Seeking Alpha

eDiets.com Incorporated (OTC:DIET)
Q2 2006 Earnings Conference Call
August 15, 2006 8:30 am ET

Executives

John Mills - IR Counsel at Integrated Corporate Relations, Inc.
Robert Hamilton - Interim CEO, CFO and Treasurer
Alison Tanner - Interim COO, Chief Strategist and Director of IR
Kevin Richardson - Chairman of the Board and Managing Partner of Prides Capital Partners

Analysts

Scott Van Winkle - Canaccord Adams
Wilson Jaeggli - Southwell Partners
Richard Fetyko - Merriman Curhan Ford and Company
Oz Tangen - Putera Capital
Rusty Hoss - Roth Capital Partners
Bill Vlahos - Odyssey Value Partners
Eric Greenman - Montreal Investments
Kevin Evernham - Evernham Capital Management
Steve Murada - Viper Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 eDiets.com Earnings Conference Call. My name is Janelle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call, you'll require assistance, please key "star" followed by "zero" and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. John Mills of Integrated Corporation Relations. Please proceed, sir.

John Mills

Thank you. It's Integrated Corporate Relations.

Good morning everyone. Thank you for joining us today for the second quarter fiscal 2006 conference call. Leading the conference call today will be Mr. Robert Hamilton, CFO and Interim CEO of eDiets. Also, on the call, with Rob, today will be Alison Tanner, Chief Strategist and Interim Chief Operating Officer, and Kevin Richardson, Managing Partner of Prides Capital Partners.

By now, everyone should have access to the second quarter earnings press release, which went out yesterday morning. If you have not received your 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 this morning that are not historical in nature are called forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to be materially different from those that we may express or imply. The risks and uncertainties include, among others, 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 the advertising markets that we may utilize, and termination of contractual relationships with our brand partners, which license certain brand components and other proprietary information for our subscription program; and regulatory actions affecting our marketing activities. 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. Robert Hamilton. Go ahead, sir.

Robert Hamilton

Thank you, John, and welcome everybody. The agenda for today's call is as follows. I will review our second quarter earnings results and recent accomplishments. Kevin Richardson at Prides Capital and eDiets' Chairman of the Board will make a few comments. And then, I'll discuss eDiets' strategic initiatives. I would then wrap up the call by updating you on guidance before we go to your questions.

Total revenues for the three months ended June 30th 2006 decreased 7.8% to 13.9 million compared to 15.1 million for the same period in 2005. Membership revenue, which is about 80% of our current business was down 15% for the quarter, as the ending paying member base of 191,000 was down about 22% from a year ago. Our rolled out advertising spending on a year-to-date basis was down $1.3 million versus the comparable period last year.

Let me share some of the other metrics on subscribers for the Q. We recorded about 88,000 new members on a $7-million ad spend, and that yielded an $80 cost per acquisition. We continue to see good click-through of banner ads, and our conversion rate was up 20% from last year. The reason for the higher CPA was primarily higher prices. Average revenue per user was up. It was $4.19, up 3% over the prior year. Lastly, the average length of stay for paying new members continues to be above six months.

As you can see, the customer economics for our new paying members, especially in June, were unfavorable. Despite higher weekly fees, it was not enough to offset a 30% increase in the cost of acquiring members, especially from the largest online portal websites. As a result, we missed our target for new members, and that will impact subscriber revenue in the near term.

We are working to improve on our cost per acquisition but the economics related to acquired-members via the web portal have gone cost prohibited. For example, we spent almost two-thirds of our ad budget with the portal sites, and it only yielded about one-third of our new members. Our subscription business is a driver for our other revenue lines, and we remain committed to it. But we are pulling back unproductive advertising and exploring alternative methods to capture new members.

Moving to non-subscription revenue. This totaled 2.8 million for the Q and includes the advertising, ecommerce, field delivery and licensing, all of which combined for an increase of 41% over the same period last year. Ad revenue added about $1 million in revenues in the second quarter, and that was down about 8% from the prior year.

A part of that was specifically tied to lower new members, for which we get paid on a performance basis. On the positive side, we were able to raise the ad rates 70% over the prior year. You'll see Wal-Mart, Citibank and Microsoft advertising on our website. We think that's a good start, and we'll be looking to expanding that whereas by improving the positioning of our original and third-party contacts.

Our direct-to-consumer food delivery program added nearly $900,000 in gross revenues in the second quarter, and that was without any significant advertising. We believe this is going to be a very big opportunity for our company. At the present time, the food delivery service is currently undergoing a comprehensive evaluation and marketing testing. Once those important steps are complete, we'll be ready for the 2007 winter diet season.

