eDiets.com Inc. Q1 2006 Earnings Conference Call Transcript (DIET)

May.16.06 | About: eDiets.com, Inc. (DIET)

eDiets.com, Inc., (OTC:DIET)

Q1 2006 Earnings Conference Call

May 16, 2006, 8:30 a.m. EST

Executives:

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Alison C. Tanner, Chief Strategist, Director Investor Relations

Stephen J. Rattner, President and CEO, Nutrio

Analysts:

William Lennan, Wedbush Morgan Securities

Tom Wyman, San Francisco Capital Management

Oz Tangen, Putera Capital

Paul James, James Investment Advisors

Adam Meisel, Aquifer Capital

Eric Green, Osmium Partners

Operator

Good day ladies and gentlemen and welcome to the eDiets.com First Quarter 2006 Earnings and Nutrio Acquisition Conference Call. My name is Gregory and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. At that time, if you wish to ask a question, please press “*” followed by “1”. If at anytime during the call you require assistance, please press “*” followed by “0”and a coordinator will be happy to assist you. I would now like to turn the presentation over to Mr. John Mills of Integrated Corporate Relations. Please proceed sir.

John Mills, ICR

Thank you. Good morning everyone. Thank you for joining us today for the first quarter fiscal 2006 call. Leading the conference call today will be Mr. Robert Hamilton, Chief Financial Officer and Interim Chief Executive Officer of eDiets. Also on the call with Rob today will be Alison Tanner of eDiets, Chief Strategist, and Stephen Rattner, Co-Founder and Chief Executive Officer of Nutrio.com. By now, everyone should have access to the first quarter earnings press release, which went out earlier this morning. If you have not received the release, it is available on the Investor Relations portion of the eDiets’ website at eDiets.com.

Before we begin, I would like to remind you that the statements we make that are not historical in nature are called forward-looking statements. These forward-looking statements involve known and unknown risk and uncertainties that could cause our actual results, performance or achievements to be materially different from those that we may express or imply today. The risk and uncertainties include among others to those related to the expected closing date of the transactions, costs, synergies, Nutrio’s revenue, and EBITDA, ability to leverage Nutrio’s technology, synergies, and accretive nature of the transaction.

Additional risk include ability to obtain sufficient in our accessible outside financing when and if required, changes in general economic and business conditions, changes in the acceptance of our product by consumers, a decline in the effectiveness of our sales and marketing efforts, loss of market share, and pressure on prices resulting from competition, volatility in advertising markets that we may utilize, and termination of contractural relationships with our brand partners which license certain brand components and other proprietary information from our subscription program, regulatory actions affecting our marketing activities, and the outcome of any litigations pending against us. For additional information on this, you can refer to our Form 10-K for the year ended December 31, 2005, and other reports that we file from time to time with the SEC. All forward-looking statements made today are current only as of today. We do not undertake any obligation to publicly update any forward-looking statements. And now, I’d like to turn the call over to Mr. Rob Hamilton. Go ahead Rob.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Thank you, John, and good morning everybody. The agenda for today will be slightly different than our previous earnings call given the announcement with regards to our agreement with Nutrio. First, I will discuss the Nutrio transaction and its importance for eDiets’ business strategy as well as provide the financial details of the transactions. Then, I will review first quarter results. Next, Stephen Rattner, Founder and CEO of Nutrio, will tell you more about the company, and Alison Tanner will then talk about the synergies of the deal and some of the strategic initiatives going forward. Lastly, I will wrap up the call by updating you on the guidance before we go to questions.

We are very pleased to announce that we’ve signed a definitive agreement to acquire Nutrio.com, a leading business-to-business provider of interactive private label nutrition, fitness, and wellness programs for commercial clients. The acquisition of Nutrio is an important step in our growth strategy to expand and diversify revenue beyond subscriptions and maximize our profitability with a very strong cash flow.

As you know, today, we have mainly relied on dieting customers via our B2C business. While we remain 100% committed to this profitable business model, we rely that there were other complimentary growth opportunities easily within our reach. Our strategy is to capture a larger share of the dollars spent by the 70 plus million people who were dieting in the U.S. By enhancing our e-Commerce offerings with food, monetizing site content, and increasing licensing activities, we are expanding our overall revenue and earnings potential. Our goal is to add to value to all of our customers or users.

We believe that the Nutrio acquisition is another positive step towards expanding our revenue and earnings. Today, many corporations turn to the web as the powerful tool promoting nutrition and healthy lifestyle across the organizations. Nutrio has built a dedicated customer base including leading food manufacturers, health insurers, and pharmaceutical companies. Joining forces with Nutrio would firmly position eDiets as a primary provider of diet, fitness, and healthy lifestyle solutions in the B2B space. Overtime, we will extend our product offering into new markets and increase our customer base, which should help accelerate our topline performance and have a positive impact on our earnings.

In addition to the expected technological or financial synergies, the acquisition will also further strengthen our management. Stephen Rattner, President and CEO as well as founder of Nutrio will be joining eDiets and assuming responsibility for overseeing the B2B aspects of our business.

According to the terms of the purchased agreement, eDiets will pay $8.5 million in cash plus earn out payments of up to $2.5 million dollars in 2008. The deal is expected to be closed before considering cross-selling revenue opportunities. We expect to close this transaction this month.

