Weight Watchers International (WTW) James R. Chambers on Q2 2016 Results - Earnings Call Transcript

| About: Weight Watchers (WTW)

Weight Watchers International, Inc. (NYSE:WTW)

Q2 2016 Earnings Call

August 04, 2016 5:00 pm ET


Corey Kinger - Managing Director, Brainerd Communicators, Inc.

James R. Chambers - President, Chief Executive Officer & Director

Nicholas P. Hotchkin - Chief Financial Officer


R.J. Hottovy - Morningstar, Inc. (Research)

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

Frank Camma - Sidoti & Co. LLC


Good afternoon, and welcome to the Weight Watchers International Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note that this event is being recorded.

I would now like to turn the conference over to Corey Kinger of Investor Relations. Please go ahead.

Corey Kinger - Managing Director, Brainerd Communicators, Inc.

Thank you, William, and thank you everyone for joining us today for Weight Watchers International's second quarter 2016 earnings conference call. With us on the call are Jim Chambers, our President and Chief Executive Officer; and Nick Hotchkin, our Chief Financial Officer.

At about 4:15 PM Eastern Time today, the company issued a press release reporting the fiscal 2016 second quarter 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, www.weightwatchersinternational.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 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.

I would now like to turn the call over to Jim Chambers, President and Chief Executive Officer of Weight Watchers International. Jim?

James R. Chambers - President, Chief Executive Officer & Director

Thanks, Corey. Good afternoon, everyone. Thank you for joining us. In Q2 Weight Watchers delivered another quarter of transformation progress, reflecting continued recruitment growth and stable member retention. Strong consumer response to our Beyond the Scale program and SmartPoints food plan, coupled with Oprah's member engagement efforts are delivering continued improvement in our financial metrics. Three consecutive quarters of member recruitment growth are now being reflected in our financial performance, contributing to our return to operating income growth, with Q2 operating income of 5% year-over-year on a constant currency basis.

Our results so far this year validate the transformation actions we've taken and bolster our confidence that we will deliver both sales and profit growth for the full-year 2016. In North America, which represents two-thirds of our total business, we continued to deliver positive growth in Q2 across a range of key volume indicators, including member recruitment, end-of-period subscribers, and paid weeks.

North American Q2 recruitment was solidly positive for both meetings and online, although not as good year-over-year as we had originally anticipated due to some softness in mid-May through mid-June. It is important to note that second quarter ended strongly and that strength has continued into the third quarter. In Q2, North America end-of-period subscribers increased 9% and total North American paid weeks grew 8% year-over-year.

While North America continued to drive our transformation results, our international performance has remained weak. After a challenging winter season, international has shown some modest improvement in trend, but remains below prior year. Worldwide we ended the quarter with 2.9 million subscribers, a 5% increase year-over-year. Meeting subscribers totaled 1.3 million, up 7% and online subscribers totaled 1.7 million, up 4%. Total global paid weeks were up 4% year-over-year in Q2 with meetings up 6% and online up 3%.

For those of you newer to Weight Watchers, in December of 2015, we launched our new holistic consumer program, Beyond the Scale, into all of our major markets. Beyond the Scale includes SmartPoints, our new food plan, as well as a more integrated role for fitness, increased personalization, and a focus on motivational strength and positive mindset, all of which were derived from our consumer insights work and delivered via our new innovation model.

Our SmartPoints food plan, the cornerstone of the Beyond the Scale consumer platform, nudges consumers towards better food choices, while delivering even better early weight loss. Indeed, our members on SmartPoints are experiencing impressive weight loss results.

On analysis of over 100,000 new U. S. meetings members shows that they lost 15% more weight in their first two months following the new Beyond the Scale program compared to those who followed our previous program during an equivalent period. And not only are members having faster weight loss success, they are giving SmartPoints high marks for livability.

Since the launch of the new program in December, we have added a number of new features and enhancements, including offering new members orientation calls with our coaches, incorporating motivational messages, and adding personalized achievement screens in our app, when members reach progress and behavioral milestones. Looking ahead, this continuous innovation will add enhancements and features to the Beyond the Scale platform that can further drive member engagement and growth.

We continue to see strong member engagement measured by usage of our mobile tools and attendance at weekly meetings. Connect, the social media platform embedded in our app has created a more powerful, more connected social experience, where members get encouragement, positive affirmation and inspiration. Connect is a clear example of our strategy to strengthen and differentiate our experience by leveraging the power of the Weight Watchers community through technology.

