Nutrisystem 2006 Annual Report Download - page 30

G
eneral and Administrative Ex
p
enses
.
General and administrative ex
p
enses consist of com
p
ensation for
ad
m
i
n
i
strat
i
ve,
i
n
f
ormat
i
on tec
h
no
l
ogy, counse
l
ors (exc
l
u
di
ng comm
i
ss
i
ons) an
d
customer serv
i
ce personne
l,
share-based pa
y
ment arran
g
ements, facilit
y
expenses, website development costs, professional service fees an
d
o
ther general corporate expenses.
I
nterest Income
,
Net. Interest income, net consists of interest income earned on cash balances an
d
marketable securities, net of interest ex
p
ense.
I
ncome Taxe
s.
W
e are sub
j
ect to corporate level income taxes and record a provision for income taxes
based on an estimated effective tax rate for the year
.
O
verview o
f
t
h
e Direct C
h
anne
l
O
ur revenue and profitability have increased substantially from 2005 to 2006 driven primarily by profitabl
e
g
rowth in the direct channel. In the
y
ears ended 2006, 200
5
and 2004, the direct channel represented 93%, 89%
a
nd 81%, respectively, of our revenue. Revenue increases are primarily driven by new customer growth. Critica
l
to acqu
i
r
i
ng new customers
i
s our a
bili
ty to
i
ncrease our mar
k
et
i
ng spen
d
w
hil
ema
i
nta
i
n
i
ng mar
k
et
i
n
g
effectiveness. The spendin
g
on advertisin
g
and marketin
g
increased b
y
$70.8 million to $118.1 million in 2006
f
rom
$
47.3 million in 2005. Factors influencing our marketing effectiveness include the quality of the
ad
vert
i
sements a
l
ong w
i
t
h
t
h
e ava
il
a
bili
ty o
f
appropr
i
ate me
di
a. In a
ddi
t
i
on to our mar
k
et
i
ng e
ff
orts, we a
l
s
o
g
enerate new customers throu
g
h referrals and publicit
y
, such as ma
g
azine articles and mentions on television.
Former customers return to the program and, as the number of former customers grows, we generate a
n
i
ncreas
i
ng amount o
f
revenue
f
rom t
h
ese return
i
ng customers. We re
f
er to revenue
d
er
i
ve
df
rom return
i
n
g
customers as reactivation revenue.
We measure growt
hi
n terms o
f
tota
l
revenue, new customers an
d
revenue per customer. A new customer
is
d
efined as a first time purchaser throu
g
h the direct channel. We define a customer with an initial purchase of
$
100 or more to be a “program” new customer. These customers tend to stay on a weight loss program longer
a
nd spend substantially more than customers who make an initial purchase of less than
$
100. Program customer
s
made up 99%, 97% and 93% of all new customers, with avera
g
e acquisition costs of $147, $140 and $156, in
2006, 200
5
and 2004, respectively. Profit margins are measured in terms of gross margin (revenue less cost o
f
revenue) an
d
tota
l
mar
k
et
i
ng expense as a percentage o
f
revenue. We eva
l
uate t
h
e cost e
ff
ect
i
veness o
f
our
marketin
g
pro
g
rams based on the marketin
g
cost per new customer, and new pro
g
ram customer, acquired. In
2006,
$
1.9 million of our total marketing spend was used to reach former customers. When calculating ne
w
customer acquisition cost we exclude this spend. Prior to 200
6
this spend was immaterial
.
T
o be consistent with the presentation of our consolidated financial statements, we began includin
g
commissions in cost of revenue in our overview of the direct channel in 2005. Prior year amounts have been
a
d
j
usted to conform to the current period presentation
.
24