Description
I have recommended this company 2 other times and been right on each occasion (albeit in dec ’03, stock went +175% in 3 months, before the subsequent decline). I have been very patient before recommending again but now the market is presenting investors with an extraordinary bargain. Simply there are half a dozen ways an investor can make between 45-100% with little downside (-10%), in my opinion.
I want to make clear that this is not a market timing call, I feel this is a very attractive business that will get recognized over time for the following reasons:
Attractive business/Economics:
• 85% gross margins
• No inventory
• DSO’s 7 days
• Historically CAPEX = 10-15% of Cash from Operations
• Gross profit per employee is $365,000 vs. YHOO $225,000.
• GP dollars grow 3x as fast as fixed costs
• 85% of revenues subscription based business (predictablility)
• #1 player in industry on subscribers and #2 on revenues (WTW charges $45 reg fee, DIET does not)
• Industry growth 25-40% growth
• Oligopoly: Weight Watchers, Ediets, Water Front (South Beach/Denise Austin)
• extremely high barriers to entry: highly fragmented, EDIET has exclusives rts to best brands
• 70% of cost is variable and can be canceled on short notice
• Over 200,000 people visit site a day
• 13,000,000 opt-in newsletter subscribers
• 60% of online dieters have gone through EDIET, Building Brand
• Spending 68% of market cap or $1.60 per share, they can cxl this on very short notice, either they will see decent return or cxl. They are focused on for every $1 spent expect $2 in revenue back.
Ediets has exclusive rights to best brands in industry:
Atkins (#1 low carb plan)
Zone (owned by abbott labs/Dr. Sears)
Slim-Fast (owned by Unilever)
Nutrisystem (30 year old brand)
Bristol Myers Squibb (type II diabetes diet)
Dr. Phil (Celebrity talk show host)
Dr. Perricone
Bob Greene (Oprah Winfrey Personal trainer, can use her image to market)
Bill Phillips (Famous fitness author sold over 4,000,000 books)
(collectively these celebrities have sold well over 40,000,000 copies of diet books)
Plus 9 proprietary Ediets brands
This is a short cycle business, Weight Watchers generates very significant Cash Flow (27% Operating margin) from users over average of 3-4 month stay.
Quick Overview:
• Barriers-to-Entry: Retaining the exclusive online rights to leading diets is a significant barrier to entry for eDiets.
• Such exclusives on #1 brands reduces eDiets customer acquisition costs and increases subscriber retention rates/life-cycle.
• eDiets can acquire subscribers for less than half of what branded partners can due to proprietary advantages (Double click real time ad tracking, Storm Post for 13,000,000 opt-in newsletter subscribers and brand awareness (200,000 people to web site a day, $35,000,000 ad budget)
• Brands are everything in Diet business, its all about customer acquisition costs, since diet is building #1 brands, will ultimately lead to critical mass and subscribers can switch without penality.
• Without #1 brands, customer acquisition costs prohibitive. (Atkins could not make it on stand alone basis, tried twice before coming to Ediets)
• There is nowhere else for brands to go! Ediet and waterfront are the only companies with diet depot strategy, Ediet ad budget is most likely 4x that of waterfront and diet traffic is significantly higher than waterfront.
Valuation
EV $39mm = Gross Profit Dollars $29.1 LTM
.8x ev/revs
Industry Transactions (2002-2004)
EV/revs Acquirer 12 qtrs CF
Hoovers (HOOV)12/02 2.6x Dun & Bradstreet ($4.4mm)
Udate(DATE)12/02 3.9x Interactive
Lending Tree (TREE)05/03 5.5x Interactive ($24.3mm)
IGN Entertainment (IGNX) 05/03 1.9x Great Hill Partners ($48.6mm)
Pinnacor (PCOR)7/03 1.56 Pearson ($26.8mm)
Hotwire 9/03 6.0x Interactive ($9.1mm)
Sportsline (SPLN)7/04 1.26x Viacom ($45.5mm)
Average for group 3.24x ev/revs
Ediet (DIET) .80x +$5.8mm
Peer Group ev/revs
Nutrisystem (NSI) 1.6x
Weight Watchers (WTW) 4.8x
Medifast (MED) 1.4x
E Diets (DIET) 0.8x
Avg for group 2.15x
Private market transactions
• July 2003 - Abbott Labs buys Zone Perfect for $160m cash. Zone Perfect was generating $85m in revenue, yield at transaction price of 1.9x revs.