We continue to see growth in our B2B channel, another area of strategic focus. One significant recent win in this area is our partnership with the City of New York, the largest local government in the United States. Weight Watchers is now available to City of New York employees, spouses, domestic partners, dependents and retirees as part of the City's and its municipal union's commitment to improving the health of its workforce. Early response has been highly encouraging demonstrating this population's interest in Weight Watchers.

Overall, we continue to advance our transformation agenda in the second quarter, and we are confident in our Beyond the Scale strategies and our ability to deliver sustainable growth. However, we still have opportunities to optimize our marketing and promotion execution for more consistent results.

As we mentioned on our last call, our first quarter marketing execution in most of our international markets was not as strong as we would've liked, as we were developing the right communication positioning for our new consumer platform. Although, we have made some progress, internationally in Q2, we still have work to do.

Also in the second quarter, as Nick will discuss further, our North America recruitment was softer than expected from mid-May through mid-June, as some of our post-winter recruitment campaigns and promotions were not as impactful in driving traffic as we had hoped when we talked with you on our last quarterly call.

This temporary softness in North America and continued pressures internationally are reflected in our updated full year outlook. Importantly, as I said earlier, after some adjustments to our promotional approach, we have seen a return to stronger performance in North America since mid-June and remain on track for total company growth in 2016.

I'll now turn it over to Nick for a review of our financial performance and guidance. And then I'll come back to speak to our direction heading into 2017.

Nicholas P. Hotchkin - Chief Financial Officer

Thanks, Jim, and good afternoon, everyone. Let me start by discussing a few key items in our Q2 financial performance. As a reminder, given our seasonality, we measure our performance on a year-over-year comparable quarter basis. In Q2, global member recruitment, driven by continued strength in North America, was positive for the third consecutive quarter. This positive recruitment drove a 5% increase in the year-over-year end of period subscribers. Q2 total global paid weeks increased 4.2% in the second quarter.

Sustained improvement in our operating metrics is now being reflected in our financial performance. As discussed on our May conference call, with our subscription business model, there is an inherent lag between member recruitment growth and full revenue and profit realization. We began to see recruitment growth in Q4 2015, but as anticipated the benefits of that growth did not fully start flowing through to the P&L until this quarter.

In the second quarter, total company revenue was $310 million, up $2.3 million year-over-year on a constant currency basis. Service revenues grew 1.2% year-over-year on constant currency, versus a decline of 0.8% in Q1. Product sales and other decreased 1.1% year-over-year on constant currency versus a decline of 10.7% reported in Q1.

Q2 operating income was $73.7 million, a 4.6% increase year-over-year on a constant currency adjusted basis, a notable swing from the 45% decline we experienced in Q1. Q2 GAAP EPS was $0.46, know that this includes a $0.04 tax benefit related to the release of a valuation allowance for Sweden given our strong turnaround there, and reflects $0.07 of dilution from a high share count. For comparison, GAAP EPS in Q2 2015 was $0.49 which included a $0.07 gain from the early extinguishment of debt.

North America continued to be our best performing market. However, our Q2 North America business trends came in a bit below the levels we had anticipated. Our spring season got off to a strong start, but as Jim mentioned, some advertising messages and promotions fell short of our expectations in the mid-May to mid-June timeframe.

Importantly though, we have seen a rebound in year-over-year member recruitment growth trends since mid-June as we adjusted our promotional strategies. We have seen continued strong recruitment growth through July, and have confidence that our transformational initiatives are paying off, and that we will generate revenue and profit growth this year.

As discussed on our last call, our international markets did not perform well in the winter season. In Q2, the overall trends in our international markets remains challenged. The UK continues to underperform in the quarter due to the competitive market. And overall Continental Europe trends improved somewhat sequentially, but remained below prior-year levels.

Looking at our Q2 results by geographic segment, North America total revenues increased 5.7% with meeting fees up 9.6%, online revenue was down 3%, and product sales and other revenues were up 10.9%, all on a constant currency basis. Meeting paid weeks increased 11.9%, and online paid weeks increased 5.2%.

In the UK, on a constant currency basis, second quarter total revenue was down 9.4%, with meeting fees down 5.4% and online revenue down 9.5%. Meeting paid weeks declined 5.7% and online paid weeks declined 9.2%.

In Continental Europe, total revenues declined 9.8% with meeting fees down 11.1% and online revenues down 4.1%, all on constant currency. Meeting paid weeks declined 6.1%, and online paid weeks increased 0.4%.

