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Ediets.com Inc. (OTC:DIET)

Q4 2007 Earnings Call

March 4, 2008 4:30 pm

Executives

Mr. James A.Epstein – Chief Legal Officer, Sec. and Gen. Counsel

Mr. Stephen J. Rattner – President

Mr. Carla Cox – Interim Chief Financial Officer

Ms. Kim Evenson – Sr. VP of Marketing & Sales

Mr. Raymond Costa – VP of Strategic Partnerships

Analysts

Greg Badishkanian – City Group

Scott Van Winkle – Canaccord Adams

Cole James – James Investment Advisers

Bill Vlahos –Odyssey Partners

Adam Mizel – Aquifer

Tom Claudif(ph) – Graham Partners

Operator

Good day ladies and gentlemen and welcome the Q4 2007 eDiets.com Incorporated Earnings Conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. John Mills, from ICR investor relations.

John Mills

Good afternoon everyone, thank you for joining us today for the Fourth Quarter Fiscal 2007 Conference Call, within the conference call will be Mr. Steve Rattner, Presedent and Chief Executive Officer of the eDiets. Also with us today is Kim Evenson, Senior Vice President of Marketing, who will be available to answer questions at the end of the call.

By now everyone should have access to the fourth quarter earnings release, which went out after the market closed. If you have not received the release, it is available on the Investor Relations portion of the eDiets website at ediet.com.

Before we begin, we would like to remind you that statements we make 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 today.

The risks and uncertainties include, among others, that the Company will not be able to obtain sufficient and/or acceptable outside financing when and if required, changes in general economic and business conditions, changes in product acceptance by consumers, a decline in the effectiveness of sales and marketing efforts, loss of market share and pressures on prices resulting from competition, volatility in the advertising markets utilized by the company, any delay, disruption or suspension of the company's supply of prepared meals from its vendor, regulatory actions affecting the company's marketing activities and the outcome of litigation pending against the company.

For additional information on this, you can refer to our Form 10-K for the year ended December 31, 2006, 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.

Also, this presentation will discuss adjusted EBITDA, which is a non-GAAP financial measure. We believe adjusted EBITDA is an important measure to better understand our operating performance and for incentive compensation purposes. We have included a table reconciling adjusted EBITDA to GAAP net income in our earnings release, along with an explanation of why we believe adjusted EBITDA is a useful measure.

We have also posted our earnings release, which includes our adjusted EBITDA reconciliation table on our corporate website at eDiets.com.

And with that, it's my pleasure to turn the call over to Mr. Steve Rattner. Go ahead, Steve.

Steve Rattner

The format of today’s call will be a bit different than previous calls as I will provide an update on our strategic plan and additional detail on our operating and financial results before we open the call up for questions. While we are not satisfied with our fourth quarter and full year performance, we are pleased with the progress we have made on our strategic initiatives and excited about the opportunities ahead. We are building a solid foundation for future growth by providing end to end solutions for our customers and healthy lifestyles.

In 2007, we dedicate all of our resources to positioning (audio gap) to capturing larger share of the weight loss and wellness market place. We have developed a new technology platform launched our freshly prepared new delivery service, expanded our bid of E-business keeping the existing corporate relationships and include some of the best talent in our industry, all that effort to help us move from a direct response, internet advertising model to a multi-pronged business model that captures cross selling opportunities in digital diets, meal delivery, other E-commerce, support community and further leverages to escort along its capabilities to service our customers.

When we acquired nutrio.com in mid.2006, we acquired its web applications site, robust technology platform and a highly possible licensing model. Since that time, we have greatly expanded our B2B licensing efforts in the private label institutional market and these strong corporate relationships are paving the way to next evolution of eDiets.

Just as we created the digital diet depo and subscription based business model, we are creating a new integrated business model where we power major websites with co-branded and private label, offering weight loss and along those programs. We will help corporations launch and power these programs taking responsibility for everything from handling their web technology and order management and customer support across a variety of key diet along these business lines.