We financed the transaction with a private placement offering with Prides Capital. The private placement consisted of an initial 1.7 million shares sold at $5.05 per share, and subject to shareholder approval another 0.28 million shares at the same price. The transaction includes warrants for up to 1.2 million additional shares at $6 per share that are callable under certain conditions. Lastly, Prides Capital will also purchase up to 7 million shares from our founder, David Humble, who retired from the company last fall. We also welcome Prides Capital to our board of directors and look forward with working with them.

Now, let me turn me to our first quarter results for a moment. We are pleased to have improved our year-over-year first quarter results while executing our diversification strategy. Total revenues from the three-month ended March 21, 2006, increased 6% to $13.8 million compared to $13 million at the same period in 2005. As we noted, our topline growth was driven by non-subscription revenue, which includes advertising, e-Commerce, and licensing contributions from Tesco in the UK. All of these non-subscription revenues combine for an increase of 31% over the same period last year.

Broadening our services includes our direct-to-consumer food delivery program that was soft launched in January and added approximately $1 million in gross revenues in the first quarter. This initiative supports the growth of our e-Commerce strategy and the initial response has been very favorable, as approximately 2000 people purchased our food products in the first quarter and most of that was an upsell after a digital subscription plan was purchased. We are very pleased with that initial upsell rate. Now, we’ll start acquiring new members via dedicated advertising like print ads as well as infomercial scheduled to run later this quarter. Given the positive results and consumer satisfaction we’ve seen so far we’re very excited with this product going in the future. Alison will tell you more about these initiatives in a few moments.

On the subscription side of the business, we successfully increased our fees in January and we ended the first quarter with approximately 205,000 paying members, just down about 15% from last year but in line with our expectations due to the elimination of unprofitable ad spending dollars. Our subscription business is the driver for our other revenue lines and we are committed to it and expect by the end of the year the paying base will comparable to where we ended last year.

Gross margin for the first quarter was 79% versus 85% the prior year. Cost to sales includes royalty costs for our branded diet partners, costs related to credit card processing, and new this quarter, food costs. After backing out startup cost for the food program and at these low volume levels, we saw meal delivery margins in the high teens. We’ll talk later where we see them improving in the second half of 2006.

Sales, marketing, and support expense, which consists primarily of internet and television advertising expenses, and compensation for employees in sales, marketing, and support decreased 8% to $11.4 million compared to $12.4 million in the first quarter 2005. As we said earlier, we cut back in some of the unprofitable ad spending compared to the prior year. Our CPA for the quarter after adjusting for some branding program ads was about $76 versus $70 last year. We do believe the CPA will moderate in the remaining quarters and for the year be in the high 60s. General administrative expense was basically flat year-over-year after excluding $1 million for non-recurring charges and non-cash charges related to FAS 123R.

As a result of these factors, the net loss for the first quarter was $3.6 million or $0.16 per diluted share or $0.12 per diluted share excluding the non-recurring FAS 123R charges. This compares favorably to $0.16 per diluted share last year.

During the first quarter, we used $200,000 of cash from operating activities versus $2.1 million of cash used in the first quarter of 2005. We do expect to have significant positive cash flow for the full year. Turning to our balance sheet at March 31, we had $8.8 million in cash and cash equivalent, $5.4 million deferred revenue, and approximately $400,000 of debt related to capital expenses for computer equipment. Lastly, the $28 million in NOLs, we do not anticipate becoming a tax payer in the near term.

Now, I’d like to turn the call over to Steve Rattner who will be overseeing our B2B aspect of our business and we are very pleased to welcome him aboard. Steve…

Stephen J. Rattner, President and CEO, Nutrio

Thank you, Rob, and I’m thrilled to be part of the eDiets management team. I would like to share with you today a little bit more about Nutrio.com, our products and services, and why I’m so excited to join forces with eDiets.

In 1999, Nutrio.com developed its private label online meal plans, fitness programs, nutritional tools, and educational content for food manufactures, health insurance, fitness and pharmaceutical clients. Every site is completely customized and that’s the philosophy of every individual client and includes innovative applications such as integrated branded and nutritional products and patient education content to help consumers reach their health goals and strengthen relationships with physicians and medical providers.

In spite of the fact that Nutrio is a relatively young company, we are growing rapidly and have already earned a strong reputation in the industry with our premier customer base. Many of our clients are well known Fortune 500 companies and our contracts are a minimum two to three years in length providing a steady recurring revenue stream. In 2005, Nutrio’s revenues increased approximately 50% to $2.1 million and we generated EBITDA of approximately $1 million. Our model is profitable, and demand for our online nutritional fitness programs that produce successful results continues to grow. Evaluating the business combination with eDiets, we invested a considerable amount of time and due diligence making sure that our customers and employees would benefit from Nutrio and eDiets’ joint forces. We are confident that eDiets truly has the same work ethic and commitment to the market we serve. Also, eDiets is the perfect partner for Nutrio because of its extensive experience in the industry, international presence, and vision. I believe the combination of Nutrio and eDiets will enable us to achieve much greater results together. I’m confident that the two companies will be able to leverage customizable technology in healthy living in order to capture a larger share of the diet, fitness, and healthy living market going forward.

At this time, I’d like to turn the call over to Alison Tanner to add more details on the acquisition synergies and discuss guidance.

