions that are both measurable and sustainable. To highlight just a few of the actions we have taken, we have donated 1,000,000 dollars and are matching employee donations to several non profit organizations dedicated to positively influencing Black Lives. We will be spotlighting Black owned businesses in the WW shop. We have appointed a head of inclusive leadership. We have pledged to the CEO Action for Diversity and Inclusion initiative. We are creating new career and professional development programs for our Black employees, as well as creating company wide educational programs aimed at eradicating bias and racism, and we are requiring best practices in hiring to ensure diversity at all points along the WW Ecosystem. When we released our Impact Manifesto in early 2018, we made our purpose very clear. We inspire healthy habits for real life, for people, families, communities, the world for everyone to be the brand that truly democratizes wellness for all. So it is up to all of us as individuals, as an organization and as fellow humans to advocate for our employees, our members and our communities. And this is not an isolated objective, but one that will be ingrained across every priority and initiative at WW. We are focused on technology driven innovation, data driven personalization at every step of the member journey, powering community and creating meaningful experiences at every touch point. That aligns to each of our 2020 priorities. First, we will continue to build our wellness ecosystem, deepening our app experience and adding further gamification. We're focused on our 2021 winter launch and delivering a new and compelling programmatic innovation as we anniversary MyWW. Our plans are exciting and will further our efforts around personalization, motivation and weight loss success. We intend to be recognized as the world's trusted partner in total wellness and behavior change, spanning nutrition, activity, mindset, motivation, hydration and sleep, offering leading digital features and tools to help our members improve their overall health and wellness. I've spoken before of our next two priorities, amplifying the power of community through coaching and the importance of community activations, events and created content. I will speak to them both together as our upcoming milestones and strategy for both of these priorities are very much intertwined. We know that building virtual community in an enhanced way is more essential today than ever before. Building on the success and key insights from the Oprah Vision tour, the recent virtual experience and the evolving needs of today's consumer, we have refined our plans for an entirely new digitally enabled community focused and coach led premium experience specifically designed for a millennial audience. We are on track to launch this new enhanced offering in December. A new group of coaches will deliver motivation, accountability and deep insights entirely virtual to help members along their journeys. They will engage in live and on demand experiences and share unique content through a scalable modern digital platform. Backed by science and human behavior psychology, this new virtual coach centric experience will offer the tools and communities sought by millennials looking for weight loss and total body wellness. As we evolve and create more personalized offerings and build highly skilled coaching talent, we're focused on providing solutions to our members in the format and communities that fit their lives best, whether they be digital, in person or virtual studios, through virtual coach led communities, or coming later in 2021, a relaunched 1 on 1 personal coaching offering. In addition to our programmatic experiences, we will continue producing original content, events and experiences for all WW members as well as non members who want to join our wellness offerings. Looking ahead, we envision more opportunities to produce unique events such as the virtual Oprah tour that expand the reach of WW to audiences worldwide. These are critical elements of our strategy as we look to diversify our customer base and maximize member engagement. E commerce growth and consumer product expansion is a significant opportunity and is an integral part of our digital acceleration strategy. We envision WW as the go to for all things weight loss and wellness across healthy eating, healthy kitchen and healthy lifestyle. We will achieve this vision by driving brand perception and positive associations within the minds of consumers and by creating favorable interactions and memorable experiences. The advancements our team has made to enhance our e commerce experience has been exceptional. The WW shop is now our primary channel for purchases in addition to in studio purchasing with e commerce sales in Q2 up 300% year over year. In addition to integrating the WW Shop into our app in March, we have been actively expanding our product lines and categories such as the launch of our Movie Time popcorn kit, coming soon grab and go iced coffee. The future of our digital commerce marketplace will span 3 different branding opportunities. 1st, fully WW branded, such as our mini bars, frozen novelties, breakfast treats and other foods and snacks. Co branded, where we partner with another brand to develop value add products, such as kitchen tools and curated products, where we highlight products that WW found for you. We are focused on increasing the percentage of members, particularly digital members who buy WW products and are testing a number of initiatives to increase awareness and incentivize first time and repeat purchases. In Q2, only a small percentage of our digital members purchased products on the recently launched in app WW shop, demonstrating the significant opportunity found in just a modest increase to this penetration rate. In addition, we see opportunities through increasing frequency purchase and are exploring new ways to incentivize and reward repeat purchases. Expect to be hearing more from us as we build upon our e commerce momentum. Through further development of the WW Shop platform, the rollout to more international markets, exciting new partnerships, a pipeline of new products and the opportunity