Just a reminder, results for the Q2 include only about six weeks of contributions from Nutrio, but we are very pleased so far. That unit added about $300,000 of profitable revenue for that short period. The integration of Nutrio is progressing ahead of plan in terms of new potential customers in their pipeline, and we are already seeing the benefits of their strong management and technology.

Sales, marketing, and support expense, which consists primarily of Internet and television advertising expenses, and competition related to those departments, decreased normally to 9.1 million, compared to 9.2 million for the second quarter of 2005. Sales and marketing expenses as a percentage of revenues increased to 65% from 61% due to the increase in sales -- to the decrease in sales.

Given the high cost, low return of web portal advertising, you will see us being more strategic and cost-conscience in our ad spending going forward. With this new approach, you should also expect to see us take a step back on short term revenue growth in the second half of 2006.

General and administrative expense was $2 million, up 500,000 from last year, primarily due to the inclusion of Nutrio and stock based compensation expense. Adjusted EBITDA, which we define as earnings before interest, income, taxes, depreciation and amortization, stock based compensation and severance charges, was negative 0.3 million compared to positive 1.5 million in the same period last year.

Our weighted average basic shares outstanding increased 5% from last quarter, mainly due to the shares issued to Prides Capital in late May. Our basic shares outstanding as of now are approximately 24.3 million.

Turning to our balance sheet, at June 30th, we had 5.4 million in total cash, 5.2 million in deferred revenue and no debt. Two weeks ago, we added another 1.4 million in cash as the final part of the Prides fund raising was concluded. We believe the cash low point for the year was at June 30th, and expect to be positive cash flow for the second half of the year.

Now, I'd like to turn the call over to Kevin Richardson, Managing Partner of Prides Capital and eDiets Chairman of the Board to say a few words. Kevin?

Kevin Richardson

Thanks, Rob. Prides Capital is very excited to be part of eDiets.com. We invested in the business because we're seeing tremendous growth in the nutrition and healthy living marketplace. We believe that eDiets has a great core platform and significant opportunity to capitalize on the market expansion and deliver long-term shareholder value.

At Prides, we typically look for investments that can double in a three-year period, based on cash flow metrics and a good framework for profitable growth. To clarify Prides role as a partner, we will take an active role in strategic decisions. We see ourselves as part of an extended management team both I and Steve Cootey have taken board seat to ensure eDiets become a premier player in the healthy living space.

When we evaluated the many opportunities became clear that our infrastructure at eDiets including staffing the system would not support the kind of rapid growth that we anticipate going forward. Our plan is to slowdown the development in infrastructure that enables eDiets to deliver the most relevant nutrition and fitness related services, information and product possible. Near-term the team is doing lots of test to help -- to ensure the platform can handle the rapid growth we expect beginning in 2007.

With that I will hand the call back to Rob, to tell you more about the strategy going forward.

Robert Hamilton

Thank you Kevin. With really for eDiets now we look forward to a long partnership with Prides Cap. We have made lot changes at eDiets over past year. The introduction of our food delivery service, the acquisition of Nutrio, Prides investments, our candidate, number of retirements and CEO transition.

Dave founded the business in 1997, the internet [Technical difficulty]. This trend is becoming widely accepted medium for people to make changes in their life style and physical well-being. eDiets is beginning a new era as we build up our successful history and move forward with our new partner Prides Capital. eDiets overarching goals has develop long-term life time relationship with our customers and we will do that by delivering the most relevant consumer experience profits.

As Kevin mentioned, our priorities to focus on investing that enables us to do so. We plan to hire appropriate staff, thoroughly research our customers and develop a system that best meets all of their nutrition and fitness related services information in product kit. When we evaluated our use of capital in line of our goals, we determine that redeploying portion of our advertising budget the remainder of the year -- infrastructure investments would provide very long-term growth.

As I mentioned earlier approximately two-thirds of our advertising spending generates one-third of our members. So we are eliminating all of our unprofitable, non-contractual deals to explore in new market key initiatives to seek in members in the channels. The advertising dollars have being redeploy to broadening, deepening our management team and conducting research to thoroughly understand our customer.

We are focused on expanding our management team and adding more people with experience in online marketing and loans. As we're moving to the next era it is important that we have this staff, they can support eDiets positioning as almost expert. We are making progress in this area already.