Alison C. Tanner, Chief Strategist, Director Investor Relations

Thank you, Steve, and welcome to our management team. And folks on the call, I want to let you know that because of the fact that this announcement came after the close yesterday after the end of business, Steve, has not had an opportunity to be with his employees. He is incidentally a local company and he’s going to be departing soon. So, operator, we’d like to open up for just a couple of minutes if anyone has questions for Steve in particular before he departs.

Operator

Okay, ladies and gentlemen, if you wish to ask a question, please key “*” followed by “1” on your touchtone phone. If your question has been answered or you wish to withdraw your question, please key “*” followed by “2”. Please key “*” and “1” to begin and please stand by for your question.

And your first question comes from the line of Bill Lennan with Wedbush Morgan. Please proceed.

William Lennan, Wedbush Morgan Securities

Hi, good morning, Steve, the question is for you. Welcome to eDiets. Could you help us understand a little bit about your revenue model…say from 40,000, if you can give us an idea of how many subscribers your company has, how you price your services, how they’re billed, whether you’re billing your larger clients or the actual employees or customers of the clients, can you kind of help us understand how you actually collect money?

Stephen J. Rattner, President and CEO, Nutrio

Absolutely. There are two pieces to our revenue model. First of all, as I mentioned, there’s a lot of customization done, so we meet the needs of our clients. So, there are some implementation and development fees that go into that. In addition, we have a recurring revenue model where we package together different packages of licensing seats that they buy. So, they’ll pay us a monthly licensing fee based on the number of subscribers that they want to commit to in advance.

Alison C. Tanner, Chief Strategist, Director Investor Relations

So, you’re bringing people on in chunks of…

Stephen J. Rattner, President and CEO, Nutrio

Yeah, in large counts, in chunks of thousands. Currently, we have probably about 3 million subscribers that are being paid for.

William Lennan, Wedbush Morgan Securities

Okay, and would you care to share with us any of the names of some of the clients, so we can just get a feel for…

Stephen J. Rattner, President and CEO, Nutrio

I can’t do that at this time. This transaction was just finalized late last night. I do need to speak with my clients based on certain confidentiality agreements in those agreements.

William Lennan, Wedbush Morgan Securities

Could you share with us a little bit about the verticals, you talk about insurance in food companies; can you give us an idea where more of you revenue comes from in terms of verticals?

Stephen J. Rattner, President and CEO, Nutrio

Well, there are three major verticals right now. There are the health insurance companies and the food manufacturers, and they are very different. One of them is much more focussed on the wellness side and the other is trying to market some of their food products and integrate some branded products into their programs.

William Lennan, Wedbush Morgan Securities

Okay. Do you see any material overlap in some of your programs with eDiets, or I guess a better way to put it is, how do your programs complement what eDiets has on the site right now?

Stephen J. Rattner, President and CEO, Nutrio

Yeah, I think it’s a great complement. I think that we offer some similar services. I think our position is the customization fees and philosophically meeting the needs of our clients like part of…the two big things that we see adding to our customer base is the support services that we currently do not have the infrastructure to handle as well as the food delivery service, which we don’t have that piece as well. So, we’re trying to complement our program and make it a much more complete program, and I think that the acquisition will help us tremendously in that area.

William Lennan, Wedbush Morgan Securities

Okay, all right. I’ll get back in the queue, thank you.

Operator

And your next question comes from the line of Tom Wyman with San Francisco Capital Management, please proceed.

Tom Wyman, San Francisco Capital Management

Good morning and congratulations on the transaction. Steve, for the FreshCuisine, I think you commented that you have 3 million customers, could you give us some sense as to how your platform might be leveraged for driving that new business initiative for eDiets?

Stephen J. Rattner, President and CEO, Nutrio

Sure, there are a couple of ways I can say it. First of all, we will meet with our clients and some of these programs are very structured programs and can include part of their branded foods to help distribute their foods in this fashion, and the other is just from a wellness perspective. The insurance clients, for example, are very interested in keeping people on a much more structured program and adding these services will go one more step to do that.

Tom Wyman, San Francisco Capital Management

So, should we anticipate some of those initiatives in the next couple of quarters or would that be more of a 2007 timeframe?

Stephen J. Rattner, President and CEO, Nutrio

I think that we’ll start having discussions immediately and we’ll give you more information as that starts to rollout.

Tom Wyman, San Francisco Capital Management

Okay and last question, just in general, as I think about the company and maybe, Steve, you could comment on this too because you’re sort of new to the eDiets equation. For me what’s exciting is the food being delivered to the home, not necessarily just for dieting purposes but also for people to just eat healthier meals, for people that are on the fly. If you think about the business from that perspective, it probably connects with the size of the market. Am I safe in starting to think that way about the company? And I’ll tell you from a personal perspective, we actually have that going on at my house. My wife is not dieting but she absolutely loves the convenience of this new initiative.

Stephen J. Rattner, President and CEO, Nutrio

I think the program is always going to meet the needs of people differently and addressing to healthy eating and convenience is definitely going to be always one component to it whether you are dieting or not dieting or have a chronic health condition also. I do envision these programs helping people maintain and prevent their diseases; I think all of the above basically.

Tom Wyman, San Francisco Capital Management

Great, thank you, I’ll go back in the queue.

Operator

And your next question comes from the line of Oz Tangen with Putera Capital. Please proceed.