• Oct 2003 - Goldman Sachs/Parthenon Capital buy 80% of Atkins for $533mm, or about 3.3x revenue.
• Private transactions on the food side of branded diets have averaged about 2.6x revenue. Given this valuation with respect to eDiets’ $50mm in revenues plus cash, implies a $6.75 share value.
• We think eDiets is worth far more due to attractive unit economics, a recurring revenue model, a diet depot strategy (multiple brands), and multiple high margin/high growth revenue streams.
I believe that DIET will/and should be at 15% CF margins as company grows and should be over 30% once business matures. This will be done either with current management team or strategic buyer will do it for them.
Business does not consume much cash, since 2000 revenues +4.4x fold, employee head count tripled, signed extensive new channel partner list, built extensive in house tracking and monitoring systems (double click and storm post) and generated $3.2 in cash from operations. DIET is essentially unchanged price wise since coming public.
Strategy
Gross Profit dollars grow 3 times as fast as fixed costs,
At $100mm in revenues
Assuming ad ylds= revenue per sub per cycle/cost to acq
Ad yld/EBIT margin
1.7 = 1.2%
1.9= 7.3%
2.1= 12.4%
2.3= 16.5%
2.5= 20%
2.9= 27.5%
3.1= 30%
3.3= 32.5%
3.5= 35%
I think overtime can get close to 3.0 yld due to focus on both sides of coin: revenue per sub (untapped superstore launched less than 4% of revenues) and also as they slash acquisition costs from using other outlets (TV, Channel partners, celebrity spokesman, Cross Marketed in stores). This would Equate to nearly a $1 per share in earnings, could take 2-3 years.
managements goal is to grow top line while being reasonable with bottom line,
dominant market 40-50% market share with unique strategy diet depot (most others have channel conflict or cannot generate Economies of scale to make it work with one brand)
Frank Milano is the guy to talk to at Ediets.
Weakness
Need to be less dependent on Online advertising to acquire subscribers. This is happening, over last 90 days went from nearly 100% online dependent to 75%. Television ads appear to be extremely promising. I believe that online ad market is beginning to weaken, many new entrants paid very high rates in 1H04 and when see ROIs will pull.
Product segmentation: Gold, Silver, Bronze packages vs. one size fits all to maximize revenue. They have started doing this recently as I have seen on site, selling help that was free now costs $1.99 a week an effective 67% price hike.
Accountability/Metrics: I am pushing management hard for metrics in quarterly’s: revenue per sub per cycle, cost to acquire subscriber. This is going to get done. I also made introduction to hire Frank Milano, formerly of Hoovers, Dell, Exxon, to take over Investors Relations. Very sharp and honest guy, he started in early June 2004. (has MBA from university of Chicago, very experienced and knowledgeable re: price elasticity he will be a big help to DIET)
Ill Fated: management decisions with PIPE last April (but that was done at nearly 2x current prices)
CEO and Board owns 35% of equity; CEO is 68 he would be willing to sell at right price
Demographics: Significant Market Opportunity
o 200mm/60mm overweight/obese Americans
o 1.7bn/312mm overweight/obese worldwide
o Obesity has overtaking smoking as #1 cause of preventable death
o 34mm attendees in North America have attended a Weight Watchers (WTW) meeting
o 25mm books sold in ’03 on weight loss
o 2.5mm people tried online dieting since ’99.
• Operating Leverage/Scalability: Internet model requires one additional employee for every 12,000 eDiets new paying customers.
• Diet Services Market Highly Attractive: Total US market is $2.4b and growing at 10%, while the online diet market is $150m market growing 25-40%. Weight Watchers (WTW) offline 33% EBIT margin (2003).
• Access to Distribution: eDiets has #1 access to distribution in highly fragmented industry: 65% of people that have ever tried online dieting (1.6m subscribers) have gone with eDiets. Most heavily visited site with several hundred thousand visits a day, or about 25% more traffic than its nearest competitor, Weight Watchers online (WTW).
