Full Transcript of eDiets’ 3Q05 Conference Call - Prepared Remarks (DIET)

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

Here’s the entire text of the prepared remarks from eDiets’ (ticker: DIET) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

David Humble, Founder and Chief Executive Officer
Robert Hamilton, Chief Financial Officer
Allison Tanner, Chief Strategist
Ciaran McCourt, President and Chief Operating officer

Analyst:

Scott Van Winkle, Adams Harkness
Courtney Coles, Adams Harkness
Bill Vlahos, Odyssey Value Partners
Ken Farsalas, Oberweis Asset Management.
Chris Sassoon, Eagle Asset Management
John LaRosa, Market Data
Brian Freckmann, Crown
John Lewis, Osnium (ph).
Paul Johnson, private investor

Presentation


[Operator]

Good day, ladies and gentlemen, and welcome to the Third Quarter eDiets.com Earnings Conference Call. My name is Jen, 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 today’s conference. If at anytime during the call you require assistance please press “*” followed by “0” and our 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’s conference, Ms. Allison Tanner, Chief Strategist. Please proceed ma’am.

[Allison Tanner, Chief Strategist]

Thank you Jen and good morning, everyone. And thank you for joining us for our conference call. Before we begin, I just have a couple of housekeeping items. First, just to go over our Safe Harbor limitations, the statements that we make this morning that are not historical in nature are considered forward-looking statements, and those may involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to be materially different from those which we might express or imply today.

The risks and uncertainties include, among others, that we would not be able to obtain sufficient and/or accessible outside financing when and if we required it; changes in general economic and business conditions; changes in product acceptance 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 ad markets that we utilize; the termination of contractual relationships with our brand partners that license certain brand components and other proprietary information for our subscription program; regulatory actions affecting our marketing activities; and the outcome of any litigation that may be pending against us. For additional information regarding these and other risks and uncertainties, you can refer to our annual report on Form 10K for the year ended December 31, 2004, and to other reports that we file from time to time with the SEC. All forward-looking statements are current only as of date on which we make them, and we do not undertake any obligation publicly to update any forward-looking statements.

I would also like to let you know that all of the speakers today, Rob, Ciaran and Dave, are not in the same location, so the question and answer session that may just cause a slight delay. And to tell you that while we are happily back in our headquarters this morning, with most of our utilities working, we are having some intermittent issues accepting inbound calls. So a better way to reach us if you need to after this call would be through using email or through our investor relations firm, Integrated Corporate Relations; and their contact information is on the top of your press release.

And with that, I would like to turn the call over to Dave Humble, CEO of eDiets. Thank you.

[David Humble, Founder and Chief Executive Officer]

Thanks Allison. And I thank everyone for attending. Last week, Wilma knocked out all services across South Florida. While we were inconvenienced, our virtual business continued to run automatically, generating revenue in diet plans as usual. Even with the lights out, we met last week’s sales goal. As of today, we’re mostly back to normal.

Today, I am pleased to report a 14% increase in revenue to $13.5 million, and record net income of $2.1 million or $.09 a share for Q3. This is versus a loss in the comparable quarter last year. This is the fourth straight quarter where we have acquired subscribers on a profitable basis and a key indicator that we have successfully adapted to the significantly higher online advertising costs we have faced for over a year. Online advertising is still a major means of acquiring subscribers, but our plans are to further diversify to other media.

Today, our focus is continued profitability, but in addition to that, we are repositioning our site as the online authority in the diet category, introducing new diet plans to attract more subscribers, increasing revenue for subscribers, and exploring new channels of distribution.

In Q3, we built a new eDiets site from the ground up to accomplish three objectives. First, to attract more viewers to the site, we added more original content, health and diet news, and tips from Harvard Health, Psychology Today, and the Federal Trade Commission who publishes alerts in their diet category. Second, to bring viewers back, we designed the site to be the authority in the diet category, the place where consumers seeking diet advice, information, products and services can find the latest information regarding diet solutions. And finally, the new site is more advertiser friendly, with larger ad sizes. As traffic builds, the new site will generate more ad impressions and more revenue.