For example, we've recently hired Beth Gold as eDiets, Director of Research and Education. Beth is an expert on weight loss and was formally the program coordinator for Behavioral Weight Management Research lab at the University of Vermont. Two years as consultant on many online help website and he is recognized leader in the field.

We brought in a seasoned industry expert to consult on our food delivery service. And we've recently hired a VP of Product Management, both of whom we are confident will provide leadership for their respective areas. We also continued to actively search for a CEO, and we have seen a number of very good candidates. We had hoped to have an announcement regarding this soon.

Our other major initiative is to learning about our customer and better understand their needs as it relates to nutrition in fitness services information and products. We are currently conducting a research including looking at the profitability by customer segments. Our plan is to apply our findings, get to a sustainable level of subscribers and build from there. We are confident that understanding our customer will enable eDiets to better position ourselves relative to the competition.

We are also conducting research to better understand our food customer before we hit the accelerator for the food delivery service. This is an important aspect of our long-term business and integral to our overall growth. The food delivery service is currently undergoing a comprehensive evaluation and marketing testing for divisioning and channel placement. Before year-end, we plan on testing it in commercial.

Due to competitive reasons, we don't want to share much more than that, but the food delivery program will be up and running for early 2007. By providing the most relevant consumer experience possible, eDiets will start buying market share and start earning it.

In conclusion, we have narrowed our focus to a key few areas where we will execute with excellence. We are unable to give the full plan now as we are filling some key managing positions and want to ensure that everyone is on board. However, as I've discussed, you can expect to see eDiets right-size our subscription base, move forward with our food delivery, continue to improve our user experience and strengthen our management team. We continue to actively search for a CEO and will provide further details on our strategy following his or her arrival.

Strengthening our infrastructure and building a strong foundation for the business, we are committed to revalidating our operating model for eDiets and return to profitable revenue growth. Given current plan, eDiets is not providing annual revenue and earnings guidance at this time and any previously issued guidance should not be relied on. The Company intends to issue future earnings guidance at an appropriate time after it has filled key executive positions and develop a detailed plan for profitability.

This concludes our presentation at this time. And we ask the operator to open up the call for any questions.

Question-and-Answer Session

Operator

Thank you for that presentation. Ladies and gentlemen, if you wish to ask a question, please press "star" followed by "one" on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press "star, two." Please press "star, one" to begin. Please standby for your first question.

Alison Tanner

Okay. Operator, we're getting some static on the line there.

Operator

And our first question comes from Scott Van Winkle with Canaccord Adams. Please proceed.

Scott Van Winkle - Canaccord Adams

Hi, thanks for taking the question. A couple of items there. Any -- I know, you don't want to give any more information on the food marketing but any idea on timing if you want to look out for an ad and see how it goes?

Alison Tanner

Well, we -- well, planned on the in commercial before the end of the year as we said.

Scott Van Winkle - Canaccord Adams

No, Okay. Not some more specific. Okay.

Alison Tanner

That we'll be doing dispositional market [inaudible] testing.

Scott Van Winkle - Canaccord Adams

Okay. And what type of, you talk about, you know, in additional investments and infrastructure, what type of people are you looking to add or is there a kind of range of people or build deeper in the current job functions you have. Are there new job functions maybe that you're identifying that you didn't have, you know, month ago or a year ago?

Alison Tanner

We already mentioned, Scott, one new job function, which is the Vice President of the Product Management. This is an individual who has a quite a strong background in product application, product management and software product management.

And then, there are -- we'll be doing some broadening of our Online Marketing Expertise in the marketing group. And we mentioned that we have a new Vice President, a Member of Sales and Service. And so we're trying to make sales as much as the component, how we use our call center and other types of -- other than new

Scott Van Winkle - Canaccord Adams

And also are there -- are there existing relationships in to mark on the advertising side that it isn't tough to get out of as you pull back on somebody in profitable marketing spend?

Alison Tanner

I'll let Rob answer that.

Robert Hamilton

Yes. Scott, on the ad thing, obviously we have some flexibility it's good chunk of our aspects eventually on the stock market. So we'll be pulling back where it doesn't make sense, to keep those things going. We are under contract with some of the other larger portals over the next six to nine months.

So we'll be certainly working with those spend. There are areas within those portals that work quite well. We obviously wanted to cut off the unproductive areas. So we have some pretty good flexibility as far as controlling how that cost move forward.

Scott Van Winkle - Canaccord Adams

And with all -- a less aggressive push on the eDiets expense, do you have any minimums that you have established the contracts with your third party or seller of the food.