• Subscription-based Recurring Revenue Model: 85% of revenues are subscription based with average user staying 7.4 months (www.ediets.com).
Revenue Per Sub Per Cycle: The average revenue per subscriber per cycle is $100-$105. The following outlines the factors that drive this mount:
o $2.99 price point per week
o 7.4 months cycle
o $13 from product up-sells and advertising revenues
Why Online? What are the benefits of dieting online?
o Cost less than half of offline with many more benefits.
o Convenience: 24/7 access, private, 24/7 online and call center support, peer support of over 100 support boards, anonymous.
o No off-line hassle of driving to center, parking, babysitters.
eDiets Benefits for Partners - The following highlights some benefits of eDiets.
• One stop shop of #1 branded diets for consumers
• Most heavily visited diet sites (25% more visitors than WeightWatchers.com).
• eDiets has won the most industry awards (Forbes “Best of Web”, PC Magazine “Editors Choice”)
• Diet Portal - eDiets should add an additional 5-8 branded diet partners over time.
• Brand Awareness – eDiets has a six year first mover advantage (65% of all online dieters have come through eDiets).
• Repeat Customer Base – Average subscribers stays seven months per diet, but then returns every two to three years.
COMPETITION
Traditionally, dieting has been an off-line business. More recently, eDiets has revolutionized the concept of dieting via its diet portal strategy. The following highlights the competitive landscape:
• Oligopoly: Top 3 players have 90% share of online diet market (eDiets, Weight Watchers, Waterfront Media).
• Weight Watchers.com is #1 in revenues (about $90m in revenue 2004, mainly driven by offline subscribers buying online products and paying $45 registration fee).
• eDiets is #1 traffic/users
• Waterfront Media is #3 in revenues (own South Beach diet) ($25mm, approximately 50% from online diet).
FINANCIALS & VALUATION
Financial: eDiets Revenue Growth - eDiets revenues is up 10x in 4 years from ’99 to ‘2003 without branded diets. I expect substantial growth via diet portal strategy going forward.
• ’99 $2.4mm
• ’00 $11mm
• ’01 $24mm
• ’02 $28.6mm
• ’03 $38.4mm (launched online diet depot strategy)
• ’04E $50mm
I believe that as eDiets optimizes its strategy, we could see similar growth over next 5 years via
• International expansion
• Additional brands
• Potential to double revenue per sub per cycle
• New customer acquisition channels
Why eDiets? eDiets has three high growth, high margin revenue streams:
o Subscription based sales (83% gross margin)
o Advertising revenue (90% gross margin)
• Online Store revenue (95% gross margin, company gets % of sales)
Awards
In its May 4, 2004 issue, PC Magazine selected eDiets.com its "Editors' Choice" beating out Weight Watchers® and others in the category.
Nielsen//NetRatings has ranked eDiets.com as the #1 Most Trafficked Health, Fitness & Nutrition Site World Wide for the week ending January 4, 2004 with over one million unique visitors, which represents a 119% traffic surge over the week prior. Read full story here. Nielsen//NetRatings also consistently ranks eDiets.com as an Internet leader for percentage of female viewers.
eDiets.com has been named Forbes.com "Best of the Web" in the Diet and Nutrition category as well as a "Forbes Favorite" in its Spring 2004 issue. eDiets.com had previously been honored with the Forbes.com "Best of the Web" rating in the fitness and nutrition category in 2000.
Catalyst
CATALYSTS
A) Record Revenues and Best B-sheet in company history, while trading at all time low P/sls
B) CF+ for 3Q04, High Cost ad contracts expired 1 July 04
C) .8x ev/revs vs. 3.25x ev/revs buy out avg, but #1 player in group with Great brands
D) Hidden Asset: Ediet UK, could buy or sell, off b-sheet asset, (Spain, Germany, Ireland, UK)
E) 5-7% buy back possible
F) Units + Price Hikes huge impact to top/bottom line: Fitness upsell now $3.99 a week was $2.99, Last Week started selling Off line help $1.99 a week (previously free equivalent to 67% price hike), possible registration fee.. considering well over 200,000 subscribers could see significant revenue growth just by optimizing pricing.
G) Liquid and dirt cheap