eDiets (DIET) investors lose wallet-weight after Q4 results (4Q04 earnings)

| About: eDiets.com, Inc. (DIET)
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Micro-cap online diet company eDiets.com (ticker: DIET) reported Q4 numbers this morning that led to a 20% pummeling of its stock in subsequent trading. Details and comments (look at the percentage of subscription revenue spent on sales and marketing and be amazed!):

Q4 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • Revenue was up 2.8% to $11.1 million.
  • Revenues from membership fees rose less than 1% to $9.76 million.
  • Sales and marketing expense rose 14% to $7.2 million, an astonishing 74% of membership revenue.
  • Net loss was $59,000, or $0.00 per share, versus net income of $1.1 million, or $0.06 per share. No analyst estimates to compare these numbers to.
  • Total expenses, including advertising, totaled $11.2 million versus $9.7 million. The increase "was due to modest growth in sales and marketing... as well as the consolidation of eDiets Europe Ltd.
  • Cash burn from operations for the quarter was $3.2 million, versus $233,000.
  • Cash at quarter-end: $8.8 million.

Q1 Guidance

  • Revenue growth of 10%.
  • Net loss for the quarter due to advertising expenses.

Full Year 2005 Guidance

  • Revenue growth of 12-15%.
  • Positive net income for the year before expensing of stock options.

The company says in its press release:

"During the first quarter of 2005 we continue to increase our estimated margin on newly acquired subscribers and we forecast revenue growth of approximately 10% for the quarter. However, we plan to make the majority of our 2005 advertising investments in the first half of the year, consistent with the seasonality of the diet business, and as a result we expect to report a loss in Q1. Our full year budget calls for 12 to 15% revenue growth and positive net income before any recognition of stock option expense as we reap the benefits of the sales and marketing investments we are making today."

Quick comments:

  • eDiet's challenges: (1) the cost of acquiring customers is rising (due to rising online advertising prices); (2) eDiet's suffers from high customer churn; (3) the company doesn't make enough money from each customer during the subscription period; (4) barriers to entry seem to be very low, and (5) other online diet companies seem to be outspending eDiets.
  • A thought: online dieting is a naturally high churn business. Dieters cancel their subscriptions when they finish the diet. Then, if they later have to do another diet they might want to try a new program (presumably the last one didn't work well enough...).
  • DIET burned $7.7 million of cash in 2004.
  • Current market cap (at time of writing) is about $79 million.
  • Looks like DIET failed the tests it set up for itself in its last conference call.

DIET chart below (it doesn't show todays drop).