Obesity is, well, a big market in the U.S. -- roughly two-thirds of Americans are obese or overweight. Companies like Weight Watchers
Last week, the company reported its first-quarter results. Revenues increased 18% to $13 million. However, the company sustained a net loss of $3.5 million, which compares with a $3 million loss in the first quarter of 2004.
Then again, the company's accounting approach exaggerates losses. That is, the company recognizes advertising expenses when advertisements are run, whereas subscription revenue is recognized ratably over the subscription cycle (the subscription cycle is roughly six months). In other words, if eDiets increases advertising expenses -- which has been the case lately -- profits will take a short-term hit.
The advertising expenses are showing results, though. Growth in the subscriber base exceeded expectations for the first quarter, as well as the second quarter. For the year, the company forecasts revenue growth above its prior guidance of 12% to 15%. The company also expects to generate positive net income.
Basically, eDiets has been increasing the revenue per customer and also retaining customers longer. The company is constantly adding new products (such as its popular Glycemic Impact diet) and, in fact, was awarded Forbes.com's "Best of the Web."
Clearly, Web-based diets have many advantages. They offer anonymity, choice (Atkins, Slim-Fast, and so on), and personalization. No doubt, eDiets has done a tremendous job in leveraging the Internet.
To continue to grow, the company needs to spend a significant amount on advertising. However, based on the company's current cash position ($6.9 million) and the negative cash flows last quarter ($2.1 million), this is no easy feat. (As an aside, cash flow felt an impact on a comparable basis from the effects of shifting from a quarterly upfront billing to monthly billing in late 2004.) Rather, the company may have to go on a corporate cost diet -- and, in turn, maybe a profit diet, if lower advertising expenditures fail to keep revenue growth up.
Fool contributor Tom Taulli does not own shares mentioned in this article.