Now to the P&L detail on an adjusted basis to account the constant currency impact. In the second quarter, gross margin was 51.9%, up 55 basis points on a constant currency basis from the prior year, primarily due to improved meeting cost leverage from higher volume. This was partially offset by pricing due to mix and changes in our promotional calendar during the quarter as well as the lower contribution from licensing.

The increasing gross margin is a significant improvement from the 75 basis points decline we reported in Q1. So you can see how positive recruits are flowing into operating leverage with gross margin expansion.

Our marketing spend was $41.2 million, up $1.1 million versus the prior year on constant currency. G&A expenses were $46.1 million, down $1.4 million versus the prior year on constant currency. Interest expense for the quarter was $28.6 million with the decline from $30.5 million in the prior year, reflecting the Q1 pay down of the remaining balance of our B1 term loan. The tax rate for the quarter was 31.5% lower than typical, primarily due to the Sweden benefit, and earnings mix in our international operations.

Turning to the balance sheet, we ended the quarter with $114.5 million in cash. Our revolver draw at quarter end was $48 million. Although, subsequent to the end of the quarter we paid back $25 million of the revolver, and we plan to repay the remaining balance later in Q3. Going forward, our revolver will remain available for temporary working capital needs.

As a reminder, our $2 billion B2 term loan is not due until 2020. Our debt has no financial leverage covenants, and we have the ability to prepay before maturity. During Q2, we acquired our great Greater Miami franchise at an attractive multiple for $3.25 million.

Before I turn to our guidance, I'd like to update you on our tax rate assumptions. We have undertaken a comprehensive assessment of our U.S. taxes, prompted by Congress's decision in December 2015 to make the Federal R&D tax credit permanent.

While we have not completed our analysis, we believe the company is eligible for tax credits related to our historical technology investments, and therefore in Q3 we expect to record an estimated $0.10 per share one-time benefit. At this time, we expect our Q3 GAAP tax rate to be in the mid-teens, and our full year 2016 tax rate to be in the 25% range.

And now, I'd like to update our outlook for 2016. While we continue to expect year-over-year revenue trends to improve in the second half of the year, we now expect full-year 2016 revenue of slightly south of $1.2 billion. This reduction from our prior outlook reflects the uneven North America Q2 trends in high-volume weeks and some softening of our forecast internationally.

Taken together, this results in an approximately $20 million reduction in our revenue forecast for the year. Our updated forecast includes a negative foreign exchange revenue impact of $15 million for 2016 versus 2015 assuming current FX rates continue for the remainder of the year.

Our full year GAAP EPS guidance is a range of $0.90 to $1.05 which reflects our current operational assumptions and includes the approximately $0.10 per share benefit from the R&D tax credit, which we expect to record in Q3. This implies relatively flat year-over-year operating income for Q3.

For the remainder of my comments, I will speak to the mid-point of our full-year range, and on a constant currency basis. Total end-of-period subscribers is expected to be up in the mid-single digits in Q3 compared to the prior year quarter, and we expect to end 2016 with a larger subscriber base than we started the year with.

Total global paid weeks are expected to be up in the mid-single digits in Q3 and for the full-year 2016, with meetings outperforming online. In North America, we anticipate full year revenues to be up in the high single digits reflecting continued strength in the back half of the year.

In the UK, we expect revenue for the full year to be down in the low double-digits on constant currency, reflecting the challenging competitive environment. It's too early to say what impact Brexit will have on consumer confidence. But so far it has not had a measurable effect on our business trends in the UK market.

Our guidance assumes FX rate during the second half of the year of 2016 for the British pound and euro, and in line with current levels. And for CE, we expect full year revenue to be down in the mid-single digits on constant currency, reflecting significant improvements in trend in the back half of the year.

We will continue to keep a tight lid on our overall cost structure so that we benefit from the operating leverage inherent in our business model. We expect gross margin growth of over 100 basis points for the full year, primarily reflecting cost efficiencies at higher volumes.

We expect Q3 marketing spend to be approximately $35 million and the full year marketing expense as a percent of revenue to be roughly flat year-over-year. We expect G&A for the year to be flat versus prior on a percent of sales basis. Below the line for the year, we expect interest expense to be approximately $116 million. We expect CapEx, primarily driven by tech spend and capitalized software, to be in line with prior year levels in the $35 million range, and D&A in the $55 million range.

