Nutrisystem 2005 Annual Report Download - page 32

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Year Ended December 31,
2004 2003 $ Change % Change
REVENUE............................................... $37,996 $22,575 $15,421 68%
COSTS AND EXPENSES:
Cost of revenue ....................................... 21,612 14,870 6,742 45%
Marketing ............................................ 7,548 3,539 4,009 113%
General and administrative .............................. 7,039 5,829 1,210 21%
New program development .............................. — 599 (599) (100%)
Depreciation and amortization ............................ 268 223 45 20%
Total costs and expenses ............................ 36,467 25,060 11,407 46%
Operating income .................................. 1,529 (2,485) 4,014 NMF
OTHER INCOME (LOSS) .................................. 134 — 134 NMF
EQUITY IN LOSSES OF AFFILIATE ......................... — (157) 157 100%
INTEREST INCOME, net ................................... 36 57 (21) (37%)
Income before income taxes ......................... 1,699 (2,585) 4,284 NMF
INCOME TAXES ......................................... 680 (3,397) 4,077 NMF
Net income ....................................... $ 1,019 $ 812 $ 207 25%
% of revenue
Gross margin ............................................. 43.1% 34.1%
Marketing ................................................ 19.9% 15.7%
General and administrative .................................. 18.5% 25.8%
Operating income .......................................... 4.0% (11.0%)
Revenue. Revenue increased to $38.0 million for the year ended December 31, 2004 from $22.6 million
for the year ended December 31, 2003. The revenue increase of $15.4 million, or 68%, resulted from increased
direct sales ($16.1 million) and the field sales channel ($129,000) plus the addition of Slim and Tone ($84,000),
offset by decreased sales to QVC ($450,000) and case distributor ($428,000). In the year ended December 31,
2004, direct accounted for 81% of total revenue, while QVC, field sales and case distributor revenue accounted
for 11%, 5% and 3% of total revenue, respectively. In 2003, the comparable percents were 65%, 21%, 8% and
6%, respectively.
Costs and Expenses. Cost of revenue increased $6.7 million in the year ended December 31, 2005 to $21.6
million from $14.9 million for the year ended December 31, 2004. Gross margin as a percent of revenue
increased to 43.1% in 2004 from 34.1% in 2003. The increase in gross margin is primarily due to a mix shift
toward the higher margin direct channel, to higher pricing for the new NutriSystem Nourish program and to a
$529,000 write-off of old program inventory and packaging recorded in cost of sales in 2003.
Marketing expenses increased $4.0 million to $7.5 million in 2004 from $3.5 million in 2003. Almost all
marketing spending promoted the direct business, and the increase in marketing is attributable to increased
spending for advertising media ($3.2 million), public relations ($436,000), production of television advertising
($419,000) and payroll related to marketing and advertising ($231,000) offset by a decrease in market research
and consulting ($252,000). Fourth quarter 2004 marketing expenses included about $800,000 in production and
talent costs for an infomercial and short form television advertisements that were charged to expense when they
first aired in late December. Fourth quarter 2003 results included $751,000 in marketing expenses associated
with the launch of the NutriSystem Nourish program.
General and administrative expenses increased $1.2 million to $7.0 million in 2004 from $5.8 million in 2003.
The increase is attributable to higher costs associated with the increase in revenue, especially
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