In many cases, these current key solutions are co-branded and increased awareness of the eDiets brand and partnership with our clients. These accounts strike – eDiets.com and drive revenue in our meal delivery, on-line subscription and e-commerce modules directly. In other cases eDiets is a fully invisible partner benefiting from the operational synergies of improved utilization of our business systems at significantly higher volume levels. This is a transformational model that offers tremendous revenue opportunities, dramatically lowers our customer acquisition and operating costs – benefiting both the B2B and B2C segments of our business.

The first example of this next evolution of our model is our agreement with black system at client consumer healthcare. To provide customized meal delivery plans for use with their market leading alli products for weight loss. Alli is the only FDA approved over-the-counter weight loss product and has had more than two million years since its launch in January. Our alli friendly food plan has been specifically designed to work with the alli-weight loss aid, providing the convenience of our freshly prepared portion-controlled meals that will help alli users maintain and reduce calorie, low fat diet that is consistent with their lifestyle. Currently our fresh meal delivery program appears on the alli.com home page.]

In addition, we have significant capabilities to provide condition specific management plans that while smaller niche markets have positive recurring revenue opportunities. A recently announced partnership with the DaVita, a leading provider of dialysis services demonstrates this capability with the launch of the DaVita diet helper. An all-purpose online meal planning tools and make kidney friendly meals easy to plan, prepare and track.

We are excited to announce we have a strong pipeline of enterprise wide deals where we powered diet and wellness programs and that we can market directly to per-consumer based. In DaVita these days and expect to announce several soon. We have three additional deals already signed and anticipate three to four more in 2008, all household names, the bearing inside and significance. Keep in mind that the implementation and sale cycle for corporate partners is longer, so you should not expect meaningful contributions into the later part of 2008 and beyond.

Now, for an update on our technology platform since this is the tool that will power eDiets on our partner sites. I am pleased to say that we have completed the migration to the new platform and look forward to the second phase of increasing functionality. This is a major undertaking and is laying the foundation for our future, but its delayed some short-term endeavors including spending at levels we had planned for Q1, we will continue to fine tune the technology and work on the front end of this site and improve customer service so we can ramp up volumes significantly. Building on that team, while our business is traditionally highly seasonal, peaking in Q1, we expect this year to book that trend as we gain benefits from the completion of the technology migration, additional business lines, partnerships and stronger spending as the year progresses. Revenue growth on our direct to consumer business will come from increasing return for acquisition by actively broadening the product portfolio to include a full line of supplements and robust health and wellness store by the end of Q2.

Retention activities will actively reward customer for longer length of stay with gifts from our other divisions and to reduce in cross sale behavior while extending total lifetime value.

Finally, with respect to organizational development, we continue to make progress on adding talent across all area of our business. Today I am pleased to announce that Tom Hoyer has accepted the position of Chief Financial Officer, we are excited and fortunate to have Tom join our executive management team. He brings over 20 years of senior corporate finance experience to eDiets, having served as CFO of several public and private companies, this include Digital Angel, NationsRent, and 15 years at Fluor Corporation. We look forward to Tom joining us and are confident that he will be a strong contributor as we enter the next phase of our growth.

Now I will deal with the financials more thoroughly. For Q4, our revenue was $6.9 million compared to $9.5 million for the corresponding period last year. For the year, revenue is $29.7 million compared to $48.8 million in 2006. The year-over-year and quarter decrease is primarily due to the decline and digital plan revenue but as I mentioned we are seeing strong momentum in our new meal delivery program, expect even more so as we ramp up our relationship with GSK and Alli.

Digital plan revenues for Q4 were $3.9 million or 56% of revenues versus $7.2 million or 76% of revenues in the same period last year. For the full year they were $19.5 million representing approximately 66% of revenues compared to $38 million or 78% of revenues in 2006. Our meal delivery delivered a 26% increase in revenue in 2007 and I am pleased to say it performed above expectations in the fourth quarter. We are seeing strong traction in our Q4 meal delivery revenue with $1.6 million up from $1 million in Q3 as we increased our hours spent.

We expect continued momentum in our meal delivery as GSK begins to market our Alli Family Meal Delivery Plan. We ended Q4 with approximately 68,000 paying diet plan members, these includes both online subscription members, as well as meal delivery members, down from approximately 80,000 on September 30th. We reported 24,000 new diet plan members on a $ 1.3 million ads spent. For the full year, we recorded a 116,000 new diet plan members on a $10.5 million ads spent.