Alison Tanner

We cannot reveal, Scott, the nature of that contract. But I can tell you we're very committed within this program with this partner as our day and actually [inaudible].

Scott Van Winkle - Canaccord Adams

And then last question on the advertise revenue, you know, you have some new strong partners they have at advertising with you. But we should still expect a fairly direct relationship between your advertising revenue and your subscriber base.

Alison Tanner

First of the ad revenue that are related to the subscriber base are and so that has impacted this quarter. But actually, our website advertising revenue is very smooth and we think there is an opportunity to make it even stronger. We have great content but we think we're going to focusing on with user experience its how we make it even easier for -- to navigate that contract. We've seen more unique coming content portion of the website. We see more PG's per unique and we think there is more we can do there.

Scott Van Winkle - Canaccord Adams

Thank you.

Operator

And now from Southwell Partners, we have Wilson Jaeggli. Please proceed.

Wilson Jaeggli - Southwell Partners

Yeah. Thank you. I'm in the middle of a story so help me here a little bit. Talk about here, a subscriber attrition here. What has caused that, has there been any large contracts cancelled here, is it due to a lack of are you having the normal attrition that you've had in the past and you just cant attract new subscribers, helpless with the dynamics here that's pretty substantial loss in subscriber basis.

Alison Tanner

Yeah. The attrition has been now fairly steady actually about six month and we've seen that now for at least over the last couple of years. So it is fairly consistent. It does very within a week or two but again, pretty steady at about six months of the paying member base is really a function of the new members coming in based on the number of ad dollars that you actually put to work.

And I did indicate early that actually on a year-to-date basis, we're down about a $1 million or so and left that spending them, we were at last year and obviously that the variable to that is ultimately how much you're paying for each member. So it is costing us about 30% more this year then it did last year the comparable CPA in Q2 of '05 was about $60.

So it's surprising, that's driving that and as I mentioned earlier, we're very happy with convergent rates. We're seeing actually up from where it was last year despite a higher price points and the rates are satisfied with the quick through rate that we're seeing here. So we're seeing again some pricing on the especially on the quarter that's driving that the paying base being down.

Wilson Jaeggli - Southwell Partners

Is your strategy to -- I mean your attrition here, you -- what's your strategy here, I mean, now you to expect some level of general decline in subscriber base until you reach a core that you're happy with as you're changing your business model here, or do you need to really for success here, you need to actually increase the subscriber base.

Alison Tanner

Well, this is Alison. As Rob mentioned, we are right sizing that base. We are looking to really turn those customers not by customers that are profitable, but having said that, we actually have we alluded on the last call. We have implemented some new programs to improve retention. We have an overall [technical difficulty] on the lifetime relationship with the customer, but as initial retention tactics are starting to bear some fruit for us.

Wilson Jaeggli - Southwell Partners

Well, then, help me with the retention metrics here, how have they changed over the past couple of years, let's say?

Alison Tanner

Well, we have retention [technical difficulty] at about six-months and what we would expect in terms of the lifetime relationship is that customers or people who have relationship with eDiets, our point would, using different products and services, using our online support or using our free content and we be monetizing them in a variety of sales process, variety of revenue lines.

Robert Hamilton

Just to add to that, I think the company is making some average to engage the user in our experience and when we do that, we typically have a good length of space. So if you join eDiets today and we'll engage you fully in the service with the first or couple of weeks. We have a good chance of keeping you much longer than an average consumer.

So there is a lot of efforts with regards to that and that won't show up for another quarter or two by the time. That clock kind of plays itself out there, but we are optimistic there is a lot more efforts being dedicated to the retention of these members.

Operator

And our next question comes from Richard Fetyko, Merriman Curhan Ford and Company. Please proceed.

Richard Fetyko - Merriman Curhan Ford and Company

Yes, thanks for taking my question. You mentioned that you expect to be cash flow positive in the second half of this year, so wanted to confirm that I heard correctly, and if there is any details you can help us in terms of how you get to that cash flow positive operations in second half of the year, that would be helpful.

And then also on the marketing spend, I'm surprised that you're still spending on portals that much, two-thirds of your ad spend, but you sort of walked away from the portals in the past and spend more on TV as well as search engine marketing and other venues. And then just wondering you know what -- why are you spending so much -- were you spending so much on portals in the last quarter?

And then in terms of the food delivery program, what aspects are you viewing within that food deliver program, or what's held back the infomercial launch, I suppose? Thanks.