It’s early. The consumer response has been positive; and we are seeing increases in both site traffic and returning visitors. To attract more subscribers, we continue to build out our diet depot, a concept that clearly sets eDiets apart from the competition. Where our competitors offer mostly a single plan, we offer a wide array of plans that give consumers a choice. Our strategy here is moving beyond just weight management into health-related plans that increase our market reach and better position us for the corporate market, a potential new channel of distribution. As an example, two plans that we have in development are health specific, adding to our Type II diabetes, healthy heart and low-cholesterol plans.

To increase subscriber revenue, the challenge is convincing the consumer that online diet solutions are a viable alternative to the 40-year old drive to model. We have three things going for us in this respect. First, the increased awareness of overweight in America; our belief, consumers are willing to pay more for online solutions; and finally, internet technology will let us do today what just last year was not cost effective. We now have the ability to really connect with our subscribers in ways that will add value to our service, strengthen retention, and bring us closer to the price point of the offline drive-to-model.

While we have been successful marketing online and on television, there are other channels of distribution to explore. One of several opportunities we see is doing in the U.S. What has been a success for us with Tesco in the U.K., Tesco’s well respected reputation will help us make the right connections in the U.S. supermarket industry.

To summarize, we continue to acquire subscribers profitably. We are well positioned in the growing market where consumers are becoming aware of the risks of overweight, and we have substantial upside potential on product pricing, eCommerce and new channels of distribution. We have been the innovators in the market, and we will continue to lead rather than follow. I am very excited about what we have in the development pipeline and the potential of these initiatives to grow our business. Thank you again for attending, and I will now turn the call over to Rob Hamilton, our CFO.

[Rob Hamilton, Chief Financial Officer]

Thanks, Dave, and good morning everyone. As Dave mentioned in his opening remarks, we are very pleased with our current business trends and our third quarter results. Third quarter revenue increased 14% to $13.5 million in 2005, compared to $11.8 million in the comparable period last year. That income for the third quarter of 2005 was $2.1 million or $.09 per diluted share, compared to a net loss of $1.4 million or $.07 per share for the same period last year.

The company’s revenue for the nine months ending September 30, 2005, increased 21% to $41.6 million from $34.3 million during the same period in 2004. Net income for the first nine months of 2005 was a loss of $.1 million or $.01 per share, compared to a loss of $9.8 million or $.50 per share for the first nine months of last year.

Our revenue growth was mainly from a 15% in increase in revenue per member due to a combination of price increases implemented in late 2004 and our expanding portfolio service of service information and product offers. We are showing growth and earnings as a result of continued efficiency and leverage in our business, including more efficient advertising spending. Our new subscriber acquisition costs fell to 46% of estimated subscription revenue per member. And that is about an estimated 800 basis point improvement, compared to the same period last year.

Other revenue which includes the sale of advertising on our website and in our newsletters, for all these from our Tesco relationship in the U.K., and eCommerce and commissions activities was up 14% over the prior year. As Dave mentioned, we are working to improve our ad sales and are in the process of reorganizing this area of our business; and that includes the roll out of a new online magazine format. Initial reception of the new format has been positive, and we expect that over the next several quarters, that as impressions increase, ad revenues will follow.

Our gross margin remained constant at 86%. As a reminder, cost of revenue is mainly credit card fees and royalty payments due under our licensing relationships. Third quarter sales and marketing expense, which includes our online and television advertising, marketing personnel and production costs totaled $7.7 million, down from $9.5 million the year ago period. A decrease was expected as advertising accounts for about 80% of our sales and marketing costs, and we continue to be more efficient with our ad dollars spent. Offline spending new accounts for over a quarter of our ad spending, and we see that number growing in the future.

As a reminder, the second half of our year tends to be seasonally softer, and our expenditures scale down accordingly. Based on the seasonality and our ability to become more efficient with advertising spending, we expect our sales and marketing expenses will be down in the fourth quarter of this year, compared to last year, as we continue to eliminate unproductive ad volume.

General and administrative expense total $1.3 million for the third quarter of 2005, compared to $1.4 million in the comparable period last year. At the percent of revenue, our GNA was 10% for the third quarter, as compared to 12% in the third quarter last year. Our income from operations was $2 million, compared to a loss of $1.4 million in the prior year quarter. Cash from operations during the third quarter of 2005, totaled approximately $.4 million, versus cash used of $.8 million in the year ago quarter. I would like to note that in the prior year, most members pre-paid for services three months in advance, while currently, most members now pay one month in advance resulting in less up front cash for us.

