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Takeaway: WTW's issues are secular, and it doesn't have many options to work with. We're riding the short through the print, and keeping it on.


  1. POTENTIAL UPSIDE, DOESN’T MATTER: WTW could sneak out a small top-line beat; our Google Trackers suggest y/y declines in demand moderated somewhat into 2Q14, but not by any material margin.  Short Interest remain elevated, while the sell-side has turned on the name.  So any potential upside could lead to another short-squeeze, but would likely be limited (WTW lost all its gains from the 1Q14 print).  We would fade any upside into the print; remember 2014 will be one of its worst years on record in terms of revenue growth dating back to at least 2005, marked by its weakest winter selling season since at least 2007 (that includes the Great Recession).  There isn't a value play here.
  2. WHAT WE’RE KEYING IN ON: The entire model is driven off its winter selling season and the seasonal attrition rates thereafter.  The attrition rate in 2Q14 will give us a glimpse of what is required in terms of a 1Q15 selling season in order to achieve consensus estimates.  The only thing that would save WTW (in terms of its 2015 prospects) is a marked reduction in seasonal attrition.  As it stands now, WTW would require one of its best winter selling seasons on record to achieve 2015 revenue estimates, and that will not happen without a serious investment in marketing expense (see below)
  3. HEADS THEY LOSE, TAILS THEY LOSE: We believe WTW’s issues are secular.  It’s not the existence of these free apps, it’s rising access to these apps that's the bigger issue.  Member acquisition costs have risen substantially alongside the rise in smartphone penetration.  WTW is in a precarious position of trying to revive its business, which will require investment (particularly in marketing), while trying to preserve profitability on a highly fixed-cost business model in order to service its debt; WTW’s interest coverage ratio is roughly 2.5x.    


WTW: Thoughts Into the Print (2Q14) - WTW   Tracker vs. Attendence

WTW: Thoughts Into the Print (2Q14) - WTW   Selling Seasons 1Q14

WTW: Thoughts Into the Print (2Q14) - WTW   Annual Attrition 2013

WTW: Thoughts Into the Print (2Q14) - Smartphone penetration 3Q13

WTW: Thoughts Into the Print (2Q14) - WTW   Revenue vs. marketing

WTW: Thoughts Into the Print (2Q14) - WTW   Member Acquisition Costs 1Q14

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA


Thomas Tobin