Nutrisystem 2008 Annual Report Download - page 35

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Year Ended December 31,
2007 2006 $ Change % Change
(in thousands)
REVENUE ............................................ $776,767 $565,950 $210,817 37%
COSTS AND EXPENSES:
Cost of revenue .................................... 363,874 270,625 93,249 34%
Marketing ......................................... 178,700 118,150 60,550 51%
General and administrative ........................... 65,527 41,655 23,872 57%
Depreciation and amortization ......................... 5,812 2,464 3,348 136%
Total costs and expenses ......................... 613,913 432,894 181,019 42%
Operating income from continuing operations ........ 162,854 133,056 29,798 22%
OTHER EXPENSE ..................................... (39) — (39) NA
EQUITY AND IMPAIRMENT LOSS ...................... (800) — (800) NA
INTEREST INCOME, net ................................ 3,803 3,591 212 6%
Income from continuing operations before income
taxes ....................................... 165,818 136,647 29,171 21%
INCOME TAXES ...................................... 60,871 50,969 9,902 19%
Income from continuing operations ................. 104,947 85,678 19,269 22%
LOSS ON DISCONTINUED OPERATION, net .............. (795) (548) (247) 45%
Net income .................................... $104,152 $ 85,130 $ 19,022 22%
% of revenue
Gross margin .......................................... 53.2% 52.2%
Marketing ............................................. 23.0% 20.9%
General and administrative ............................... 8.4% 7.4%
Operating income from continuing operations ................ 21.0% 23.5%
Revenue. Revenue increased to $776.8 million in 2007 from $566.0 million in 2006. The revenue increase
resulted primarily from increased direct sales ($200.9 million) and QVC sales ($9.8 million). Revenue growth in
the first half of 2007 was strong yet the second half of 2007 was impacted by competitive and economic
pressures. In 2007, direct revenue accounted for 94% of total revenue compared to 5% for QVC and 1% for the
other channels. In 2006, the comparable percentages were 93%, 6% and 1%, respectively.
Costs and Expenses. Cost of revenue increased to $363.9 million in 2007 from $270.6 million in 2006.
Gross margin as a percent of revenue increased to 53.2% in 2007 from 52.2% in 2006. The increase in gross
margin was primarily attributable to price increases, lower outbound freight costs, a lower customer return rate
and lower fulfillment costs.
Marketing expenses increased to $178.7 million in 2007 from $118.2 million in 2006. Marketing expense as a
percent of revenue increased to 23.0% in 2007 from 20.9% in 2006. Substantially all of the marketing spending
promoted the direct business, and the increase in marketing is attributable to increased spending for advertising
media ($51.4 million), public relations ($2.7 million) and production of television advertising ($1.9 million). In
total, media spending was $162.7 million in 2007 and $111.3 million in 2006.
General and administrative expenses increased to $65.5 million in 2007 from $41.7 million in 2006 and as a
percent of revenue increased to 8.4% in 2007 from 7.4% in 2006. The increase in spending is primarily
attributable to higher compensation and benefits costs ($8.5 million) due to an increased headcount and the hiring
of two executive officers in 2007; increased professional, recruiting and outside services and computer services
($9.0 million) in part for projects to improve our ecommerce website and support for international expansion and
increased depreciation and amortization expense ($3.3 million) due to increased capital expenditures on our
website and a call center relocation.
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