Reducing leverage remains our top capital structure priority. The midpoint of our guidance implies EBITDAX of approximately $270 million for the year. On that basis, we anticipate ending 2016 with a cash balance approaching $150 million with no revolver borrowing.

Based on our sustained recruitment growth, we are confident we will grow our subscriber base in 2016. Given the nature of our subscription business model, this means that we will enter 2017 within an earnings tailwind instead of an earnings headwind for the first time since 2012.

As discussed previously, we are targeting a year-end 2018 net debt to EBITDAX ratio of less than 4.5 times, based on improved operating performance and cash generation. A portion of our long-term executive compensation is tied to achieving this leverage target. With our high margins and strong cash generation power of business model, it would require a revenue projection of approximately $1.4 billion in 2018 to achieve this leverage target.

Now I'll turn it back to Jim.

James R. Chambers - President, Chief Executive Officer & Director

Thanks, Nick. Our transformation progress in 2016 has been significant, and I am proud of our team's achievements in returning our company to growth. Our partnership with Oprah Winfrey has accelerated our transformation by amplifying the impact of our new Beyond the Scale program. For example, the now famous Bread ad telegraphed to audiences that the new Weight Watchers food plan is livable, not restrictive, and still delivers weight loss. Consumers felt Oprah's joy and connected with her, and with Weight Watchers.

Going forward, I believe for the Oprah Winfrey Weight Watchers partnership the best is yet to come. From our earliest conversations with Oprah, our strategic priority has been on maximizing our potential for winter 2017 and beyond. As you recall, we featured Oprah in our 2016 winter season marketing efforts, as she invited consumers to join her in her Weight Watchers journey and shared her early experience with SmartPoints.

Since then, our joint strategy is to focus Oprah's efforts on internal member engagement, examples of which include our Better Together referral program and Sweepstakes, meeting drop-in, and member conference calls. We believe this strategy will allow us to maximize her marketing potential for the upcoming winter season 2017.

I'd like to thank our leaders, receptionists, coaches and other members of our extraordinary service provider organization for the amazing work they do every day in touching and improving the lives of millions of Weight Watchers members worldwide.

Thanks again for joining us today. I'll now turn the call to the operator for Q&A.

Question-and-Answer Session


We will now begin the question-and-answer session. Our first question is from R.J. Hottovy with Morningstar. Please go ahead.

R.J. Hottovy - Morningstar, Inc. (Research)

Thanks, guys. Two questions one kind of short-term, and then one kind of bigger picture in nature. On the short term question, I was just hoping you could give us a little bit more color on what the promotional adjustments that you made in late June, and that you've seen the change in recruitment process from late June to mid-July, any color there would be helpful.

And then on the bigger picture front, obviously North America overall trends are positive, but clearly the meetings business is outperforming the online business. I wanted to see – get your take on whether or not you feel that's something structure going on, is this – what might be behind that, and then also what tactics you might be looking at to improve the overall online business? Thanks.

James R. Chambers - President, Chief Executive Officer & Director

Okay. Thanks, R.J. Nick, do you want to take the first one, I'll take the second one.

Nicholas P. Hotchkin - Chief Financial Officer

Yeah. Look, in the short term – hi, R.J. The second quarter in North America, we did have a period of unevenness mid-May to mid-June as some of our advertising and promotional offers didn't resonate quite as strongly as we'd hoped. But we've since rebounded and that's continued into July. What I've stressed is not anything in terms of change of strategy, or philosophy. Our strategy is consistent.

As you know, having people join us, on average stay for eight months to nine months, and having such a high margin business and knowing that it's such a complex consumer behavior activity, the shift from contemplation to joining our plan. We're always experimenting with the best ways to drive urgency on our business side. And I think, we've just been achieving that a little bit better once we got through the mid-May to mid-June timeframe.

So, not a change in pricing strategy per se. I mean, if you looked at the pricing for the quarter, as you'll expect where there's no growing, we've got a higher proportion of members in the early stages of their tenure with us. But because folks stay with us for eight months to nine months, it makes great economic sense for us to entice them to join by giving them an economic incentive for the beginning portion of their stay. And the second question on meeting versus online, both are growing, which I think is the most important takeaway.