to bring our products significantly more WW members, we are positioning our consumer product portfolio for exponential growth in the years ahead. And finally, Health Solutions and being the partner of choice. Our goal is for WW Health Solutions to be the best in class digital health solution to make WW accessible and affordable to a broader and more diverse population. We believe healthy living is a human right and we aspire to make wellness accessible to all, not just a few. We're actively evolving this business from being viewed as a wellness perk to being a powerful partner in health by working with organizations to help their populations lose weight, stay healthy and prevent chronic conditions. We see a significantly larger opportunity in the years to come to greatly accelerate growth and reach a significantly larger universe of consumers. In the UK, WW is now a key partner with Public Health England for its better health campaign to help people lose weight, get active and eat better. Last week, Public Health England launched this adult health campaign to seize the opportunity for a national reset moment of health. It follows research that shows that nearly 2 thirds of adults in the UK are overweight or living with obesity. Among the initiatives under Public Health England's plan is the expansion of weight management services under the NHS to provide more people with the support they need to lose weight. And in the U. S. Last week, we announced that WW Health Solutions has been added as a new wellness and weight management solution to CVS Health Point Solutions Management offering, which serves millions. Joining the Point Solutions Management platform will enable employers that use CVS Caremark for pharmacy benefits management to access WW Health Solutions with simplified contracting, preferred pricing and streamlined eligibility and billing processes. The new offering makes it easier for plan sponsors to add WW Health Solutions to their benefit packages. Through the collaboration, plan sponsors can offer their members WW digital offerings, which are accessible virtually anywhere to meet members where they are, helping them along their weight loss and wellness journeys. Third by the COVID crisis, employers will need to take on a greater role in advancing employee health and wellness. In addition, people are seeking out more virtual options. I've personally spoken with many healthcare providers recently and they've said patients often now prefer for consultations to be done virtually. We are truly seeing a dramatic shift in consumer preferences and one that I believe is here to stay. We are confident that we are focused on the right actions, not only to best serve our members today, but to position WW as a leader in delivering human impact through technology. We know that good health and community are essential and having the tools to better manage your health should not be considered a luxury, but a necessity. We are focused on making WW accessible and relatable to more people than ever before, broadening our reach, offering WW in new formats and creating new and engaging experiences that help members along their wellness journey. Thank you for joining us on the call today. And with that, we will now turn the call to the operator for Q and A. Speakers, you may unmute your lines. We will now begin the question and answer session. Our first question will come from Steph Wissink with Jefferies. Please go ahead. Thank you. Good afternoon, everyone. Mindy, a 2 part question for you. One is really just to clarify. You talked about a premium experience targeting millennials in the back half of the year. Is that similar to or aligned with the virtual coaching model? Or is that something separate that's more targeted towards that specific demographic? No, that is separate. So, it is a whole new vertical of membership that we will be launching. Now we are going to continue some virtual workshops for our workshop members, but this is a completely different vertical. We are bringing in a new cohort of coaches. It's very content driven and community driven. And we're very excited. We will be in between from a pricing perspective, our digital and our workshop membership. But I really think it is going to accomplish 2 things. It will attract new audience, new diverse audience, but it's also an opportunity to up sell from digital for those people who want more accountability, more engagement and more community. That's great. And then just one follow-up for you, Nick. This is more just a numerics question, but you mentioned that the July business has continued to demonstrate some nice acceleration. So it almost looks like your business is defying some of the historic seasonal patterns. Can you talk a little bit about as you think through the back half of the year, how we should think about the normal seasonality that waterfall effect versus what you're able to actually offset and maybe gain some ground relative to that historic trend? Okay. I've been pleased with the rebound and we're growing nicely in July also, which is important as we approach our fall campaign. Look, having Q2 end of subscribers be at 5,000,000, an all time high for Q2 and effectively equaling the Q1 number, also 5,000,000 dollars was a very important achievement for us. And so to your point on seasonality, look, last year's seasonality was pretty exceptional historically, a peak to trough decline during the year of 8% from Q1 to year end. But certainly, our performance in Q2 and the speed of the digital growth of subscribers up 23%. It was a very encouraging quarter. Okay. Thank you. Our next question will come from Lauren Cassel with Morgan Stanley. Please go ahead. Great. Thanks so much. My first question was just on the real estate. The color you gave was helpful. But I guess, how should we think about what the right number of branded geolocations is long term? And then ultimately, what sort of savings do you think we could see there? I think in 2019, you spent a little over $50,000,000 on rent. Is it $20,000,000 or $30,000,000 there? Sort of ballpark, what could we see in 2021? And then my second question is just around marketing spend in the back half of the year. You noted