Turning to our balance sheet, cash and cash equivalents at the end of September 30, 2005, grew to $7.7 million, and we do expect our cash balance to grow in the fourth quarter. In addition, we have to make future cash flows from our current paying members as of September 30, 2005, to exceed $10 million. Though this is not for accounting purposes, we do look at these future cash flow streams as an asset.

With regards to guidance for 2005, the company now expects to earn between $.04 and $.06 per diluted share in fiscal 2005, compared to a loss of $.49 per share in 2004. Revenues of 53 to $54 million are expected for the full year. Please note, we are in the midst of our budgeting process for 2006, and although not complete, we are targeting the 2006 revenue growth rate at least comparable to 2005, and with GAAP profitability for the full year. That concludes my comments. Now, we’ll turn the call over to Ciaran McCourt.

[Ciaran McCourt, President and Chief Operating officer]

Thank you, Rob. The results that Rob reviewed are the best indications of our overall progress as we drive growth and invest in the future. Over the past nine months, we have made a number of improvements in our business model that have resulted in strong revenue growth and improved earnings.

Factors including price increases, more effective CPA management and modest overhead reductions all helped our improving numbers. Probably, our most important factor was the improvement in our cost to acquire a new customer, otherwise known as our CPA. This can be attributed to flexible ad buys both on and offline, and continued success with our commission driven sales, rather than straight ad buys, such as search and direct response to you.

Our TV media had a particularly strong quarter, as we recorded our most efficient CPA. In addition, our ability to manage our media optimally so that we deliver the most cost effective ad placements with the most targeted message has helped drive down the CPA. Finally, the release of programs, as Dave mentioned, like the new Mediterranean Diet, helped diversify our marketing message and offering, which has increased our conversion.

In addition to our product innovations, I would like to give you an update on several of our strategic operational initiatives. In the third quarter, as Dave said, we began testing a new authoritative approach to our homepage. The early results are promising in that the conversion from our homepage has improved. If any of you have not visited our site recently, I invite you so to do. You can see how we intend becoming the authority for consumers interested in a healthier lifestyle.

We are encouraged about the direction that the ad revenue and eCommerce side to our business is taking. Though ad revenue growth this quarter trailed our subscription revenue growth, there were some noteworthy achievements. Firstly, our CPM rate increased 67% year-over-year, as evidenced by the quality of our recent advertisers. For the first time, we are seeing major pharmacists, finance companies, and CPG’s advertise on our site. We also had our first significant homepage base in this quarter. We believe our diet depot strategy will help grow this part of the business. We can publish and digitize a great variety of diets, offering vendors a unique audience for their products and service.

In addition, we are setting a target to increase our ad impressions by a minimum of 50% in ‘06. That’s combined with the higher quality advertisers means that this should be a lucrative market for us going forward. Though traditionally as a company we were focused on subscription revenue, it appears that we have a lot of potential in this area.

In addition, our eCommerce revenue, including sales of vitamins and products, increased 22% year over year from our store. We will indeed expand and re-design the store in ‘06. In addition, we see a meal delivery service as an additional opportunity here. We are currently testing this service in our sales process.

Going forward, we see ad revenue and eCommerce becoming a more significant piece of our business models. These two areas are particularly significant, as we can match our expenditure and revenue more closely than we can our subscription revenue. This can help change the dynamics of our business model.

Other notable successes this quarter include a bookazine (ph) deal with Time, Inc, which will launch in January ‘06, and will be available in checkout stands across the nation; our international revenue continues to expand with our U.K., royalty stream from Tesco, beating our expectation; and Germany and Spain revenue growing, albeit off a very modest base. In addition, we are in early stages in exploring some new international licensing deals.

Overall, we believe the strength of our innovation in new products and services, combined with our improving operating efficiencies will continue to increase profits and increase our revenue for the long term. Even though we have made strong improvements through the first nine months of this year, we believe we are in the very early stages of an exciting marketing opportunity. In ‘06, we want to be ready to embrace new platforms to engage with our customers. As we look to the fourth quarter of ‘06, we will continue to drive growth and invest in the future in order to produce long-term shareholder value.

With that, operator, I believe we are ready for questions.

Question-and-Answer Session

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