Oz Tangen, Putera Capital

Good morning. You mentioned you have 3 million subscribers, can you give us a sense if the subscriber growth is in line with the revenue growth and also help us understand…you said $2.1 million in revenue, so that’s about $0.70 per subscriber. Maybe if you can take us very quickly through an example of how the revenue model works with the health insurance company, who pays for it and so on?

Stephen J. Rattner, President and CEO, Nutrio

Okay; all of our clients at this time, they take…it’s a program that is free to their members and in some cases to their site visitors. So, for example, the health insurance company, if you’re a member of that insurance company, they offer this program or if you’re the member of one of our fitness companies, then you have access to the program. So, they’re integrating in to their overall offering; that is what they are trying to do. And as far as the model goes, we’ve kind of taken the marketing piece out of our equation and put that on to our client. So, they determine how they’re going to market to their end-user and they need to make large commitments to us in order for us to take them on as a client upfront.

Oz Tangen, Putera Capital

Is it fair to say, you’re getting roughly $0.70 per subscriber?

Stephen J. Rattner, President and CEO, Nutrio

I guess that’s fair to say. The way it works out is that our clients pay for these subscribers on an ongoing basis throughout the term of the contract, not just for the term that they are using the service.

Alison C. Tanner, Chief Strategist, Director Investor Relations

So you don’t have insurance.

Stephen J. Rattner, President and CEO, Nutrio

Right, there is no insurance. We wanted a very predictable model. I mean very predictable and steady revenue stream. So, if we sign up a client and they commit to “X” hundreds of thousands of users, from day one, whether they sign up for those users or not, they’re paying us for hundreds of thousands of users and the marketing is on them, to bring the consumers on. So, in some cases we are getting paid for a much higher rate because they’ve committed to higher levels than they’ve obtained at this point and in some cases we’re getting paid at that rate.

Oz Tangen, Putera Capital

So, maybe a better way to look at it is how many contracts you have?

Stephen J. Rattner, President and CEO, Nutrio

Absolutely.

Oz Tangen, Putera Capital

Can you give us any sense in the ranges?

Stephen J. Rattner, President and CEO, Nutrio

I’ll give you the ranges. Currently, we have nine contracts and the contracts range anywhere between $3500 a month and $80,000 per month.

Oz Tangen, Putera Capital

And would it make sense to market this to companies themselves, large companies as well, or should this be through…

Stephen J. Rattner, President and CEO, Nutrio

One of the things that we are currently undertaking is to market these things to large companies and through distributors to get to smaller midsized companies, because I think at the end of the end of the day the end-users are all these people that need these services. So, we want to reach them the best way and most efficient way that we can.

Oz Tangen, Putera Capital

Why didn’t you guys take any stock from eDiets? I don’t know if you made a comment on that.

Stephen J. Rattner, President and CEO, Nutrio

I really don’t have any comments on that. This was just the way the deal worked out.

Alison C. Tanner, Chief Strategist, Director Investor Relations

May I could just say one thing. You have some other shareholders, so there are situations in their stage in life and their objectives are more conducive to cash. But having said that, the management team will be eligible for the same kinds of equities, incentive programs as the rest of us are.

Oz Tangen, Putera Capital

All right, I’ll get back in the queue, thanks.

Operator

And I’m showing no further questions at this time.

Alison C. Tanner, Chief Strategist, Director Investor Relations

Okay, we’ll send Steve on his way and if there are other questions about the business and we can make Steve available in the future. So, with that, operator, I just have a few remarks and we’ll close up and get back to a general Q&A.

Operator

Yes mam.

Alison C. Tanner, Chief Strategist, Director Investor Relations

Welcome everyone to the call. I would like now to recap some of our growth initiatives in each of our four core revenue lines starting with the largest, which is the subscription business, and in that business we have to do three things to grow, some combinations. We need to acquire more subscribers, generate more revenue per week for them, and keep them longer. And we are working on each of these aspects this year. As we had described to you on our last call, through pricing changes that we implemented in January, we have effectively raised our average weekly ticket by about 10% compared to last year and the second quarter will be the first quarter in which that will flow through the majority of the subscriber base because we do grandfather people in at older price points.

To improve retention, Rob and I have recently reconstituted a multidisciplinary retention task force, and since the highest proportions of our cancellations occur in the first month of a subscriber’s life, the task force’s initial mandate has been to make recommendations for improving the sales experience and the first month of membership experience. They have just submitted a number of creative improvements which we are now scheduling for implementation, and those would be expected to be implemented in the third quarter. And note that a one week improvement in our 26-week retention rate generates an incremental $1.5 million in revenue at very high margins. We feel this is a good area to focus on. Our current forecast, though, does not include any improvements in retention.

With respect to higher levels of member acquisitions, we have reviewed our advertising opportunities in identifying some new programs through which we can market our membership programs. Some of these leverage our vast archive of diet and fitness related content being placed on third-party websites to drive people over to eDiets.com. And in addition, we’ve recently entered into at least two significant ad commitments with certain portals, though we’ve not been advertising for as much as two years. Most of those will kick in the second half of the year. Also, after reviewing the incremental contribution of our meal delivery revenues as they are flowing through our upsell process, we now believe that we can buy somewhat more expensive advertising for eDiets.com without violating our own guideline that we spend no more than 50% of expected revenues to acquire a customer. And as a result, we have added at least $4 million or over 20% to our previous ad budget for the subscription business for this year, and we now expect to end the year with our subscriber base about that with last year.