a return to TV in all markets in the fall. I guess, how should we think about marketing spend in the 3rd 4th quarters? Look, in terms of the real estate footprint, you see that it's very flexible, so we can nimbly adapt to any environment. You see us running the play of concentrating our business in those WW branded studios where we can control the health and safety environment. So that's why we've concentrated on those 650 WW branded studios today, and we'll only open those 3rd party studio apps selectively. Now in terms of the savings from that, we're well on track to deliver a $100,000,000 cost savings plan versus our rent, a third marketing and about a third G and A. And so the rent savings are incorporated with those cost of sales savings, which frankly should be the more permanent part of the $100,000,000 cost savings plan. In terms of marketing, what you saw we under spent marketing this year in terms of dollars spent versus last year. Frankly, I think we've punched over our weight in terms of the efficacy and the wonderful marketing efforts of the team forward. We deliberately slowed down marketing in Q2 because of the uncertainty of COVID. Going forward with the momentum we have, you can expect us to continue to spend at levels that the momentum of the business deserve. Okay. And just quick one clarification. Is there an opportunity to we we'll nimbly manage the business. And you've heard me say we've got a flexible real estate footprint with 189 lease renewals in 2021. So but we're committed to with this smaller real estate footprint, very committed to creating a fantastic face to face studio and retail experience. I think we have a great opportunity to do that in addition to, as Mindy said, for those areas that aren't served by a face to face studio, continuing to offer virtual workshops to our members. Okay. Thank you so much. Our next question will come from Vikram Kasavathota with Guggenheim Securities. Please go ahead. Yes. Thank you for taking the question. I was wondering if you can give us some color on the characteristics of the subscribers that have joined in recent months, particularly around the age and the mix of first time users versus returning? And if there's anything to call out with respect to just the overall behavior acceleration of our digital membership is definitely diversifying our audience. So as I mentioned, about 51% of the members joining are under 45. And there's a pretty broad swath there. So that we are definitely seeing. We've also been very focused in our marketing around diversity, influencers, etcetera. So that's also helped in that regard. Now what we are seeing is there isn't dramatic differential between what people are doing based on the cohort. But what we're excited about is we are seeing greater engagement year on year overall across all of our verticals. And that's really because of the work that we've done around personalization, across nutrition, fitness, fit on is a personalized video fitness for you and it now syncs up with all our fit points. And what we're seeing across and we're also seeing we launched Connect Groups a while ago. So what we are seeing is people are finding their own cohorts that they want to interface with. So whether that's young moms, college students, black women, men, etcetera, we have a lot more opportunity for integrated engagement and that is why our retention is where it is. Okay, great. And then maybe just as a follow-up to that, can you talk about how the pricing strategy has evolved here throughout the first half of the year? And when you think about the launch that you have later this year and what you're seeing in the market right now, just what your approach towards promotional activity is in the second half of twenty twenty? Any color there would be great. Thank you. Yes. Look, our pricing and promotions strategy has been pretty constant year over year. When you look in detail at our numbers, you'll see a few things. Pretty stable price realization on the digital side. For example, in February, we took $1 of price on new member sign ups, and that's a factor there. Then look, on the Studio side, in addition to the impact of offering longer term plans, which makes so much economic sense with us because it makes sense for us to give a discount to get the longer retention. As you can imagine, in the COVID environment, we've been implementing various member saves strategies. But overall, our promotion and pricing strategy is intact and working well for us. The thing I like best in the quarter was the great results that we're getting from the 2 week free trial in the Apple Store, and it really shows how the team is innovating and trying new things. Great, great way to attract new members to the brand and the conversion from pretrial to paid has been impressive. Great. Thank you. Our next question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead. Hey, good evening and thanks for taking my questions. I guess first, what has retention been like on those customers that had entered through the studio product and maybe haven't been able to engage in that physical experience? Second, I guess on the studio side, when you have reopened, I guess in some markets, any commentary on behavior? And then just one other quick one. When someone does a digital through App Store, I'm assuming that there's a significant take from Apple, does that change the economics of the product? Thank you. Look, on the retention side, we're thrilled that retention is over 10 months. And as Mindy said, that's driven by the engagement strategy. On the studio side, it's helped immensely that we introduce these virtual workshops and our members find them convenient and are using them and enjoying them. In terms of the App Store, yes, for those digital subscriptions, we pay Apple a commission on those. Our pricing strategy in the App Store comprehends that. So the incremental margins on those sign ups are terrific for us. And sorry, I might have missed the middle part of the question. No, actually, the you on the reopening studios when you have seen markets where you've been able to reopen? Any significant commentary on performance there? Yes, it's been really interesting, because we