Nutrisystem 2010 Annual Report Download - page 35

Revenue. Revenue decreased to $509.5 million in 2010 from $524.6 million in 2009. The revenue decrease
resulted primarily from decreased reactivation revenue and a reduction in sales through QVC partially offset by
an increase in retail revenue. In 2010, direct revenue accounted for 96% of total revenue compared to 4% for
QVC. In 2009, the comparable percentages were 94% and 6%, respectively.
Costs and Expenses. Cost of revenue decreased to $224.8 million in 2010, from $241.2 million in 2009.
Gross margin as a percent of revenue increased to 55.9% in 2010 from 54.0% in 2009. The increase in gross
margin was primarily attributable to a reduced level of returns, the mix of products with higher gross margins
and ongoing cost savings initiatives.
Marketing expense decreased to $145.9 million in 2010 from $146.4 million in 2009. Marketing expense as a
percent of revenue increased to 28.6% in 2010 from 27.9% in 2009. Substantially all of the marketing spending
in 2010 promoted the direct business. The decrease in marketing is attributable to decreased spending in the
production of television advertising ($3.2 million). This decrease is offset by increased spending in advertising
media ($1.5 million) and marketing consulting ($1.4 million). In total, media spending was $127.6 million in
2010 and $126.1 million in 2009.
General and administrative expense decreased to $73.9 million in 2010 from $76.4 million in 2009 and as a
percent of revenue decreased to 14.5% in 2010 from 14.6% in 2009. The decrease in spending is primarily
attributable to decreased professional, outside and computer services ($3.2 million) due to our focus on cost
containment and charges incurred in 2009 to streamline work processes and right size our organization ($1.9
million). These decreases were partially offset by higher compensation and benefits and temporary help ($1.9
million) and increased non-cash expense for share-based payment arrangements ($1.5 million).
Depreciation and amortization expense increased to $11.8 million in 2010 from $11.2 million in 2009 due to the
relocation of our corporate headquarters and capital expenditures on our website.
Other (Expense) Income. Other (expense) income represents the impact of changes in the Canadian dollar.
Equity and Impairment Loss. In 2009, we abandoned our interest in Zero Water because the business was no
longer aligned with our current strategic direction. An equity and impairment loss of $4.0 million was recorded
including the write-off of the remaining investment.
Interest Income, Net. Interest income, net decreased to $5,000 in 2010 from $104,000 in 2009 primarily due
to borrowings under our credit facility during 2010.
Income Taxes. In 2010, we recorded income tax expense of $19.3 million, which reflects an effective tax
rate of 36.3%. In 2009, we recorded $13.1 million of income tax expense for the reporting period. The effective
tax rate in 2009 was 28.5%. The increase in the effective tax rate was primarily the result of the abandonment of
our investment in Zero Water in 2009 which provided an income tax deduction for the entire original $14.3
million tax basis investment in Zero Water and reduced 2009 income tax payments by approximately $5.0
million.
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