Turning to the advertising business, there are two components to consider -- our own inventory of advertising impressions and CPM rates. Our CPM rates have grown nicely versus last year, while our sellout rates remain very high. We actually have more demand for our advertising today than we can satisfy.

On the other hand, our inventories ad impressions come from three places and here’s what is happening with those. The three places are our subscription sales frontal, our newsletters, and our website. The sales frontal piece, not surprising is closely tied to our advertising for the subscription business, which though is higher than previously budgeted is still expected to be down in aggregate versus last year, in coming quarters. So, we’re seeing some flatness to slight decline in ad revenues through the frontal. On the other hand, newsletters and side traffic have recently started to trend up very nicely versus last year, and as a result the outlook for ad sales in the second half of the year is improving, with the roughly 20% that is frontal related being down slightly for the year, but the newsletter and web advertising sales being up 20% to 30% year-over-year in the second half.

In our meal delivery business, which comprises the bulk of our e-Commerce today, as Rob mentioned, we haven’t spent much to advertise this business to date in order to have a controlled rollout. This is a very big opportunity for us. In fact, Wedbush has estimated that there’s a market potential here of nearly $1 billion per year, but with a new entry such as this business we wanted to work all the early stage issues before becoming more aggressive at promoting it. Until recently also, the features and functionality of our meal delivery service has not fully been rolled out. We have the majority in place now and are comfortable, but the operations are running smoothly and are ready for a full launch.

Determining how best to market and expand the meal delivery business will be an ongoing process, but we expect to invest a base amount other than TV of about $0.5 million in the second quarter on a variety of channels to test and drive this business, and those include affiliate marketing, keyword search, print advertising, which some of you may have seen we were in the New York Times Magazine recently apart from the crossword puzzle, direct mail, and inserts.

We’re also on track to start airing our infomercials around Memorial Day. In preparation for the infomercials, we have re-branded the meal delivery service as eDiets Express and we’ve consolidated our price points at two levels, $35 and the critical sub $20 level; we’re at $19.95 and we expect a mix of $19.95 and $35 sales going forward.

For the way in which we are thinking about the economics of this business today after a few months of testing and with these price points now set, is that the average consumer will spend around $200 per week, perhaps slightly less including shipping on the service, and once our retention initiatives are fully in place, we expect at least five weeks of retention. Our marketing partner also infers that they see individuals signing up for multi-week cycles per year, but we are ramping in our own estimates to five weeks by the end of this year and we’ve not included any multiple cycle potential in our guidance.

Our gross margins on this product will vary depending on the volume of sales and at the current level, we would be modeling about a 25% gross margin, something into the low 30s as we get into the tens of millions of dollars of revenue, which we think is very achievable in future years, and then what we’re testing now is what the acquisition costs will be. As you can see, this is a continuity program just like our subscription business and we will be applying our expertise in the subscription business to make eDiets Express also successful.

Finally, turning to licensing; with the acquisition of Nutrio, we are now solidly in that business, probably a year to two years before we reach this kind of critical mass. We’ve actually been in the licensing business since 2004 when we executed a country level license with Tesco, the largest retailer in the United Kingdom. We did just over $1 million in revenues with Tesco last year. With Nutrio on hand, we can expect now to be tracking at an annualized rate of licensing revenues of over $4 million, although of course we will not have a full year of Nutrio in our numbers in 2006.

And with that update, I’ll turn the call back to Rob Hamilton for some closing remarks.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Thank you, Alison. As you could see, we are very optimistic about eDiets’ future. The leading industry indicators point to a sustained demand for our products as the B2B continues to proliferate in the U.S. But again, eDiets is committed to adding value to our customers and users, and the acquisition of Nutrio is consistent with our strategy of providing consumers with a broad portfolio of the highest quality nutrition and healthy lifestyle products and services available. We are encouraged with the progress we are making on our key strategic initiatives and remain committed to our subscription business. As we grow ad revenues, monetize content, and expand and enhance our e-Commerce offerings to capture more of the subscriber dollars, we expect to leverage our existing subscriber base and add new subscribers at a higher return.

Going forward, we see 2006 revenues of $60 million, about 10% higher than last year. Contributions from Nutrio in the food business will be more evident in the second half of the year, while our paying base is down from last year; so that will have an impact on growth in the near term. In the end, we see improved offerings as result over last year, excluding $1.5 million from non-recurring and non-cash charges.

In summary, our outlook for the remainder of 2006 is bright. I also look forward to early 2007 when our four complementary revenue streams are firing on all cylinders. Now, operator, we would like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. As a reminder, ladies and gentlemen, it is “*” followed by “1” to ask a question. If your question has been answered or you wish to withdraw your question, it is “*” followed by “2”. That’s “*” to begin, and please standby for your first question.

And your first question comes from the line of Bill Lennan with Wedbush Morgan. Please proceed.

William Lennan, Wedbush Morgan Securities

Hi, back to Nutrio for a second. Could you tell us how much Nutrio revenue was in the new guidance for 2006 approximately?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Well, we’ll have Nutrio for slightly over half of the year, and they’ll track it a little north of $3 million in revenues for the full year.

William Lennan, Wedbush Morgan Securities

Okay, and then one other quickly, housekeeping items; the $500,000 spent on meal advertising, am I correct, did you say that excludes the infomercial?

Alison C. Tanner, Chief Strategist, Director Investor Relations

That’s right.

