eDiets.com, Inc. Q2 2008 Earnings Call Transcript

Sep.21.08 | About: eDiets.com, Inc. (DIET)

eDiets.com, Inc. (OTC:DIET) Q2 2008 Earnings Call August 7, 2008 8:30 AM ET

Executives

Stephen J. Rattner – President, Chief Executive Officer

Thomas J. Hoyer – Chief Financial Officer

Kim Evenson – Senior Vice President of Marketing

Analysts

[Dietrich Bass] – Canaccord Adams

Paul James – James Investment Advisors

Operator

Welcome to the second quarter 2008 eDiets.com Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference Mr. John Mills of ICR.

John Mills

With me on the conference call are Mr. Steve Rattner, President and Chief Executive Officer of eDiets; Tom Hoyer, Chief Financial Officer; and

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 second quarter earnings release which went out today or went out yesterday after the market closed. If you have not received the release, it’s available on the Investor Relations portion of the eDiets website at eDiets.com.

Before we begin, we’d like to remind you that statements which are not historical in nature are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties which 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 pressure on the price resulting from competition; volatility in the advertising markets utilized by the company; a delay, disruption or suspension of our supply of prepared meals from its vendor; regulatory actions affecting the company’s marketing activities; and the outcome of the litigation pending against the company.

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

December 31, 2007 and other reports that we may 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’ve 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. With that it’s my pleasure to turn the call over to Mr. Steve Rattner. Go ahead Steve.

Stephen J. Rattner

Thank you John and welcome everybody. Today I will provide an overview of the quarter and our Chief Financial Officer Tom Hoyer will give additional detail on our operating and financial results. I will then conclude the prepared portion of the call with a few closing remarks before we take your questions.

As we discussed on our last call, implementation of our new enterprise platform resulted in significant operational and fulfillment challenges during the first quarter. While we made significant progress rectifying many of these issues, the process has taken longer than expected and continued to impact our second quarter performance.

Second quarter revenue decreased 15% to $6.5 million as we slowed down our advertising and focused on shoring up our infrastructure. And we recorded adjusted EBITDA of ($1.4) million. Despite the technology issues and lack of advertising, our meal delivery program continues to pick up momentum with revenues growing over 280% from last year.

For the past few months, we intensely focused on improving the IT platform and to prepare for several key B2B launches in the second half of the year and to position ourselves for a successful 2009 diet season. Our management employees have been extremely hard at work addressing immediate customer needs and preparing longer term solutions since we last spoke.

Two weeks ago we implemented new robust payment, billing and fulfillment functionality that has resolved the order generation, fulfillment and settlement issues we are experiencing. The new functionality also allows us to better serve our business clients. This major launch with the culmination of our efforts during the second quarter and cleared the way for us to move forward with additional features and functionality.

For example, in the last week alone we launched two new B2B client programs where we provide the website, including order processing, filling, fulfillment, community and support. We also launched new and improved community on our eDiets.com website in response to customer needs and which we expect will further engage our customers.

I’m also pleased to report that we have made significant progress with our meal delivery and food supply chain issues. As you may recall, in the first quarter we were finding it increasingly difficult to accurately forecast our fresh food needs, resulting in large amounts of wasted food and disproportionate increases in meal delivery expenses.

We have three initiatives underway to substantially improve our meal delivery margins; a new inventory control method, SKU optimization, and price increases which have thus far met with little resistance. On the B2B side of our business, we’ve experienced short term delays in launching a few of our key B2B programs as the implementation cycle has been longer than originally anticipated. However, we continue to sign and launch new deals. Year-to-date we have signed eight new agreements with B2B clients and have launched five new client programs.

As is typical with any product launch, our clients are typically engaged in a phased rollout process. A typical rollout for an enterprise-wide branded program, including online services, digital meal plan, content, service, support, community and meal delivery begins with a test market which often is geographically defined. In most cases this is followed by a broader geography test, often incorporating functionality improvements and then finally it is expanded to the full market availability.