really were not 100% sure what the reaction was going to be once we were opening. We put into place a scheduling tool because obviously we can't have as many people there at one time. So we've had to have more meetings with less people. And so people reserve and sign up. And just in the 1st couple of days, we were sold out. So people really the ones that really feel that their community and their coach are important, have come back and have engaged, just in smaller groups. But to Nick's point, we've been very focused on the studios that we are branded, owned and operated. And albeit, we will have a smaller footprint that still covers a significant percentage of our members. And our real focus is how do we make them more and more a destination. Great. Thanks so much guys. Our next question will come from Brian Nagel with Oppenheimer. Please go ahead. Hi, good evening. Hi. Thanks for taking my question. So the first question I have, and maybe it's a bit of a follow-up to a couple of the prior questions. But as we look at the sequential trend in subscribers, it's really remarkable how well Q2 has held up relative to Q1 and we're not seeing that normal seasonal fade. As you look at the data, what gives you the confidence that this is much more reflection of the underlying quirk right now with the COVID landscape? It's definitely the work that we've done and the power of our trusted brand, why people are really coming to us at this time. If you think of all of the innovations and what we have done over the course of a number of years and really building out this entire ecosystem of support, that's what's made a difference. It's not we've been able now certainly to accelerate it and we just launched hydration, we just launched sleep. I mentioned before, we are seeing higher engagement year on year. We're seeing and we're monitoring when people join as new members, what is their motivation and we are unequivocally is because we're trusted, we're about sustainable livable behavior change. And they know that they will also have the support of community. And that's been pretty constant. And that's why it's been accelerating. Thanks, Mindy. Then a follow-up, Nick. Well, Nick, first off, congratulations on the new role. I do want to ask you, I guess, maybe one final financial before you hand reins over. Just as we talk about the a lot of talk about the ongoing digital transformation of WW, again, clearly a lot of success there. But how should we think about the investments, the ongoing investments needed to continue or maybe potentially complete this transformation? We've been investing in the digital experience continually. And that's why we've got such a market leading award winning app and digital experience now. So that acceleration of that digital first strategy is very evident in our Q2 results, but it's not new. And it's that long term approach that's enabling us now to rapidly become a technology experienced company. But going forward, I don't see any change to the key tenets of the business model in terms of a low CapEx, highly cash generative business model. I think the biggest change to the business model as mix shifts towards a richer mix of digital subscribers and you see there's some in our Q2 results with that 60% gross margin, you'll see us be versus where we were with a higher mix of studio, you'll see us be a lower revenue but a higher margin company. And we've definitely got margin expansion opportunities with this strong digital mix and the higher revenue digital product that Mindy has talked about that we're launching this winter. Thank you very much. Our final question today will come from Alex Fermi with Craig Hallum. Please go ahead. Hi, Alex. Hi, thanks for taking my Nice to speak with you all. I wanted to ask Mindy about something that you said in the prepared remarks. I think you said about 51% of the new members that you signed up over the past few months have been below the age of 45. Can you talk a little bit about how that compares to what you've normally seen over the years? Is that tend to be a number that has fluctuated over the years or had that generally been pretty constant? And can you talk a little bit about how much that might be driven by just the mix shift with digital becoming a bigger part of the business this year? Or have you also seen a change in your incoming customer age within the digital product? So I think it's a combination of things. It definitely has accelerated, as we have moved towards a more digital experience. And the rate of sign ups in this quarter on the digital side being so strong, but we really saw that shift there. That's number 1. Number 2, I think part of it is we've had a strategy to go after new cohorts and modernize the brand. So I think that definitely is a factor as well. And the biggest opportunity for us is always word-of-mouth. We're community based business in addition to having great marketing. I also think that the digital marketing efforts and social marketing efforts over the past year has been fantastic. So I think it's a combination of all of those things. Great. That's really helpful. Thank you very much. This concludes our question and answer session. I would like to turn the conference back over to Mindy Grossman, CEO for any closing remarks. Well, thank you, everyone. And while 2020 certainly won't be the year any of us had envisioned just 5 months ago, I'd say the way our global teams quickly adapted to this changing environment and they were ready to reimagine anything and everything they do And we're agile and pivoted to deliver the best experience for our members. And that has been both motivating and inspiring. And we continue to be focused on delivering coaching, community, creative content and thought leadership to our members in ways that are personal and authentic. And by providing behavior change and human connection through technology, we can now truly deliver upon our purpose to inspire healthy habits for real life, for people, families, communities, the world, for everyone. So thank you for joining us today and I look forward to speaking with everyone again soon. The conference has now concluded. Thank you for attending today's presentation. You may now