James R. Chambers - President, Chief Executive Officer & Director

Yeah. So, I think, we've talked in prior calls to the focus that we have put behind our meetings business, which is a flagship Weight Watchers product, highly differentiated, drives great results and high satisfaction amongst our members, but we have seen through experimentation and testing in the field, all over the globe, we've seen opportunities to improve that experience, which we have been implementing as we go. So, between the improvements to the experience and doing a better job on our visitor site of presenting what our product choices are and what the benefits and differences are between those choices, and encouraging folks who might not otherwise have seen meetings as their first choice to consider it and in fact choose it, we have done a great job I think of exposing the virtues there and getting folks to sign on.

With respect to the online products, recall that we've been going through a very significant technology transformation. And at the same time, as I mentioned in the script, we introduced an entirely new consumer platform back in January.

We've been probably moving very, very quickly to implement changes and put in a new innovation model, and have been really gaining ground and improving our digital products. But we did start with a fair amount of tech debt, and a fairly average experience to build off of.

So, between things like a different site look and feel and navigation, enhanced features like Connect, our journey tab with personalized messaging about how people are going through their journey and giving them badges and cues and little prompts to encourage them. We've really done a quick and I think strong job to improve that product.

We do have a ways to go. We see a lot more upside in the fundamental strategy of bringing all of what we know, and all of what we do in the meetings business into our digital platform in support of both meetings members and between meetings as well as digital-only subscribers. Well, I think that's the differences between the two businesses. A lot of priority around meetings and driving some real significant enhancements. Similar, on the online side, but still more work to do.

R.J. Hottovy - Morningstar, Inc. (Research)



And we have another question from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

Great. Thank you very much for taking my question. Couple things, just wanted to ask about. First one, from a high-level perspective and just thinking about the guidance for this year. It looks like after you exclude the benefit of the tax credit you expect to get in the third quarter, that's the low end of guide, or the high-end of guidance rather, it's about $0.10 lower than it was before. I mean, just ballpark, I mean, how much of that is just due to the lower translation of the pound against the dollar in the back half of the year versus how much of that was due to that one month-long mid-spring slowdown that you saw in recruitment? And in regards to the May, June recruitment slowdown was there something specific in either the message in the marketing, or the way in which it was deployed to consumers? And how did that change in July?

Nicholas P. Hotchkin - Chief Financial Officer

Hey, Alex, it's Nick. In terms of the guidance, yeah, $0.90 to $1.05 including $0.10 of the R&D tax credit that we expect to take in Q3. In terms of the issues impacting our guidance, the updated operational outlook really incorporates two issues. So, it's primarily the impact of that North America uneven period, mid-May to mid-June that you referenced. And obviously when you lose new recruits versus expectations in the higher volume weeks that has some flow-through into Q2.

And then secondly, while the international markets are showing – particularly some CE markets are showing sequential improvement, some softness versus our prior expectations. So those two are the main drivers.

In terms of what exactly the issue was in mid-May to mid-June, as we've said, it was really the mix of advertising and promotion messaging just not quite resonating as much as we'd hoped. I think importantly, though, we feel that we've got a real compelling fact pattern (31:05) for fall, so we're confident – we really know about our plans for fall. And as we've mentioned it was temporary in our business, it's been doing well into July.

James R. Chambers - President, Chief Executive Officer & Director

Yeah, I think, we've shared in the past that this is a very responsive category. When you get the message right, whether it's a promotion team or a digital ad, or a TV ad, when you get the theme correct, when you get the message correct you see a tremendous amount of response. That having been said, it's a pretty tricky category to consistently deliver the right kinds of messages. So we do have routinely things that work better than others as you might expect and we had a couple of themes here that weren't as strong.

The bridge, intentionally, we have begun to do our message development, our creative execution process in a very different fashion on much more of a global collaborative basis, pooling the insights, and learnings and execution paths from all of our markets and building things more collectively. Not to say that the output will be exactly the same in every market, but we're taking full advantage of the experiences and the talent we have around the globe to drive for a higher degree of consistency, and the impact of our marketing message is a critical priority.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

That's helpful, thanks Jim and Nick. And I guess, it's probably too soon to say with any kind of certainly, but thinking about all the new recruits that you signed up in January and February, and I guess, now at this point those – the meaty part of that class is now about six months in or close to it. Do have a sense relative to prior years at this point of where you think paid length of stay for the most recent round of new recruits is going to shakeout based on how many have dropped out up until this point versus what you would've normally expected or other metrics that you look at?

Nicholas P. Hotchkin - Chief Financial Officer

Yeah, I will tell you, Alex, you talked about where we were to where we are, and I look back at year-end, and after a period of negative recruits, we ended the year with 5% fewer people in the brand or 120,000 fewer people in the brand. So now at the end of Q2, to end Q2 with 5% more people in the brand or 140,000 more people in the brand versus a year ago shows how the program is resonating.