In short, a full enterprise-wide partnership can take months to develop and successfully launch. During the second quarter we signed an agreement and launched a program with national health and wellness expert Jillian Michaels of NBC’s popular weight loss show, The Biggest Loser and Waterfront Media, the largest privately held online health company and operator of Jillian Michaels Online. This is an exciting partnership as The Biggest Loser has 15 million TV viewers weekly and Jillian has approximately 2 million subscribers to her website and daily email newsletters.

The new program, which launched in June, is powered by eDiets and distributes a co-branded meal plan for in-home delivery called the Jillian Michaels Meal Delivery Plan. It is a comprehensive, weight loss program that features premium quality, freshly prepared meals and snacks in calorie smart portions.

In the second half of 2008, we anticipate signing two to three more additional deals. And finally, we continue to improve our management team and recently welcomed Laura Klein as Chief Information Officer. Laura joined us from [Sharon] Health Care and I’m confident her technical skills as well as her substantive health and wellness background will be invaluable to eDiets.

I would now like to turn it over to Tom to review our financial results.

Thomas J. Hoyer

Thanks Steve. For the second quarter our revenue was $6.5 million, compared to $7.6 million for the corresponding period last year. The 15% quarter over quarter decrease was primarily due to continued declines in our digital plan revenue following an over 70% reduction in our advertising spend. And also issues related to the new technology platform. That decline was partially offset by increases in our meal delivery program.

Digital plan revenues for the second quarter were $2.5 million versus $5.7 million in the same period last year. Our meal delivery revenue was $2.7 million, up from $700,000 in the same period last year. We ended Q2 with approximately 55,000 paying diet plan members, which include both online subscription members as well as meal delivery members. That’s down approximately 40% from the same period last year and from approximately 68,000 paying diet plan members at the end of 2007.

We recorded 38,000 new diet plan members on a $2.8 million ad spend in the first half of 2008. The second quarter we recorded [inaudible] diet plan revenues which include corporate licensing, ad sales and royalties of $1.2 million versus $1.7 million last year. The decrease was primarily the result of lower advertising revenues as the number of eDiet site visitors decreased.

Our corporate licensing business unit contributed $800,000 of revenue during the quarter compared to $600,000 last year. At the end of the quarter, we had $1 million of deferred revenue related to corporate licensing.

For the quarter gross margin was 46% compared to 42% in the first quarter of 2008. Meal delivery continues to grow as a percentage of our overall sales and while it’s a lower margin business it’s a faster payback on the investment to acquire a customer. The sequential margin improvement is due to our successful efforts to reduce product waste during the quarter and also to the price increase that went into effect in early June.

As Steve mentioned we have made significant progress in both reducing our cost of food, particularly as it relates to waste, and passing along cost increases to our customers. Our new agreement with our food supplier will enable us to achieve a substantial improvement in gross margins, with the full effect realized in the fourth quarter of this year.

Sales, marketing and support expense which consists primarily of television and internet advertising expenses, and the compensation for these activities, was $2.3 million compared to $4.4 million in the second quarter of 2007. Of that total, approximately $0.8 million was allocated toward advertising and media expense compared to $2.8 million for the same period last year.

Regarding G&A expenses we recorded $1.8 million of cost in the quarter compared to $1.7 million last year. The increase was mainly due to recruiting costs. Our adjusted EBITDA was ($1.4) million for the second quarter compared to ($0.4) million in the second quarter of last year.

We’ve invested approximately $800,000 in capital expenditures for the second quarter but most of it related to our new technology platform. And we estimate we’ll spend another $850,000 of CapEx for the remainder of 2008, primarily for the completion of the technology platform and for enhancements to the technology infrastructure.

Lastly, turning to our balance sheet on June 30, 2008 we had $2.8 million of unrestricted cash and $3.8 million of deferred revenue. During the second quarter we borrowed $2.6 million from our majority shareholder Prize Capital in the form of a senior secured note. Prize has committed to provide another $2.5 million, which we will borrow when necessary.

In addition, we expect to achieve improvements in our operating performance during the third and fourth quarter compared to our second quarter results based on the improvements we have made in our overall business platform during the second quarter, and also be successful in impending launches of our B2B initiatives. That concludes my comments and I will turn it back to Steve.