Robert Hamilton

All right. I'll take first couple of part then let Alison talk about the food. Richard first question on the cash flow, we do expect to be modest in our cash positive for the second half of the year. As you know in the diet business, traditionally in eDiets, we usually scaled back our advertising. They will be doing that, especially with the unproductive ads. So we do not see any further degradation of the cash balance at this point.

With regard to your second question on the marketing spend, again, the portal spend -- the portal buying thus represents a very, very significant component of our ad budget. We have arrangements with all of the major portals right now. And again, as I did indicate earlier, some components within those relationships are working quite well and other areas are not working.

So we want to make sure we pull those out. And you know, pulling that has always been a very important part of the business. We think it will be going forward, but we just need to unattach ourselves from the areas that are not doing quite well, obviously. So that's exactly where we are right now. We've started that process and that will continue throughout the rest of the year. And then, Al, I'll let you address Richard's comments on the food delivery.

Alison Tanner

Yes, Richard, we have gotten a lot of learning about the meal delivery business over the last couple of quarters. And so based on what we've learned about the product and also about our customer for the eDiets Express product, we are looking across the board, as I said, at the meals new presentation option. And we are also looking at how we can better match up some of the customers coming in with the experience on the website and then the ordering process for instance.

And with respect to the infomercial, as I said, we are going to be testing that on in before the year-end. One thing actually that we've been doing with that is creating additional success stories. We have some people that are extremely enthusiastic about the eDiets Express. And people are now taking those in, and now that's pretty much in.

Operator

Representing Putera Capital, we have Oz Tangen. Please proceed.

Oz Tangen - Putera Capital

Good morning. Can you guys talk about this advertising a little bit more? I mean a couple of quarters ago, you guys came in and said you're going to cut advertising. And then you came back and said you're going to spend some more, do some deals and, you know, increase or maybe get advertising back to where you were initially thinking you're going to spend.

And now, you know, you're cutting back in advertising. I guess, can you explain why? You know, in the second quarter, you spent almost 9.1 million, while your membership has been declining. You were basically -- can you talk a little bit more about that?

Robert Hamilton

Sure. And just to clarify for the listeners, the sales and marketing expenses as other expenses as well, so out of that about $7 million is actually advertising of the 9 million in the sales and marketing number. And, you know, with regards to the question, the challenge that we are seeing specifically in the online portal is really the ongoing increase in run rates, the prices that we're effectively seeing.

A good chunk of the advertising, we're able to actually do on the [spark] market. So you know, we're watching those very, very closely. But those numbers continue to increase on a regular basis. And I think we all understand, you know, what's going on in the online ad environment, especially with the major portals. They continue to have a lot of success drawing in dollars of model stores and that is I think putting some pressure on eDiets as well as other companies advertising in that area.

So you know, from our perspective, we will be reviewing our entire ad spend. Again, most of it -- most of the unproductive areas there in the portals, we'll cut back where we can. If there are others there maybe some areas that are offline and is not efficient, we'll cut back on those areas as well. And again, the majority of our members come in to us at a very, very nice profit below -- much below are the average cost per acquisition here.

So we want to get those economics in line with how we are presently monetizing the customer right now.

Oz Tangen - Putera Capital

I see. So will total advertising dollar spend be meaningfully below last year's levels in the second half?

Robert Hamilton

Well, we still have a fair amount of contracts that we are winding down over the next six to nine months. We'll probably be -- actually, you know, what, they probably need to get back to on that just to kind of give you a little bit more clarity as far as where that comes out. But on a general basis, I can say overall spending will be down. As far as the specific with regards to components, let me give you a little bit more detail offline.

Oz Tangen - Putera Capital

And you mentioned exploring alternative methods. Can you talk about those? What are the alternative methods and is there any reason why you weren't exploring them before?

Robert Hamilton

The question is alternative methods of cost per acquisition.

Oz Tangen - Putera Capital

Yes. There is a significant strategy going on, but let me repeat the question. You mentioned that you're exploring alternative methods to acquire customers on the advertising side. I want to get some more color on that, if you can please.

Alison Tanner

We don't have a further detail on that at this point. But one thing we are looking at is just whole name recognition of eDiets.com, the recognition and appreciation of that within the marketplace that drives people to our site directly.

Oz Tangen - Putera Capital

Okay.

Alison Tanner

And we also mentioned in the press release that we've engaged DZP, which is an ad agency out of New York, which is using the same media we have been using, but producing some new advertisement for us for late Q4.