William Lennan, Wedbush Morgan Securities

Okay. What do you think you’ll spend on the infomercial?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Well, the production cost will be expensed in this quarter, which will be a six figure investment and then we will be buying on a slot basis starting with some very modest investments and then we can ramp that and tweak the infomercial as we go along. So, we have a good amount of flexibility there depending on how the results come out.

William Lennan, Wedbush Morgan Securities

Okay, and back to some higher level topics here. The good news is you’ve got a strategic investor who is very excited about holdings on the food site; you’ve got your Chairman selling an enormous amount of shares, why is David selling right now?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Well, what David has shared with us is, if you look back at his track record, David starts companies. He has essentially started four different companies that have gone public and seen them grow to levels of revenue of $20 million to $100 million, and that’s where we are, and we’re becoming a more mature company, and I think David would tell you he has many other ideas that we would like to also pursue in starting.

William Lennan, Wedbush Morgan Securities

Okay. Can you give us an update on the status of the CEO search and the addition of strategic investor and partner chains at all?

Alison C. Tanner, Chief Strategist, Director Investor Relations

We have engaged Spencer Stuart for the search, and the last report I got was that we will be receiving resumes and we have a search committee with the board that is managing that process, and I believe that Prides has indicated they also have a couple of ideas of CEO. So that is continuing forward.

William Lennan, Wedbush Morgan Securities

Okay, and you talked about meal delivery retention goal of five weeks, what’s the average sale right now either in the first quarter or through today if you have that number it would be better?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Right, I wouldn’t characterize by the goal of what’s in our model. We’d like to be better than that and if we think we can be better than that over time based on the experience with the partner and do some things we’re seeing within our own numbers. So, we are probably in the mid three- to four-week range at this point and we have some technical issues that we’re actually making it difficult for renewals to happen, and those have been corrected, and so that is what gives us confidence about our levels.

William Lennan, Wedbush Morgan Securities

Okay, and then long term on that model, you mentioned gross margin goal and you said you’re trying to find where the stack will be. Do you have a high-level view of what the model will look like for that business long term, gross margins a low 30s, marketing expense, do have a goal there?

Alison C. Tanner, Chief Strategist, Director Investor Relations

We want this business to be profitable with solid double digit operating margins.

William Lennan, Wedbush Morgan Securities

And last question, I’ll jump back in the queue; back to the retention issue for a second. Apart from the technical reasons, the people who don’t leave for the technical reasons, what is their main issue for not continuing?

Alison C. Tanner, Chief Strategist, Director Investor Relations

I’ll have to get back to you on that in terms of order of priority, but some of the reasons would be things like travel or their schedule changes to where they’re able to cook for a period of time and then not cook, and people go on and off in the experience of our partner more than once within the course of the year.

William Lennan, Wedbush Morgan Securities

Do people use the service for diet or people who just want their food delivered conveniently? I’m not sure it makes a difference, but I’m just asking.

Alison C. Tanner, Chief Strategist, Director Investor Relations

We have been leading by marketing it through our diet plan sales frontal and most of the people who are in there are speaking weight loss. The original concept didn’t have anything do with weight loss. It was actually for college athletes who were eating 5000 calories a day of junk to keep their weight up. So, this has applications for weight loss, weight maintenance or weight gain.

William Lennan, Wedbush Morgan Securities

All right, thank you.

Operator

And your next question comes from the line of Oz Tangen with Putera Capital. Please proceed.

Oz Tangen, Putera Capital

Would your manufacturer contribute to any advertising costs?

Alison C. Tanner, Chief Strategist, Director Investor Relations

The model that we’re using is a clean model where they are responsible for the wholesale costs and we are responsible for the marketing costs. That’s been the spirit of our partnership and it also just makes it cleaner. We can understand what costs are really in what buckets.

Oz Tangen, Putera Capital

So, down 25% to 30% level, you’re streaming your advertising expenses, obviously they are going to be 20% or 25%.

Alison C. Tanner, Chief Strategist, Director Investor Relations

We’re not making any assumption on our advertising expenses yet and I want to remind you that we do have some sources that have bearer cost for our subscription sales frontal. So, what we’re trying to do now…we have providence on a certain part of the model or minimum for the model right now and we are now trying to gather the information on how much of costs go for these subscribers through various channels.

Oz Tangen, Putera Capital

So, specifically just the revenues that will come from the infomercial, is it fair to think that you’re going to be losing money?

Alison C. Tanner, Chief Strategist, Director Investor Relations

I don’t think that’s fair.

Oz Tangen, Putera Capital

So, those dollars with the spending…again it’s not a good way to look at it, I mean it’s not a realistic way, but just for the mathematical understanding, the revenue dollars that come directly from the infomercial with the gross margins you have and the amount of dollars you’re going to spend for that, I guess you’re saying you shouldn’t lose money?

Alison C. Tanner, Chief Strategist, Director Investor Relations

We will have to analyze that. As I mentioned earlier, this is a continuity business like the subscription business, and what we do in the subscription business is we analyze our average cost to acquire. If we were not to run any ads that were unprofitable, we would be in much smaller business. So, what we’ll be looking at with the meal delivery business as well is what our average cost to acquire for all of the dedicated advertising components together.