And based on the weight loss that we've talked about and the livability of the program, retention has been stable. When we look forward, we've just talked about the forward implications of our return to sustained growth, ending 2015 with those fewer people in the brand versus prior, that represented a $20 million revenue or a $0.14 headwind coming into this year. So, I'm not here to give guidance for 2017 here today. I've previously illustrated that based on strong recruitment growth and steady retention, we could have a mid-single-digits growth in our active base at this year end, that would translate into a $30 million revenue tailwind, and a $0.19 EPS upside going into 2017. I'm not sure where that's going to land, but it feels like it could be at least double digits EPS tailwind heading into 2017, representing both the positive recruitments and the fact that retention on the program, on our new program is strong.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

That's helpful. Thanks. And then lastly, if I could just ask the New York City partnership, obviously, that sounds exciting for a number of reasons. Now that you have a little bit more history with several of these more impactful B2B type partnerships, what has been your experience in terms of the pace of recruits?

And have you typically found that it's mostly additive to your business or is there some – for instance, when you launched with Humana, was there some impact of cannibalization of otherwise full price paying customers, kind of, migrating to the cheaper insurer-funded program?

And, I guess, how should we think about your pipeline of potentially additional partnerships? Are there a lot of firms that you are in various stages of negotiations now about rolling out to their platforms as well?

James R. Chambers - President, Chief Executive Officer & Director

I'll leave the cannibalization question to Nick. But we've had a strategic accounts business for quite a while. And I think the ability to manage and successfully position our company into a long sales cycle business against large clients like this, is something that we're learning about, getting better at. We have a great team that does that.

We're also in a great partnership with clients of this nature to leverage what we've learned about marketing through organizations to their end members their end consumers. They're choosing Weight Watchers because of the results we deliver, and the power of our brand. But getting the message through to employer populations, for example, is something that we've worked at over time and gotten better at.

We do think there are models for the larger client engagements that we have been developing in the last couple of years. I'm not going to make a prediction or a projection as to where they go. And part of that is because of the long lead cycle. But we have seen, when we get the selling process right and we have our technology that we spent a lot to get aligned with the B2B market requirements. When we get those things right we're a really attractive partner and really have enjoyed the benefit of knowing that we're in some big organizations helping a lot of people, in this case, both employees of the City of New York as well as spouses and other related folks. So we're real excited about the model. Nick, let me turn it to you for comments around the revenue source.

Nicholas P. Hotchkin - Chief Financial Officer

Yeah, I'd like to note that we're excited about it. Initial response has been encouraging. And to your point, Alex, sure, wherever we launch a program like this we do have some existing members we're shifting to this new plan. But we anticipated that and it's always included in our modeling.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

That's great. Thank you both very much.


Our next question is from Frank Camma with Sidoti. Please go ahead.

Frank Camma - Sidoti & Co. LLC

Good afternoon, guys.

James R. Chambers - President, Chief Executive Officer & Director

Hey, Frank.

Frank Camma - Sidoti & Co. LLC

I apologize if you answered this in the commentary. I missed the beginning. But I wanted a little deeper dive into the marketing aspect here. I mean, you've mentioned a couple of times that during May and June, I believe, it was that the message perhaps didn't resonate as well with the consumer as you wanted to. But I was also wondering about the actual spend itself. While it was in line on a percentage of revenue basis versus last year, and actually up on absolute dollars, the quarter before you actually spent a little more as a percentage of revenue, I was wondering if that was strategic or if you precluded if there was something that's preventing you from spending more, or you weren't seeing the return? Just wondering if you can comment on that?

Nicholas P. Hotchkin - Chief Financial Officer

We're very comfortable with the marketing plan we laid out and we always have spent at the right level, in the right places that we feel maximizes profitable recruits. So no change in strategy there at all.

Frank Camma - Sidoti & Co. LLC

Okay. And for the second half of the year, or next quarter – or the current quarter specifically, any change in the premium for media you have pay due to the Presidential cycle, or is that anything we need to consider in our models?

Nicholas P. Hotchkin - Chief Financial Officer

No, we don't anticipate the presidential cycle being a major impact on our results.

Frank Camma - Sidoti & Co. LLC

Okay, great. Thanks guys.


This concludes our question-and-answer session. With that, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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