Oz Tangen - Putera Capital

I see. And Nutrio.com, have you had any new accounts? I mean that sounds like a business, you know, if it is managed well, that can be a very profitable and very attractive business. Have you got any new accounts? What are you seeing there from an outlook point of view?

Alison Tanner

Well, Nutrio, we do think it is a very attractive business, which is why we bought it. And we've said that the profit margins on that are quite good as ASP model. And actually, it is in the 2007 sales cycle right now. Usually, they add one to two accounts per year.

And at this point, they are on track to add a lot more than that, and that is due to improved product offerings, expanded product offerings and also told us that the alliance with eDiets although has been helpful for them with a few potential clients currently in the contract stage, and [you're] there in the form of construction benefits and [technical difficulty].

Oz Tangen - Putera Capital

And, I guess, I mean our take on the meal delivery is obviously, you know, you're looking foresee. And you know, I'm sure you'll be able to attract a strong CEO here. And we're thinking that, you know, it would make sense for the CEO to come on Board and then look at the plans and sign-off on the plans before you make a very significant launch in a business that's very -- that can be very meaningful to you. Is that -- does that make sense or --?

Alison Tanner

We're committed to the four revenue lines in which we are currently involved.

Operator

And our next question comes from the line of Rusty Hoss with Roth Capital Partners. Please proceed.

Rusty Hoss - Roth Capital Partners

Good morning. Just -- and I apologize if I missed this. Can you talk about just kind of the breakout of the advertising spend, which between affiliates, CBC TV and WebPortal? Where that is today and then kind of where you see it going? I know it's still early in the research process, but just kind of your guidance things of where that spread goes.

Robert Hamilton

Rusty, understand, you know, affiliates and search and all that that's very, very successful and profitable program for us. We'll continue to ramp that as much as possible. With regards to the other areas and more expensive areas as far as the client members, a fair amount of that is basically on the CPM type basis.

It's not performance-based. There is, you know -- so I'd say just down and very roughly about maybe 25% of our member acquisitions is performance, other 75% or so is kind of an traditional CPM getting members and expected member of our site and conversion that's get on our end.

Rusty Hoss - Roth Capital Partners

Yes. But the second part, where do you see that going, I mean, web portals, CPM advertising doesn't seem like it's going down any time, since I would assume that they are going to move more toward performance, which obviously would be affiliate in CPC is that--?

Robert Hamilton

Well, we don't what exactly, which you estimated to go from CPM, I will just reiterate, you know, again, we do have some longer term contracts or at least contracts, at least in the next six to nine months with some of these partners. So it sounds like we're going to be down tomorrow. But we will be working with them closely to make sure we optimize it.
And then, obviously going forward after that we'll be more into work with them in their most efficient areas so, you know, that's -- for that process net evaluation we're going through right now, as far as kind of cherry picking with what works best for us. That combined with all the other new revenue streams that we have, you know, obviously we just would be quite optimistic as far as our combined bases, as far as all of the pieces to this business.

Rusty Hoss - Roth Capital Partners

Okay. And just quickly second question is on your ad revenue, obviously down a little bit here but you had mentioned better pricing and I'm curious how would your subscriber number is down, how you got better pricing?

Robert Hamilton

Yes. We've made some changes in that advertising area over the last or so and we are seeing some good things. And obviously it's -- which listing higher pricing ensures purchasing from the outside world. We are obviously able to charge more internally here. We have a highly sort after audience as far as people coming to our site, signing up for our newsletters and as a results we're able to charge market rates with regards to perspective advertisers.

I mentioned some of the Fortune 500 advertisers we do have with thrilled we made great improvements over the last year. And I think you did know that revenue was down like you said a good -- a part of reason is actually because of some performance based ads which actually get tied into a new member here but we do think there is really wonderful opportunity.

As Alison mentioned our content continues to be very, very good. And the original content, you know, we will supplement that with third party [technical difficult] were applicable. And ultimately we do think that will drive more traffic and yield good revenue growth opportunities. And obviously as you can imagine very, very high margin business for us.

Rusty Hoss - Roth Capital Partners

Okay. So some of that is related to your -- would be directly related to your sub-numbers. But some of it is not necessarily related to that?

Robert Hamilton

That's correct.

Rusty Hoss - Roth Capital Partners

Okay. Got it. Thank you very much.

Robert Hamilton

Thank you.

Operator

Representing Odyssey Value Partners, we have Bill Vlahos. Please proceed.

Bill Vlahos - Odyssey Value Partners

Two questions. One, you guys referenced early success with Nutrio, can you elaborate? And then, secondly, Kevin, can you talk a little bit about the CEO search, what sort of person are you're looking for, what sort of background should they have, and just sort of how close are you?