While more of our ad dollars are currently going toward meal delivery. We believe that our integrated approach will benefit the whole company and drive down our overall customer acquisition cost. In Q4 we recorded nine diet plan revenues, which includes corporate licensing, ad sales and royalties of $1.5 million versus $1.8 million last year. For the year other revenues were $6.3 million compared to $7.6 million in 2006. Our corporate licensing business unit contributed $0.8 million of revenue during the quarter and $2.6 million for the year, compared to $0.6 million and $1.7 million, respectively last year.

At year end, we had $0.5 million of deferred revenue related to corporate licensing, compared it to virtually nothing a year a ago. For the quarter gross margin was 69% compared to 80% in Q4 last year. For the year, gross margin with 76%, compared to 80% in 2006, the decrease was primarily due to our growth our lower margin meal delivery business. Our goal is to manage gross margins, along with our average value per customer and average cost of acquisition for customer. Sales marketing and supports expense, which consist primarily of internet and television advertising expenses and compensation for these activities decreased 29% to $3.2 million in Q4, compared to $4.6 million in Q4 of 2006. For the year, sales and marketing expenses decreased 44% to $17 million compared to $30.4 million in 2007. As I mentioned, more of our ad dollars are going to our meal delivery, but the spending benefits the whole company, as users engage with a broader range of offerings, when it comes to eDiets.

Regarding G&A expense, we recorded $1.8 million of cost in Q4 and $7 million in 2007, compared to $1.9 million in Q4 last year and $8.5 million in 2006, when we had hired professional consultancy cost. Our adjusted EBITDA with $(-)0.4 million for Q4 versus $(+)1.2 million in Q4 2006 and $(-)2.2 million in 2007 versus $(+)20 thousand in 2006. We invested approximately $2.2 million in CAPEX in 2007 with most of it relate to our new technology platform and estimated we will $0.5 million of CAPEX in 2008. And, lastly turning to our balance sheet, on December 31, 2007 we had $7.1 million of unrestricted cash at $3.7 million of deferred revenue, which will able to support our growth plans for Q4.

In summary, we are very encouraged by our progress and so far and we are excited about the opportunities ahead. We believe that our enthusiastic and experienced management team, strong brand name recognition and different shape multi-prong business model with fully integrated technology platform will enable us to deliver superior value to our customers and build long-term value for stockholders.

Turning to guidance, we are maintaining our previously issued 2008 revenue guidance at $15 million and are providing gross margin guidance of 49% for the year. We expect to re-evaluate our guidance, as we gain further insight into our new B2B business model, with that I would like to open the call to questions.

Question and Answer Session

(Operator Instructions)

Operator

Your first question comes from the line of Greg Badishkanian with City Group.

Greg Badishkanian - City Group

Maybe you can provide some color on your marketing strategy, particularly for your meal delivery business in 2008, what type of media channels are you going to use, in terms of celebrities? Do you have anything in the pipeline, maybe you could use more color on that?

Kim Evenson

In terms of we are going to 2008, we will continue to focus on DRC(ph) dancers as it is the primary leg of the marketing plan and we talked about - we are trying to grow the lower cost EPA channels with partnerships playing a key role for us and evolve new e-mailed letters potentially can help the program in advancing. We are not going to say that we are eliminating the opportunity to do any celebrity testimonial, but right now we do not have identified on the horizon.

Greg Badishkanian - City Group

Has Glaxo provided some estimates in terms of what they are going to spend on marketing in 2008 for Alli. I believe that is part of the strategy, but have they talked about that publicly?

Kim Evenson

We cannot really share any details, in terms of their marketing fund related to it.

Greg Badishkanian - City Group

Right, okay, fair enough. And, also just looking at the overall diet industry, weight watchers, nutri-systems, is all over the softness in January and February. I am just wondering if you have seen that same trend or if you are in a different position than they are given what you sell and what they sell?

