Nu Skin 2010 Annual Report - Direct Selling News

ITEM 7.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operation
should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto, which are included in this Annual
Report on Form 10-K.
OVERVIEW
We are a leading, global direct selling company with operations
in over 51 markets worldwide. We develop and distribute innovative,
premium-quality anti-aging personal care products and nutritional
supplements under our Nu Skin and Pharmanex brands, respectively.
We strive to secure competitive advantage in four key areas: our
people, our products, the culture we promote, and the business opportunities
we offer. In 2010, we posted record revenue of $1.5 billion.
Revenue in 2010 grew 15% based on the success of strong product
launches and distributor initiatives. As of December 31, 2010, we had
a global network of approximately 800,000 active independent distributors.
Approximately 36,000 of our distributors were qualified
sales leaders we refer to as “executive distributors.” Our executive
distributors play a critical leadership role in the growth and development
of our business. Approximately 86% of our 2010 revenue came
from markets outside the United States. While we have become
more geographically diverse over the past decade, Japan, our largest
revenue market, accounted for approximately 31% of our 2010 total
revenue. Due to the size of our foreign operations, our results are often
impacted by foreign currency fluctuations, particularly fluctuations
in the Japanese yen. In addition, our results are generally impacted
by global economic, political, demographic and business
conditions.
Our revenue depends on the number and productivity of our
active distributors and executive distributor leaders. We have been
successful in attracting and motivating distributors by:
• developing and marketing innovative, technologically and scientifically
advanced products;
• providing compelling initiatives and strong distributor support;
and
• offering attractive incentives that motivate distributors to build
sales organizations.
Our distributors market and sell our products and recruit new
distributors based on the distinguishing benefits and innovative characteristics
of our products. As a result, it is vital to our business that
we continuously leverage our research and development resources to
develop and introduce innovative products and provide our distributors
with an attractive portfolio of products. Over the last two years,
we have successfully introduced a suite of innovative ageLOC antiaging
products including the ageLOC Transformation daily skin care
system, ageLOC Edition Galvanic Spa System II and ageLOC Vitality
nutritional supplement, and we are currently developing additional
ageLOC anti-aging products for the future. These products are designed
to positively influence the expression of genes that we believe
play a critical role in the aging process. We also offer unique initiatives,
products, and business tools, such as our Galvanic Spa System
and Pharmanex BioPhotonic Scanner, to help distributors effectively
differentiate our earnings opportunity and product offering. Any delays
or difficulties in introducing compelling products or attractive
initiatives or tools into our markets may have a negative impact on
our revenue and distributor recruiting.
We have developed a global distributor compensation plan and
other incentives designed to motivate our distributors to market and
sell our products and to build sales organizations around the world and
across product lines. In 2008 and 2009, we implemented modifications
to our compensation plan to improve commission payments
early in the distributor lifecycle. The results from these modifications
have been positive. We continue to evaluate further changes to our
compensation plan to help increase distributor productivity and earnings
potential. However, there are always risks associated with making
changes to our compensation plan as there is a degree of uncertainty
as to how distributors will react to such changes and whether such
changes will impact distributor activity in unanticipated ways.
With the launch of ageLOC Transformation, we implemented a
product launch process that has been refined in our South Korea market
that has contributed to our growth in revenue in 2010. This process
generally involves introducing the product in a market through an initial
limited offering that is often tied to a distributor event. The limited
offering typically generates significant distributor activity and a high
level of distributor purchasing. This generally results in a higher than
normal increase in revenue during the quarter of the limited offering.
We typically launch the product for general sales a few months following
the limited offering. Information regarding product launches below
refers to the launch of the product for general sales and not to the
limited offering used to introduce the product. Reference to introduction
of a product refers to the limited offering.
Our extensive global distributor network helps us to rapidly introduce
products and penetrate our markets with little up-front promotional
expense. Similar to other companies in our industry, we experience
a high level of turnover among our distributors. As a result,
it is important that we regularly introduce innovative and compelling
products and initiatives in order to maintain a compelling business
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