Alison Tanner

Okay. You wanted to have a little more color on the pipeline at Nutrio?

Bill Vlahos - Odyssey Value Partners

Sure.

Alison Tanner

Well, Nutrio has been focusing on some new channels and also developing some extensive set of products over the last quarter, and also it's been quite busy with additional pieces of business from existing clients. And so those will start to show up in the numbers more in the second half.

In addition, as I think you know, their revenue streams tend to work in stair-steps because customers usually are buying blocks of seeds [ph]. So they have a couple of existing clients that are about to bump up in terms of their level of number of seeds of the licensing.

So they are developing additional business with current clients, they are developing additional business through new products, introductions that will be coming, and they're developing additional business from brand new clients, including eDiets.

Kevin Richardson

On the CEO search, Spencer Stuart has done a really good job for generating a -- specking out the prospects and bringing us a lot of different talents that we'd had through. The Board kind of down selected the three candidates. All three are topnotch people. They have direct marketing background, health and wellness, and some other backgrounds.

There's an online presence with each and every one of them. They have to have proven leadership that they've shown to have profitable rapid growth and can handle the online side of things, understand customer acquisition costs, understand the lifecycle revenue management of a customer, and really understand that there is an opportunity here with the four revenue streams to growth geometrically, and kind of put the four corners to the puzzle in place, and then execute on the strategy.

One other things that whomever comes on knows is there's going to be pay and options are tied to performance metrics, and those metrics are going to be so that we can get good returns to shareholders. And I would say that from a timing standpoint we're hopeful that we can have something announced before the quarter is over, potentially sooner.

Bill Vlahos - Odyssey Value Partners

That sounds good. Do you know if all three of the final candidates want the position?

Kevin Richardson

Yeah. The opportunity here is exciting. I mean when you -- it doesn't take much to -- on the recruitment fund, you pull up the stock charter in Nutrio Systems and some other guys and say, can you be half as good, can you be a quarter as good? And if we are you hit a homerun and that's only one quarter of our opportunity here. So all the candidates are very excited.

We've had, like I said, Spencer Stuart did a very good job bringing us some very talented people and one of the harder things is with which one do you go with because they're all -- whomever we choose and whomever we get will be, I think, a spark that this company really needs so that we can execute on a longer-term plan and layout metrics near term that the shareholders can hold that's accountable to.

Bill Vlahos - Odyssey Value Partners

It sounds great. Thank you.

Operator

With Montreal Investments [ph], we have Mr. Eric Greenman [ph]. Please proceed.

Eric Greenman - Montreal Investments

Good morning. This question is for Kevin. Kevin can you elaborate on your short-term and longer-term expectation for your investment and what directs the shareholders, can you expect at your involvement?

Kevin Richardson

Sure. I -- longer-term we see a huge opportunity here in the health involvement space. We have really great employees down there -- that's kind of a hidden jump but we have been surprised with to the positive and there is a lot of opportunity here to really develop the four corners of the platforms that's food fulfillment, the ad and content side, the subscriber side and then Nutrio.

The Nutrio acquisition has been exceeding our expectations. The leader there Steve Rattner has done a fantastic job and the outlook for '07 and this is long-term stable contract there is about better than expected. That's the long-term opportunity here, and we can all play with our numbers and see where -- how geometrically this thing grow rapidly with the right team and leadership in place.

Near term is been retooling and the teams done a I think a great job testing and making sure pulling back on profitable spend and refocusing that spend were works profitable and making sure our customers expense is really good. Between down the next probably, we're only going to hear a few things out of the company because we are in a lot of testing mode and learning more about out customers.

You'll hear about our new CEO soon, you'll hear prior results from how the infomercials doing, you'll hear some profits announcements from Nutrio and potentially eDiets and that these are high profile, well respected companies. It's a new products and services potentially out of the food side and other places.

And then on the outspending front, you heard the big names that want to be in this space and we're doing a good job there. And then at some point and the not so distant future, we'll layout our '07 in longer-term plan and we'll give you metrics to measure it by. And finally, we're implementing in a vision, which is an ERP/CRM system to understand our customers better, a bunch of modules are now in place.

The whole system will be out by Q1 and understanding the customer and economics around that customer really very important when you're direct marketing and direct marketing type company, which is in essence a lot of what we are. So we're really excited about the longer-term, I think there is a lot of things that have been going on in the near term that are going to shed some light in the very near future. So we're very excited about all the opportunities we see.