Steve Rattner

Yes, we are in a different position. One is based on what we sell and what they sell, but also, because we are starting at a lower point than they are and truthfully we are just coming out of the gates and we are gaining some momentum here. So, we are very enthusiastic about where we are staying in the first quarter.

Greg Badishkanian - City Group

Right, good, thank you very much.

Operator

Your next question comes from Scott Van Winkle of Canaccord Adams.

Scott Van Winkle - Canaccord Adams

Steve, I do not know if you can give us specifics, but I loved to know what you are thinking on the gross margin on the food side to get to that 49% blended.

Steve Rattner

Part of the revision that we used and the script, actually Scott, was we are taking in the business. Our company is really looking at ourselves as having paying members and we are going to start defining with our paying membership based is, including meal delivery, but because of the cross selling opportunities across all of that, the margins that are included in driving that is going to be very dependent on that. So, the media drives all of our products, although we are very directed in bringing in the meal delivery customers with our immediate plan right now.

Scott Van Winkle - Canaccord Adams

You mentioned the spending not as aggressively in the first quarter and the corporate relationship obviously with Glaxo and what you have in the Harper starting to contribute in the back half of the year. Are those two co-related? Do you look at this as, because you got this business coming in the back half of the year that you said that you do not need to be quite as aggressive in the first quarter or were you really not ready to go out and throw money at marketing and thinking that if you better find in the mall or you will be better spending in the back half?

Steve Rattner

I think there are three aspects. One of them is to continue to better find the model. We will get better efficiencies in the back half. The other thing is that with launching our new platform, it is a new platform and there are issues to work through with any new platform of this size of project we began and thirdly the way the immediate cost rolled out in the first quarter, as far as availability of media at the rates that the metrics that we have made out for. There were some issues that prevent us from clearing and getting the clearance that we wanted in some of the media that is starting to free itself up now. So, again we are very metric-driven and we will continue to operate that way and they sure gain the best return our marketing development.

Kim Evenson

And even when we are not, we will hold on to it for later investment.

Scott Van Winkle - Canaccord Adams

Yes and on the food program, have there been any major changes either that you are offering or what you are able to deliver or anything. It has been awhile since I actually sampled the products, are there any improvements or changes or debt or rent the products that were changed.

Steve Rattner

We continue to add product and improve our product and that is something that we will never stop. I think we initiate the five-day plan to get people a lot more flexibility, but the Alli plan took up a tremendous men of our resource is getting ready to launch that plan, so that was very significant. In addition, we have improved our package and labeling of our products. It shows up in for the consumer looking a lot better. We are working on a couple of other plans. I think we may have discussed on the last call that our more conditions specific and again doing some testing around those plans and try to better understand and get all those details worked out.

Scott Van Winkle - Canaccord Adams

Respecting in Glaxo’s need to keep information tight, competitively, do you have the ability to take results from that plan and use them to help market the opportunity to other corporate customers? Are you going to be given the opportunity to share some results and use as a selling method?

Kim Evenson

We will be added in aggregate level and able to share some information that we think that will be very helpful to us and we do look in a general way to bring the partnership on line. We are very pleased about the effects that we accept that we are having our own corporate position.

Scott Van Winkle - Canaccord Adams

Lastly, talking about the range of potential customers on the corporate side for the private branded meal delivery program, is there also a range of type of companies and how they market? I am wondering if is there anyone out there with a captive audience that we would not think as maybe the normal or the logical partner for eDiets here that seize an opportunity to monetize our customers based?

Kim Evenson

Yes, I think we have examined a lot of partnership. I think the first one that you will see are probably more predictable in nature, but there have been a wide range under consideration.

Operator

(Operator Instructions)

Your next question comes from the line of Cole James with James Investment Advisers.

Cole James - James Investment Advisers

On the Alli deal, I have read some comments regarding potential revenue possibilities for that, they are pretty wide, we are talking from, I think it is $ 4 million on the lowest side and the $25 million on the high side. Can you give us what your expectations for that program?

