Nutrisystem 2014 Annual Report Download - page 32

Results of Operations
Revenue and expenses consist of the following components:
Revenue. Revenue consists primarily of food sales. Food sales include sales of food, supplements, shipping and
handling charges billed to customers and sales credits and adjustments, including product returns. Revenue from
the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. No revenue
is recorded for food products provided at no charge as part of promotions.
Cost of Revenue. Cost of revenue consists primarily of the cost of the products sold, including compensation
related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and
packing material. Cost of products sold includes products provided at no charge as part of promotions and the
non-food materials provided with customer orders.
Marketing Expense. Marketing expense includes media, advertising production, marketing and promotional
expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in
these activities. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed
number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the
terms. Direct-mail advertising costs are capitalized if the primary purpose was to elicit sales to customers who
could be shown to have responded specifically to the advertising and results in probable future economic
benefits. The capitalized costs are amortized to expense over the period during which the future benefits are
expected to be received. All other advertising costs are charged to expense as incurred or the first time the
advertising takes place.
General and Administrative Expense. General and administrative expense consists of compensation for
administrative, information technology, counselors, customer service and sales personnel, share-based payment
arrangements for related employees, facility expenses, website development costs, professional service fees and
other general corporate expenses.
Interest Expense, Net. Interest expense, net consists of interest expense and unused line fees on our revolving
credit facility net of interest income earned on cash balances and short term investments.
Income Tax Expense (Benefit). We are subject to corporate level income taxes and record income taxes based on
an effective income tax rate for the year.
Overview of the Direct Channel
In 2014, 2013 and 2012, the direct channel represented 91%, 92% and 96%, respectively, of our revenue.
Revenue through the direct channel were $365.1 million in 2014 compared to $327.8 million in 2013 and $380.8
million in 2012. Revenue is primarily generated through customer starts, reactivation of former customers and
the customer ordering behavior, including length of time on our program and the diet program selection. The
revenue increase in 2014 was primarily attributable to an increase in new customers and on-program revenue,
which offset decreased reactivation revenue from the decline of new customer starts in previous years. We
experienced a positive response to new product offerings and messaging resulting in an increase in new
customers. On-program revenue increased in 2014 as compared to 2013 as it benefited from the increase of new
customers, partially offset by a decline in the number of paid days a customer stayed on the program.
Additionally, we had a higher average selling price in 2014 as compared 2013. Critical to increasing customer
starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing
our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, as
well as the price and availability of appropriate media.
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