Nutrisystem 2007 Annual Report Download - page 34

Direct revenue increased 38% in 2007 from 2006. In 2007, the number of new customers acquired increased
by 156,067 or 20%, over 2006. The increase in new customers is primarily attributable to higher marketing
spending. Marketing to new customers increased $59.3 million, or 51% in 2007 compared to 2006. Overall
marketing spend per new customer was $184 in 2007 compared to $146 in 2006. Direct revenue increased 178%
in 2006 from 2005. In 2006, new customers increased by 450,269, or 130%, over 2005. In 2006, marketing to
new customers increased $68.8 million, or 145% compared to 2005.
Direct gross margin increased to 54.8% in 2007 from 54.2% in 2006, primarily driven by a price increase,
lower outbound freight costs, a lower customer return rate and lower fulfillment costs. Direct gross margin
increased to 54.2% in 2006 from 51.6% in 2005, primarily driven by a 3.5% price increase.
Marketing cost per customer increased from $146 to $184 from 2006 to 2007. Marketing cost per program
customer increased from $147 to $186 in the same periods. The higher marketing cost per customer can be
attributed to the significant increase in marketing spend and increased competition.
We analyze revenue per customer across two cycles. The first cycle is defined as the initial diet cycle and
refers to revenue obtained within nine months of a customer’s initial purchase divided by the new customer count
for each of the last nine months. For reporting purposes, we use the average revenue per customer computed in
the trailing nine months. Generally, revenue per customer in the initial diet cycle has been increasing. The
trailing nine month revenue per customer was $605, $632 and $648 for December 31, 2005, 2006 and 2007,
respectively. We believe these increases are primarily driven by the price increases and by increased unit
purchases per customer.
The second cycle is referred to as reactivation revenue and is defined as customers who were more than nine
months removed from their initial purchase. Reactivation revenue contributed approximately $95.5 million to
revenue in 2007 compared to $37.8 million to revenue in 2006. Reactivation revenue is increasing primarily due
to the increasing number of former customers. We believe that reactivation revenue is particularly profitable
because a relatively low marketing expense is incurred to generate this revenue.
Overview of Distribution via a Television Home Shopping Network
We distribute our proprietary prepackaged food through QVC, a television home shopping network. In
2007, this channel represented 5% of our revenue as compared to 6% of our revenue in 2006 and 7% in 2005. On
the QVC network, we reach a large audience in a 50-minute infomercial format that enables us to fully convey
the benefits of the NutriSystem diet programs. Under the terms of our agreement, QVC viewers purchase
NutriSystem products directly from QVC and are not directed to the NutriSystem website. Retail prices
(including shipping and handling) offered on QVC to consumers are similar to prices offered on the website. We
generate a lower gross margin (as a percent of revenue) on sales through QVC relative to the direct channel, but
QVC sales require no incremental advertising and marketing expense and, management believes, exposure on
QVC raises consumer awareness of the NutriSystem brand. Net sales through QVC were $41.1 million in 2007,
$31.3 million in 2006 and $15.6 million in 2005. QVC sales are a function of the number of shows and the sales
per minute on each show. Sales increased in 2007 versus 2006 and 2005 because the sales per minute of air-time
increased.
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