Nutrisystem 2007 Annual Report Download - page 37

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Year Ended December 31,
2006 2005 $ Change % Change
(in thousands)
REVENUE ............................................ $565,950 $210,161 $355,789 169%
COSTS AND EXPENSES:
Cost of revenue .................................... 270,625 108,356 162,269 150%
Marketing ......................................... 118,150 47,327 70,823 150%
General and administrative ........................... 41,655 19,351 22,304 115%
Depreciation and amortization ......................... 2,464 700 1,764 252%
Total costs and expenses ......................... 432,894 175,734 257,160 146%
Operating income from continuing operations ........ 133,056 34,427 98,629 286%
INTEREST INCOME, net ................................ 3,591 846 2,745 324%
Income from continuing operations before income
taxes ....................................... 136,647 35,273 101,374 287%
INCOME TAXES ...................................... 50,969 13,567 37,402 276%
Income from continuing operations ................. 85,678 21,706 63,972 295%
LOSS ON DISCONTINUED OPERATION, net .............. (548) (691) 143 21%
Net income .................................... $ 85,130 $ 21,015 $ 64,115 305%
% of revenue
Gross margin .......................................... 52.2% 48.4%
Marketing ............................................. 20.9% 22.5%
General and administrative ............................... 7.4% 9.2%
Operating income from continuing operations ................ 23.5% 16.4%
Revenue. Revenue increased to $566.0 million for the year ended December 31, 2006 from $210.2 million
for the year ended December 31, 2005. The revenue increase resulted primarily from increased direct sales
($337.4 million) and QVC sales ($15.7 million). In the year ended December 31, 2006, direct revenue accounted
for 93% of total revenue compared to 6% for QVC and 1% for the other channels. In 2005, the comparable
percentages were 90%, 7% and 3%, respectively.
Costs and Expenses. Cost of revenue increased to $270.6 million for the year ended December 31, 2006
from $108.4 million for the year ended December 31, 2005. Gross margin as a percent of revenue increased to
52.2% in 2006 from 48.4% in 2005. The increase in gross margin is primarily attributable to a 3.5% price
increase in our direct channel, lower food and outbound freight costs and a greater proportion of our revenue
attributed to the higher margin direct channel (93% in 2006 versus 90% in 2005).
Marketing expenses increased to $118.2 million in 2006 from $47.3 million in 2005. Marketing expense as a
percent of revenue decreased to 20.9% in 2006 from 22.5% in 2005. Substantially all of the marketing spending
promoted the direct business, and the increase in marketing is attributable to increased spending for advertising
media ($67.4 million) and production of television advertising ($1.3 million). In total, media spending was
$111.3 million in 2006 and $43.9 million in 2005.
General and administrative expenses increased to $41.7 million in 2006 from $19.4 million in 2005, but as a
percent of revenue decreased to 7.4% in 2006 from 9.2% in 2005. The increased expense is primarily attributable
to higher costs associated with the increased scale of the business, specifically: compensation and benefits costs
($11.0 million); non-cash expense for share-based payment arrangements ($4.8 million); professional and outside
services and computer services ($2.2 million); telephone expenses ($702,000); insurance ($689,000); and sales,
use and miscellaneous taxes ($670,000).
31