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Takeaway: 1Q14 was so weak that the impact will carry forward into 2015. Consensus doesn't get that, so we'll remain short untill they do

SUMMARY BULLETS

  1. 1Q14 RECAP: Declines in revenue and attendance were at its worse level dating back to at least 2007, but largely expected.  WTW raised guidance, but that was driven more by new cost assumptions than anything else.
  2. CAN'T RECOVER FROM 1Q14: Consensus is assuming 2015 growth will be virtually flat in 2015.  That will require one of its best winter selling seasons on record in 1Q15.  We doubt that will happen.
  3. PUSHING OUT THE HEALTHCARE OPPORTUNITY: We don't believe the B2B business will be much of a contributor in the long-run, but management commentary suggests the contribution will be immaterial near-term. 

1Q14 RECAP 

The quarter was particularly weak, but WTW did beat consensus estimates for the quarter.  WTW Attendance declined in -16% in 1Q14; its worst level dating back to at least 2007.  Same can be said for total revenue growth (-16%).  Much of that was already expected after its 2014 Guidance release.

WTW did increase its 2014 guidance to $1.45-$1.70 vs. $1.30-$1.60 ($0.12 at the midpoint), most of that seems to be driven by new cost assumptions.  WTW didn't provide much of anything on its call to suggest the business in turning.  In fact, the CFO stated that, "the fundamental situation of the business hasn't changed" when discussing guidance.

That said, the move in the stock yesterday suggests the shorts are getting nervous and getting out of the way.  We're not, details below.

WTW: Not Out of the Woods Yet - WTW   Total Rev   NA Meeting

WTW: Not Out of the Woods Yet - WTW   Attendence   Online 1Q14

CAN'T RECOVER FROM 1Q14

The first quarter is everything for WTW given seasonal membership patterns.  WTW membership peaks in 1Q, then seasonally declines through the year and troughs in 4Q.  So the strength of 1Q14 sets the tone for all of 2014.

 

In this case, it sets the tone for 2015 as well.  As we mentioned above, 1Q14 was its weakest quarter on record for membership growth dating back to 2007, and WTW will progressively cede membership through the year.

To recover in 2015 (to the essentially flat growth consensus is assuming) would require WTW to have one of its largest winter selling seasons on record in 1Q15.  We estimate WTW need to generate roughly 36%-50% sequential growth in membership in 1Q15 in order reach consensus revenue estimates in 2015 (range based on ARPU). Below you can see WTW's historical success on this front; we believe the odds are stacked against them.  

WTW: Not Out of the Woods Yet - WTW   1Q 4Q Attrition 2 

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PUSHING OUT THE HEALTHCARE OPPORTUNITY

“The strength of our B2B business and our healthcare business over time is rooted in the strength of our B2C Business…I think healthcare is an important growth contributor for us overall. We said we can grow it to a $300 million plus business by 2018. But the key to us returning to growth is the first and foremost the B2C reinvention”

WTW “re-imagining” and re-engineering” essentially pushes out the opportunity they outlined so positively for the B2B Healthcare offering back at JPM Conference and their Analyst Day.  Instead of offering an offset to declines in the consumer business in the near term, it seems B2B contribution will emerge all at once in a compressed time frame between fixing the B2C engine and 2018.   

We’d make the following points regarding the B2B opportunity

  1. Their B2B plan sounds like Disease Management: a mature, low-multiple business with deeply entrenched incumbents and capabilities.
  2. Meaningful visibility on their 2018 targets are over a year away, or more.

CONCLUSION

We're going to remain short until the Street realizes WTW's weakness is more than just a short-term episode with no easy fix.  If you have any questions, or would like to discuss in more detail, let us know.

Hesham Shaaban, CFA

@HedgeyeInternet

Thomas Tobin

@HedgeyeHC