Stephen J. Rattner

Thanks Tom. In summary we continue to believe in the long term opportunity. Our entire organization has been hard at work rectifying the fulfillment and supply chain issues and I am very pleased with our progress. We significantly increased the functionality of payment, billing and fulfillment and improved our site experience with the launch of community which we believe will improve our ability to deliver on our digital meal delivery and B2B businesses.

We reduced the complexity and waste in our food supply chain that will lower costs associated with inefficiencies and improve our margins. While we have withdrawn previously issued guidance given the challenging macroeconomic conditions and delays in key B2B launches, we do expect to see operating losses decline in the third and fourth quarter as we benefit from the resolution of our technology and supply chain issues.

We continue to focus on fine tuning the platform for upcoming B2B launches in our meal delivery program in order to enter the post-holiday diet season in a strong position. Also for those of you in the Boston area we will be at the Canaccord Adams Conference in Boston on August 12. The audio presentation will be webcast and slides available on our website. And we’ll be participating in Citi’s annual Healthy Lifestyle Seminar in New York on September 16.

With that, I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Dietrich Bass] – Canaccord Adams.

Dietrich Bass – Canaccord Adams

You know the revenue was pretty strong relative to our estimate and I just want to get some more color on the back half of the year. And I understand it’s a seasonally lower period for the diet season. And I’m just kind of wondering, you know, if you step back and look at the macro, you know, is there more pressure coming from the poor economy? Or do you see any uptick in the competitive environment?

Stephen J. Rattner

The macro economy I mean there’s definitely a [pinch] on consumer spending. I think that that’s being experienced everywhere. As far as the competitive environment there’s nothing new in this space. There’s lots of competition. We think we have a very unique offering with quality products, so we’re getting ready to compete.

Thomas J. Hoyer

For the second half of the year, you know, as we’ve talked about before our B2B portion f our business we have, you know, we’re focused on that for the second half of the year. Because you’re right for the B2C to the consumers is seasonal, cyclical. So we’re focused on the B2B portion for the second half of the year.

Dietrich Bass – Canaccord Adams

And I guess going to your B2B partners, I know you don’t want to give out who they are, but could you perhaps comment on what type of customers they are?

Stephen J. Rattner

Yes. It’s not that we don’t want to; in many cases we can’t. They’re different channels. As we did announce we did launch the Jillian Michaels Meal Delivery Program with Jillian Michaels and with Waterfront. There’s a health insurance provider that we are launching with, as well as a fitness center. So there’s different channels and different ways that we’re going to be able to reach our consumer base, their customer base.

Dietrich Bass – Canaccord Adams

Switching over to the food delivery side, what do you guys have to do successfully on the IT side, the fulfillment side, manufacturing, etc.? And I guess where do you stand on all those initiatives to make this a successful channel for you guys?

Stephen J. Rattner

We’ve been working very hard since last year and up until a couple of weeks ago on the IT side and getting things right on the IT side, which we have done. We are continuing to improve our methods of operations on improving the supply chain, coming up with methods to lower our food costs and distribution costs to the consumer to increase our margins. Those things are currently underway and we expect to have all those things in place within the next several months, but we’ve made significant progress in that area, starting a couple of months ago as well.

Dietrich Bass – Canaccord Adams

You mentioned a price increase in June. How much was that on average? I also thought last quarter you talked a bit about perhaps reducing the number of offerings in the program and I was just wondering if you saw any impact this quarter on the margin side from that?

Thomas J. Hoyer

You know success in meal delivery for us we’re kind of focused on three success factors. One was raising the price. The second one was simplifying the fulfillment process which included on the front end reducing the number of SKUs down to the most popular meal plans, and gaining the efficiencies in our fulfillment process by not having so many SKUs running through our food manufacturer.

The third item was to fix our IT platform so that we didn’t suffer from waste and refund issues. We talked about those in the first quarter a little bit which we have largely accomplished. Though the progress that we’ve been making in terms of simplifying the SKUs that’s still underway. The price increase we did and it seems to be sticking fairly well. And fixing the IT platform as Steve noted we got a major, major piece of it done two weeks ago. So we’re moving along pretty well.