Steve Rattner

There are first partners that we just launched in a less than a week ago and it is included in our current guidance, we will continue to look at that and update guidance, as these relationships come to full wish in a little bit more and we have a little bit more color on our selves, but we are continuing working very hard with Glaxo and with all of our other partners on the marketing plans. So, I think that we are very excited about working with one of the leaders in the industry and believe that the partnership is going to be a very profitable and one that we can build a very strong relationship with. We are very optimistic, but at this point there is really no numbers I could share with you.

Cole James - James Investment Advisers

Yes it is pretty early, I understand that. You mentioned there are three other deals that were signed and out of curiosity, did you say that the Alli guide or the Alli possibility or revenue projects from that is not in the guidance or it is?

Steve Rattner

It is in the guidance as of now.

Cole James - James Investment Advisers

I am sure you have modeled something, but these three other deals that you said were signed that you mentioned, you are pretty quick, by the way. And, you said that there are three or four more in the pipeline, can you give us any kind of clarity on the size of those? Are they similar to the Alli deals, smaller or anything?

Steve Rattner

Yes, they vary in size. Again, for us we are very involved in how they will be marketed, because the size of the company versus the marketing plan is very important. So, we did say varying in size and some of them might we do believe are sizeable as Alli, but we are still working at its earlier stages right now. We are still working on these things and we are trying to remain very tempered about our B2B business and overall in our guidance, really is a B2B segment without any over allocation to any one of those partners.

Cole James - James Investment Advisers

So, you got those the Alli one, you got three more, signed any time frame one with the press release on those?

Steve Rattner

Just starting seeing someone shortly.

Cole James - James Investment Advisers

Okay and you said there are three to four more in the pipeline, the other thing, you said that you are enthusiastic about the first quarter, even though you were not able to spend like you have wanted to spend, so I am curious, what do you think is driving this quarter to make you enthusiastic about, because it is not Alli that has really gone yet, just the website launch?

Steve Rattner

We are happy with first and foremost, the product acceptance and second of all we are happy with our return on our invested dollar and as Kim eluded too, we will hang on to that dollar when we could not spend it at the right time but we are very happy with what we are seeing as we gotten significant more scale than we had in the fourth quarter, we are very pleased with the fourth quarter results that we had from our tests, and what we had from the initial state is of our scaling. We are very happy with what we are seeing on those returns on capital. We would have liked to have been able to spend more a bit certain of the fact that I just mentioned prevents us from doing that.

Kim Evenson

Just to build a little bit and we saw some one time occurrences in Q1 that certainly did not help our Q1 overall results; but the patterns that we are seeing that are generalizable and will move it forward in terms of the business are one that we feel very good about and we will keep the fun bags over the year.

Cole James - James Investment Advisers

One more deal here, as regarding the digital subscriber said that the non-meal delivery, are you seeing a flattening out of that business or any kind of increase; do you expect that to increase over 2008?

Kim Evenson

We continue to expect that this whole business to shrink, I mean that we do not expect that to be a major growth channel, we are looking at subscriber based overall and we expect the overall subscriber-based to grow.

Steve Rattner

Right, so total member paying based will grow and that is the way we are redefining as we move into these other aspects of our business, once the store as well as our nutritional supplement line and with meal delivery we do expect a growth in total paying member based.

Cole James - James Investment Advisers

One last thing, I just had to note here too and based on your comments on this, so unlike previous years or typical dieting companies fluctuations in revenue you think we can look for more of the sequential quarter-over-quarter increase in the revenue throughout this year?

Steve Rattner

I think this year is a little bit of aberration for us, that we are getting this launching and getting the relationships go but I think that is what we could expect to see.

Operator

Your next question comes from Bill Vlahos with Odyssey Partners.

Bill Vlahos -Odyssey Partners

Most of my questions were answered, but since I have you on the phone Stephen, did you not in the press release that there was 2 million end-users on the Glaxo product is that right?

Steve Rattner

They have announced that through December 31 that they had 2 million stores on the Alli program.

Bill Vlahos -Odyssey Partners

Would you be in the position to sort of state a rough market goal or a (inaudible) if you got even 1% of those it would really move the needle quite substantially for you?

Steve Rattner

Yes.

Bill Vlahos -Odyssey Partners

Even a mere 1% would change you company?

