Nutrisystem 2006 Annual Report Download - page 33

Y
ear En
d
e
d
Decem
b
er 31, 2006 Com
p
are
d
to Year En
d
e
d
Decem
b
er 31, 2005
Year Ended December
31,
2006
200
5
$
Chang
e
%
Chang
e
(
in thousands
)
REVENUE
..............................................
$568,209 $212,506 $355,703 167%
COS
T
S
AND EXPEN
S
E
S
:
Cost of revenue
......................................
271,396 109,431 161,96
5
148%
Mar
k
et
i
n
g
.
.......................................... 118
,
479 47
,
793 70
,6
8
6
148%
G
enera
l
an
d
a
d
m
i
n
i
strat
iv
e
.............................
4
3,169 21,009 22,160 105%
D
e
p
reciation and amortizatio
n
...........................
3
,047 983 2,064 210%
T
otal costs and ex
p
ense
s
...........................
436,091 179,216 2
5
6,87
5
143%
O
perat
i
n
gi
ncome
.................................
132,118 33,290 98,828 29
7
%
I
NTEREST INCOME, net
..................................
3
,6
55
860 2,79
5
32
5
%
Income
b
e
f
ore
i
ncome taxe
s
........................
135,773 34,150 101,623 298%
I
NCOME TAXE
S
........................................
5
0,643 13,13
5
37,
5
08 286%
N
et incom
e
.
.....................................
$
8
5,130 $ 21,015 $ 64,115 305%
%o
fr
eve
n
ue
Gross marg
i
n
............................................
5
2.2% 4
8
.
5
%
Marketin
g
...............................................
2
0.
9
% 22.
5
%
General and administrative ................................. 7.6% 9.9%
Operat
i
ng
i
ncom
e
.........................................
23
.
3
%1
5
.7%
Revenue. Revenue increased to $568.2 million for the
y
ear ended December 31, 2006 from $212.5 million
f
or the year ended December 31, 2005. The revenue increase of
$
355.7 million, or 167%, resulted primarily fro
m
increased direct sales (
$
337.4 million) and QVC sales (
$
15.7 million). In the year ended December 31, 2006
,
d
irect revenue accounted for 93% of total revenue com
p
ared to
5
% for QVC and 2% for the other channels. In
200
5
, the comparable percentages were 89%, 7% and 4%, respectively.
Costs an
d
Ex
p
enses
.
Cost of revenue increased
$
162.0 million to
$
271.4 million for the year ende
d
December 31, 2006 from $109.4 million for the
y
ear ended December 31, 2005. Gross mar
g
in as a percent o
f
revenue increased to
5
2.2% in 2006 from 48.
5
%in200
5
. The increase in gross margin is primarily attributable t
o
a
3.5% price increase in our direct channel, lower food and outbound freight costs and a greater proportion of ou
r
revenue attributed to the hi
g
her mar
g
in direct channel (93% in 2006 versus 89% in 200
5
)
.
M
arketing expenses increased
$
70.7 million to
$
118.5 million in 2006 from
$
47.8 million in 2005. Marketin
g
expense as a percent of revenue decreased to 20.9% in 2006 from 22.5% in 2005. Substantially all of th
e
marketin
g
spendin
g
promoted the direct business, and the increase in marketin
g
is attributable to increase
d
spending for advertising media (
$
67.2 million) and production of television advertising (
$
1.3 million). In total
,
media spending was
$
111.3 million in 2006 and
$
44.1 million in 2005
.
General and administrative ex
p
enses increased $22.2 million to $43.2 million in 2006 from $21.0 million in
2
00
5
, but as a
p
ercent of revenue decreased to 7.6% in 2006 from 9.9% in 200
5
. The increased ex
p
ense i
s
pr
i
mar
il
y attr
ib
uta
bl
eto
hi
g
h
er costs assoc
i
ate
d
w
i
t
h
t
h
e
i
ncrease
d
sca
l
eo
f
t
h
e
b
us
i
ness, spec
ifi
ca
ll
y
:
compensation and benefits costs ($10.8 million); non- cash expense for share-based pa
y
ment arran
g
ements ($4.
9
million);
p
rofessional and outside services and com
p
uter services (
$
2.3 million); tele
p
hone ex
p
enses (
$
704,000)
;
insurance
($
676,000
)
; and sales, use and miscellaneous taxes
($
673,000
)
.
I
nterest Income
,
Net. Interest income, net increased $2.8 million to $3.7 million in 2006 from $860,000 i
n
2
00
5
primarily due to higher cash balances and investments in marketable securities.
2
7