Dietrich Bass – Canaccord Adams

You know most of the CapEx this year was to the IT platform. I guess, you know, looking out to ’09 is there any other major projects I guess where your CapEx will be employed?

Stephen J. Rattner

We don’t anticipate any.

Operator

Your next question comes from Paul James – James Investment Advisors.

Paul James – James Investment Advisors

You didn’t mention anything on retention rates. Can you talk about how that’s going?

Stephen J. Rattner

Our retention rates have been increasing. We believe as we continue to make improvements to the program we’ll continue to see this increase. Historically satisfaction levels are high. As our last survey revealed 82% of our customers surveyed would recommend the product to a friend and 52% would definitely recommend it. So we feel that we’re going to continue to see these trends and we have seen increases in our retention rates over the last several months.

Paul James – James Investment Advisors

Okay. But you don’t want to give a number, right?

Stephen J. Rattner

Not really.

Paul James – James Investment Advisors

Tom you mentioned earlier that Q3 and Q4 there would be a substantial improvement in gross margins on the meal side. Is there any way you can give a range on that or anything that we can point to to kind of – I guess the question is in Q3 and Q4 do you expect that we’ll see kind of a maximum gross margin or do you expect that to come maybe in Q1 ’09 when revenues might be a little stronger?

Thomas J. Hoyer

Yes I’d say in Q4 we won’t reach the maximum gross margin in the fourth quarter. We should get about 70 or 80% of the way there in the fourth quarter.

Paul James – James Investment Advisors

Now Steve you mentioned on the B2B side these deals can take a little while to get going. Are there any things that are starting right now or that’s going to be starting very soon that can move a little faster than the several month process?

Stephen J. Rattner

Oh, we’ve started some. We mentioned that we started Jillian Michaels back in June and started that process and launched. And we launched a couple of things last week. So the pipeline is very – we have a very full pipeline and we’re now maturing a little bit more, we’re in different stages of the process as we continue to bring things on.

But most of these companies are very large and substantial and have a product rollout process that follows a certain methodology. But coming into the fourth quarter we should start seeing some fruition of some of the rollouts that happened earlier on and be really cranked up for the first quarter of next year.

Paul James – James Investment Advisors

Getting back to Jillian really quick, is Waterfront planning on spending anything on advertising on the bigger fluids of this fall? Do you know?

Stephen J. Rattner

They are continuing to tweak the program and their advertising and they will spend, once they feel that they have got things where they need to get them to get the return on investment they’re looking for.

Paul James – James Investment Advisors

On going forward the future advertising spend, I mean it’s like you said, Prize will put in another $2.5 million if necessary. So I’m assuming that from an operational standpoint you guys are going to be doing quite a bit better. But from an ad spend factor going forward and I’m sure there’s not going to be much in Q4 but in Q1 ’09 are you pretty committed to that quarter? From an ad spend perspective?

Stephen J. Rattner

We’re going to increase advertising when we’ve made the margin improvements to our meal delivery program and also when we can buy media at a rate that gives us the return on investment we’re looking for. And from that point we’ll measure and monitor the results weekly and we’ll prudently scale new spending as appropriate.

Paul James – James Investment Advisors

Tom real quick on the CapEx in the third and fourth quarter? What do you expect to see for those two quarters?

Thomas J. Hoyer

About $850,000.

Paul James – James Investment Advisors

For the two quarters combined?

Thomas J. Hoyer

For the two quarters combined.

Paul James – James Investment Advisors

And digital subscribers do you see any residual affects on acquiring digital subscribers when you’re advertising for your meal delivery program?

Stephen J. Rattner

Yes we do actually. We’ve been looking at that data and as we are spending on – our TV spends directly related to meal delivery do enhance our subscribers.

Operator

And there are no further questions. I would now like to turn the call back over to Mr. Steve Rattner.

Stephen J. Rattner

Thank you. We look forward to updating you again next quarter.

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