Steve Rattner

Yes, 1% would be a significant change for us. We are just very tampered with our comments about in putting up any kind of projections with our Alli relationship. The numbers that you put out there are as far as the 2 million that is public information that Glaxo has put out there.

Bill Vlahos -Odyssey Partners

Okay and you made a comment about how you would re evaluate your guidance; but presumably your guidance is only assuming a very, very modest amount of success in general with your B2B offering, is that a fair statement?

Steve Rattner

I think it is assuming a modest amount.

Operator

Your next question comes from Adam Mizel with Aquifer

Adam Mizel - Aquifer

A couple of things on the partnership angle; number one will you be doing future B2B deals that do not involve food as a component as you have in the past or all featured will just include food?

Steve Rattner

We will be doing both, but we have invested a lot of time and money in this new platform. We do want to leverage that new platform were integrated into our relationships our business relationships, but not all of those relationships will demand a food component, some may demand a support component or a commerce component as well so we have more ways and more modules so to speak to capture a larger share of our partners’ customers.

Adam Mizel - Aquifer

I am going to try a different direction to try to understand how to think about the size and potential economic as various of these corporate partnerships is very hard and so you are really talking about two different types; you talked about larger Glaxo-Alli type relationships so I described that and I would say large fortune 100 consumer product companies and then you talked about more niche-oriented strategies like what you are doing with DaVita; and each of those both the larger and the niche give us a sense of the key elements that you look for in a partnership in terms of relationships the kinds of things that make it work and the size range of any of those that would be useful. I do not care how big Glaxo is, to be honest right now because I understand why you cannot tell me but you are going to do press releases and we are not going to know how to even remotely try to describe any value without some understanding of what you look for to make a deal worth your interest and time, so anything you could provide us would be very helpful.

Steve Rattner

We are looking for a couple of things, first and foremost we are looking for them to drive customers for us, and we are looking for someone who is committed to put some skin in the game as committed to marking that program for a period of time because we do believe that these things do take time to work through, and so those are the things that we are looking for; and someone who has a customer-based that they are willing to reach out to and market too and drive customers and that really is the determining factor. You are right, I agree with you 100%, the name is nice but without the rest of these it is not going to translate into much rush and so that is what we continue to push forward on and might want to participate with.

Kim Evenson

That there were also gilding towards the organization where we can have an enterprise wide impact and we offer both the meal delivery solutions they certainly will not be part of every plan, but taking our clients with the existing customer basis that then can also cross out within our capabilities that can cross out from meal delivery to online and other e-commerce modules is important as well.

Adam Mizel - Aquifer

As you are competing for these; who do you typically compete against and are they able to offer a competitive fresh food product like we offer?

Steve Rattner

Not only that, it is more than not being able to offer the competitive fresh food product; that is why we spent a year, we are not finished but building this - platform that really incorporates and not only the front-end web applications and tools but also the order management systems and the customer support and the integration into fulfillment and to other and to store and e-commerce store. And so with all those things as well as the differentiated product in having the logistics work out for them; it is a pretty monumental task for other people to do and so that is really what we have been doing for the last year and what we are super excited about.

Operator

Your next question comes from Tom Claudif(ph) with Graham Partners.

Tom Claudif(ph) - Graham Partners

How do I view this in terms of advertising, in other words, did you pay Alli to be on their website did Alli pay you; did you do the work for free and then it looks like a good way to acquire customers, I am just trying to get an idea of the cost of acquiring customers in that manner.

Steve Rattner

I cannot talk about the specifics of the deal itself but we did not pay Alli and they did not pay us for this part of the program. It is a marketing arrangement that we have that I cannot disclose, we have earned their NDA and cannot disclose the financial arrangements of that particular agreement. I hope I answered your question the best I could.

Tom Claudif(ph) - Graham Partners

Do you share revenues at all or you cannot say that either?

Steve Rattner

Yes I cannot say how the deal is structured.

Operator

There are no further questions at this time; I would now turn the call back over to Steve Rattner for the closing remarks.

Steve Rattner

Thank you and I look forward to speaking with you next quarter.

Operator

Thank you for your participation to today’s conference. This concludes the presentation.

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