Oz Tangen, Putera Capital

Can you talk about advertising spending? You mentioned you’re going to spend an additional $4 million. We had some discussions on this, but I want to make sure I’m clear. Last year you spend about $28 million in advertising, so this year you’re thinking about cutting it? When you talked in the fourth quarter conference call you talked about an additional $4 million…

Alison C. Tanner, Chief Strategist, Director Investor Relations

On the subscription business what we are budgeting at this moment is to be down 10% year-over-year. However, as I mentioned, recently we’ve started to see some new interest in advertising opportunities and as those make economic sense we’ll pursue them.

Oz Tangen, Putera Capital

So, based on the current guidance, what do you expect the advertising spending to be relative to last year?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Down about 10% from that $28 million…

Oz Tangen, Putera Capital

That does include the additional $4 million you mentioned on the conference call, right?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes that includes the $4 million, but as I mentioned there seems to be a trend developing where our ad buying team, which was recently reconfigured, has been finding some new places for us to advertise cost effectively. So, it could be some additional increment above that, but that’s not in our guidance.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

As we said earlier, we think we feel pretty good by the end that our paying base will be kind of back up to where it was last year even though we’re down at the end of the first quarter here. So, we’ll set ourselves up for a good 2007, early part of 2007, and again have the ability to start cross-selling these multiple services.

Operator

And as a reminder, ladies and gentlemen, it is “*” followed by “1” to ask a question, and your next question comes from the line of Paul James with James Investment Advisors. Please proceed.

Paul James, James Investment Advisors

Good morning, guys. Rob, a couple of quick questions, most of my questions have been answered here, but regarding the meal delivery service, do you guys have any plans or is it even in the stars whatsoever to come out with even a lower priced product than the $19.95 product, like something on the lines of what Nutrio Systems is doing or Weight Watchers or something like that, pre-packaged food that isn’t like what you’re delivering at the moment?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Over time our vision is a very good better or best product line, and we have better investments.

Paul James, James Investment Advisors

Okay, so that is a possibility then?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes. Our main focus right now is getting the learning from the ad side of the equation with our current product offering, but the longer term view is be good, better, best.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Paul, just to add, when you’re factoring the costs, keep in mind this wonderful product we’re offering at $19.95 is fairly inclusive with regards to all the meals, and so we need to do a good job on the marketing side because some of the lower cost offerings aren’t inclusive with regards to people’s food needs over the course of the year. So, when we get the apples-to-apples comparison out there, I think we’ll do a good job of that.

Alison C. Tanner, Chief Strategist, Director Investor Relations

That’s right, because they don’t include the apples, so there are several dollars per day of additional food spending that needs to be done.

Paul James, James Investment Advisors

The other thing too, are you guys looking at some sort of programs that may involve like a five day or a midweek type program for that, because I’ve been talking to different people. Very few people I’ve talked to say they really want it seven days a week. They’re going five days; the work week would be incredible.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

You’re absolutely right. We’ve got a lot of great suggestions and learnings over the last couple of months and again that was the purpose of this early soft launch there, and you’re right, some consumers are looking for the Monday through Friday offerings, some consumers are looking to cut back on breakfast and lunch and all that. So, I think longer term we can definitely see a lot of different types of plans to meet these specific needs and we think it is great dollars there to capture some of those consumer. So, we’re looking forward to starting to put that in place in the later half of 2006.

Paul James, James Investment Advisors

Another question that sounds great; as far as the subscriber base, do you guys see the ability to grow that in 2007?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Our focus is those three levers and we want to keep a stable base, but we’re mainly looking to grow the subscription revenue and that includes revenue per week. And one thing we didn’t mention earlier is that we’re in the planning stages right now of the product enhancements that we’re going to be launching in the later second half of this year and into the first half of next year, which could result in some higher realized revenue per week, as well as we’ve put ongoing focus on retention.

Paul James, James Investment Advisors

And you did mention that you didn’t have anything on the numbers for the retention levels increasing, correct?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Right, but just by virtue of that, if retention increases all other things being equal, the base will increase.

Paul James, James Investment Advisors

That’s right, absolutely. And one quick final question, back to the meal delivery; you were mentioning gross margins, do you have any revenue guidelines or possible timeframes on where the gross margins would increase?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes, getting up into the upper 20s and low 30s will be tens of millions of dollars, $20 million or $30 million in terms of our revenue. But, if you assume that we continue to do a good job of upselling through the subscription upsell at 1.5% to 2% of that, and if you think about also the ability to solve this through the institutional market through Nutrio, and if you think about some modest levels of success with the dedicated advertising, you really don’t have to be too aggressive to start getting up into the $20 plus million a year runrate.

Paul James, James Investment Advisors

Great, that sounds interesting, thanks for your time.

Operator

And your next question comes from the line of Adam Meisel with Aquifer Capital. Please proceed.

Adam Meisel, Aquifer Capital

A couple of questions. You mentioned that you had started in the last couple of weeks with some print advertising, can you give us a sense of how in the early days that has impacted order trends versus in advertising?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes, we have seen a significant bump up in sales in the days right after print ads such as spending our time with this. It’s definitely a noticeable increase.

Adam Meisel, Aquifer Capital

Okay, the same question. I’m trying to reconcile at least in my own mind where on a spectrum to evaluate your guidance. So, let me just run through some simple math and see if I’m thinking about it right. In your last quarterly call you had suggested that you thought revenues in 2006 would grow 4% to 6% from last year. You’re just in the middle of that 5%, you were guiding to $56.4 million…

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Adam, that 4% to 6% was for the first quarter of 2006, and obviously we came in at the high end of the 6%.