Eric Greenman - Montreal Investments

All right. Thank you.

Operator

And our next question comes from the line of Kevin Evernham [ph] with Evernham [ph] Capital Management. Please proceed.

Kevin Evernham - Evernham Capital Management

Hello, Alison and Rob can you hear me, okay?

Alison Tanner

Yes, we can.

Robert Hamilton

Yes.

Alison Tanner

Alison Tanner.

Kevin Evernham - Evernham Capital Management

Hi, there's been a lot of stay that I was just wondering. Say -- I saw during the month of June that price capital bar about 800,000 shares and averaged price were roughly $ 4.75, which I think is the largest in center purchase than we've seen anytime. So I was really happy about that. My question is will the window reopen in the couple of days normally or would there be some other information such as the CEO search that would preclude the window from opening for the insiders and the outsiders?

Alison Tanner

Well, Kevin not.

Robert Hamilton

The CEO search is close enough at this point that the window is probably not going to open until that announcement occurs.

Kevin Evernham - Evernham Capital Management

Okay. Thanks for that information. And Rob, if I can ask you one other question. I saw that your August 1st, you have close with price capital, but does Mr. Humble still own a little bit of stock as he still retains some shares -- any time or he is completely out?

Robert Hamilton

Yeah. At this point Dave does only a small amount of stock, but as we mentioned, he effectively resigned from the board and no longer involve with company other than that shareholder.

Kevin Evernham - Evernham Capital Management

Okay. Thanks Rob.

Robert Hamilton

Thank you.

Operator

Again ladies and gentlemen if you would like to ask a question please press "star" "one" on your touchtone telephone.

And our next question comes from the line of Steve Murada [ph] with Viper Capital. Please proceed.

Steve Murada - Viper Capital

Good morning. I want to focus a little bit on Nutrio, some of the comments that you guys made earlier. First what was the run rate of Nutrio when you purchased it? And what expected now given the step up that you have already mentioned, as well as the contract that have already been singed?

Alison Tanner

The run rate of Nutrio is up $3 million in revenue for the year. And the -- that anticipated some step up in the second half. So they are on track for what we expected.

Robert Hamilton

All right. And Steve the great thing as we mentioned earlier the Nutrio contract are all long-term relationships. So we love that recurring revenue stream. These companies are making a pretty significant investment in Nutrio with regards to the development of the results. Again not all that revenue recognized to immediately right up and may be operating for fairly long-term, but we are happy with again that pipeline and how that hold acquisition going after just couple of months.

Steve Murada - Viper Capital

So with the next 12 months the expected revenue is 3 million, how does that compare to the run rate at the moment that you purchased it?

Alison Tanner

That's the forecast for 2006.

Robert Hamilton

Yes. That 3 million we [inaudible] we only have ownership for that for about a month or so.

Steve Murada - Viper Capital

No, but I guess when I'm trying to delineate is, the contract that you guys have signed as well as the step ups are going to be realized that might not have before.

Alison Tanner

As I said, some step ups and some new contracts were contemplated in that $3 million forecast for 2006.

Steve Murada - Viper Capital

And could you ever sell fresh food direct to its clients?

Alison Tanner

There is no reason why they couldn't sell fresh food or other products or services. In fact, one thing that Steve is very good at is identifying opportunities to extend his platform within a particular client.

Steve Murada - Viper Capital

Has that been discussed at all in the contract that you're currently negotiating?

Alison Tanner

Well, we are doing customer research across all types of customers with respect to meal delivery right now.

Steve Murada - Viper Capital

Thank you.

Operator

We have time for one more question. And our next question comes for a follow-up, with Merriman Curhan Ford, we have Richard Fetyko. Please proceed.

And at this time, Mr. Fetyko has removed himself from the queue. I would like to turn the call back over to Robert Hamilton for closing remarks. Please proceed, sir.

Robert Hamilton

Well, we thank you very much for joining us. Obviously as you can tell by our discussion as well as Kevin's comments, we are very optimistic for the long-term future of this company. The things that we have in place are very exciting. We just need to put them together and we will report back to you and hold ourselves accountable and we look forward to having a new CEO Board on board next time we chat with you. And thanks again for your time and please contact us if there is any other further questions that we can answer for you. Thanks again.

Operator

Thank you for your participation in today's eDiets.com earnings conference call. This concludes the presentation. You may now disconnect. Have a wonderful day.

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Source: eDiets.com Q2 2006 Earnings Conference Call Transcript (DIET)