Nutrisystem 2005 Annual Report Download - page 30

program new customers acquired in 2004 generated more revenue in 2004 than the same customer group did in
2003. Finally, in 2004 a higher percentage of new customers were obtained in December, which implies more
revenue from 2004 new customers fell into the subsequent year than was the case in 2003.
Customers that initially purchased in a prior year contributed approximately $7.0 million to revenue in 2004
and $6.0 million to revenue in 2003.
Overview of Distribution via a Television Home Shopping Network
In the second quarter of 2001, we began distributing our proprietary prepackaged food through QVC, a
television home shopping network. In 2005, this channel represented 7% of our revenue as compared to 11% of
our revenue in 2004. 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 with
QVC, QVC viewers purchase NutriSystem products directly from QVC and are not directed to the NutriSystem
web site. Retail prices (including shipping and handling) offered on QVC to consumers are similar to prices
offered on the web site. We generate a lower gross margin (as a percent of revenue) on sales to 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
$15.6 million in 2005 and $4.2 million in 2004. QVC sales are a function of the number of shows and the sales
per minute on each show. Sales increased in 2005 versus 2004 because more shows aired and the sales per
minute of air-time increased.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Year Ended December 31,
2005 2004 $ Change % Change
REVENUE............................................. $212,506 $37,996 $174,510 459%
COSTS AND EXPENSES:
Cost of revenue ..................................... 109,431 21,612 87,819 406%
Marketing .......................................... 47,793 7,548 40,245 533%
General and administrative ............................ 21,009 7,039 13,970 198%
Depreciation and amortization .......................... 983 268 715 267%
Total costs and expenses .......................... 179,216 36,467 142,749 391%
Operating income ................................ 33,290 1,529 31,761 2077%
OTHER INCOME (LOSS) ................................ — 134 (134) (100%)
INTEREST INCOME, net ................................. 860 36 824 2289%
Income before income taxes ....................... 34,150 1,699 32,451 1910%
INCOME TAXES ....................................... 13,135 680 12,455 1832%
Net income ..................................... $ 21,015 $ 1,019 $ 19,996 1962%
% of revenue
Gross margin ........................................... 48.5% 43.1%
Marketing .............................................. 22.5% 19.9%
General and administrative ................................ 9.9% 18.5%
Operating income ........................................ 15.7% 4.0%
Revenue. Revenue increased to $212.5 million for the year ended December 31, 2005 from $38.0 million
for the year ended December 31, 2004. The revenue increase of $174.5 million, or 459%, resulted from increased
direct sales ($158.5 million), QVC sales ($11.4 million) and the field sales channel ($2.7 million) plus the
addition of Slim and Tone ($2.3 million), offset by decreased sales in our case distributor channel ($360,000). In
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