Adam Meisel, Aquifer Capital

Okay positive. So, did you give kind of guidance of what you thought the year was going to be?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes, we said 8% to 10%.

Adam Meisel, Aquifer Capital

So basically 8% to 10% was taken down, you got it to $58.5 million of revenues for the year, is that right on the first quarter?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Yes, basically our guidance for the legacy business has not changed.

Adam Meisel, Aquifer Capital

Right, and you’ve given new guidance of $60 million of revenues and you told us that effectively you were going to get $1.5 million of revenues in the back half of the year from Nutrio. So, basically the only change in guidance was adding Nutrio’s revenue. Is that the right way to interpret what you told us?

Robert T. Hamilton, Interim CEO and Chief Financial Officer

That’s correct.

Adam Meisel, Aquifer Capital

Let me just make sure I understand. In that guidance, you had projected $1 million a quarter of food revenues, so $4 million, I remember that from the last call.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

Let me just kind of comment there. The $4 million you are referring to is what we’re really happy with regards to the upsell on the food business. So, we did $1 million on the upsell in the first quarter, so if you just annualize that you can think you’re at $4 million or $5 million right there. Then, there will be a couple of additional $1 million of revenue that we would expect as the ad dollars start to come into place now between now and the rest of the year.

Adam Meisel, Aquifer Capital

Rob, you didn’t answer my question, which is I don’t understand how you can have $60 million of revenues because you’re basically there without any benefit from the ad spending and the infomercials, so I’m just trying understand, is my conclusion exactly right, which is your guidance presumes no revenues from the incremental ad spending on the informercials; I think that’s what it does. I just want to make sure I am understanding it correctly.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

On the ad spending side and the subscription side there is tale that when you spend your ad dollars you typically see that three to six month after effects. But, at this point\, we feel real good about the business and feel really strong about how the year ends up and sets itself up for going into January.

Alison C. Tanner, Chief Strategist, Director Investor Relations

We always had an assumption of some contribution from dedicated advertising for the meal delivery business. Now, some of that shifted back into the latter half of the second quarter from the beginning as we were continuing to work on some product enhancements and take the learnings from the first half. And then what’s happened in the subscription business is we have said that that would be done in the mid-to-upper single digits for the year in terms of revenue, and now it’s like the high end of that range as a result of the spending we have on hand now. We did mention that we were willing to pay a little bit more for subscribers now, given what we were seeing on the upsell revenue from the meals.

Adam Meisel, Aquifer Capital

So, I think the sum of all that is, as we look at this, you’ve maintained conservative guidance and there should be a significant upside in the back half of the year based upon this acquisition, based upon the new marketing plan around the eDiets Express. There are a lot of good things that can happen at this point.

Robert T. Hamilton, Interim CEO and Chief Financial Officer

We think the future is very, very bright and we feel real good, especially with the B2B addition. Like Alison, we’ve cut off two years of building our own B2B and we’ve got world class customers that immediately open up other doors to other clients because of who they are. So, let us get back working together and you can see why we feel so good, and the numbers speak for themselves going forward.

Adam Meisel, Aquifer Capital

When do you think that the transaction will fully get completed with Prides and the David Humble purchasing of his shares and all that?

Alison C. Tanner, Chief Strategist, Director Investor Relations

We’re going to file the process very shortly once our general counsel gets a little sleep, and then we’re going to try to do that as expeditiously as possible, but that would be subject to SEC rules, and we don’t know if that will happen or not. I think our objective would be that it closes in the next couple of months.

Adam Meisel, Aquifer Capital

Okay, great, thank you.

Operator

And your last question comes from the line of Eric Green with Osmium Partners. Please proceed.

Eric Green, Osmium Partners

Thank you for taking my call. I’m just wondering, to get a little more about the motivation of Dave’s sale. I read in the proxy that he is 70 years old. Is this is a retirement phase or is he doing this for other reasons?

Alison C. Tanner, Chief Strategist, Director Investor Relations

Well, Dave is a very robust individual. He took up certain sports and got up to the Olympic level in the 30s and 40s. So, 70 for him is probably not like 70 would be for you or for me. I really can’t comment on whether he is going to retire from business, but he is moving on from eDiets.

Eric Green, Osmium Partners

But it’s not a loss of confidence in the name of the company?

Alison C. Tanner, Chief Strategist, Director Investor Relations

No, what he has said is that we’re getting out of the stage for his sweet spot for investing himself and his resources.

Eric Green, Osmium Partners

All right, thank you very much Alison.

Alison C. Tanner, Chief Strategist, Director Investor Relations

I was just reminded now. He’s not completely exiting. He will continue to hold half a million shares and he does still remain Chairman of the Board.

Eric Green, Osmium Partners

Sure, okay, thank you.

Operator

And, ladies and gentlemen, this does conclude today’s question and answer session. I would now like to turn it back over to management for any closing remarks.

John Mills, ICR

We thank all of you for joining us this morning. As you could see, we had a lot to talk about. We feel real good about our four revenue driving opportunities going forward and we’ll certainly keep you updated in the coming months. Feel free to contact us if there are any additional comments that we can help you with. And again, thanks for joining and we’ll see you again.

Operator

And, ladies and gentlemen, thanks for your participation in today’s event. This does conclude the presentation and you may now disconnect. Have a great day.

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