Q1 2020 Earnings Call
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Yes.
Good morning, ladies and gentlemen, and welcome to the Palatine Interactive one P. trainee earnings conference call. At this time, all participants I know listen only mode.
They will conduct a question and answer session and instructions will follow at that time.
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I know this conference call is being recorded I would now like to kinda confidence over to your host Ms. Allison lightly you may begin.
Good morning, and welcome to Palatins first quarter earnings conference call for fiscal year 2020, joining us on today's call to answer your questions are John Foley, our co founder and CEO William Lynch, Our President and Joe what worth our CFO a copy of today's shareholder letter is available on the Investor Relations section of our website at <unk>.
You W. W. Dot one Palatine dot com and have been furnished to the FCC on form 8-K.
Before we begin I'd like to remind you that our comments on responses to your questions. This morning reflects management's views as of today only and will include statements related to our business that are forward looking statements under federal Securities law.
Actual results may differ materially from this campaign, Dan or implied by these forward looking statements due to risks and uncertainties associated with our business.
For a discussion of the material risks and other important factors that could impact our actual results. Please refer to our SEC filings and today's shareholder letter both of which can be found on our website.
During this call we will discuss both GAAP and non-GAAP financial measure a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter with that I'll turn the call over to John who will begin with a few opening remark.
Hi, everyone. Thank you for joining our first earnings call I want to kick off point, saying that I'm very proud of what the Palatine team has accomplished over the last few months and the results. We delivered in the first quarter go pellets on team.
Specifically, let me jump into our first a few highlights for the quarter.
We obviously completed or IPO in September raising over 1.2 billion of capital as you heard US say several times, we put our members first and we're excited about what these funds raised in the IPO will allow us to do to expand our global footprint to build a robust pipeline of products and continue innovating on our software or Conte.
And at our platforms.
Second on October 12, we launched home trial, which allows customers to try the pellet on bike at home for 30 days after delivery risk free obviously, the stays true to our members first obsession and we are encouraged by the initial sales impact that we are seeing.
In October we closed the acquisition of one of our long time, Taiwanese based bike manufacturing partners chronic fitness, who I personally worked with for years going back to as far as 2012, and who collaborated with US one creating our award winning peloton bike. We're excited that the acquiring pulp sorry, we're excited that acquiring.
<unk> gives us more control over scaling our supply chain in order to stay out in front of the high demand for our products.
We will continue to work with our Oh with other great manufacturing partners in Taiwan and beyond as we believe that as smart to be dual sourced on all of our core products.
Lastly, I want to give some highlights some financial highlights for our strong operating and financial metrics for Q1.
Connected fitness subs ended at over 500560 2000.
This representing 100 in a 3% you're on your growth rate, allowing us to serve more than 1.6 million members.
We continue to see low churn with the average net monthly connected fitness churn at 0.90%.
As you get a as you can guess engagement is the leading indicator of retention and in Q1 or connected fitness subscribers averaged 11.7 workouts per month, showing significant year on year growth of 31% versus the same period last year.
Interestingly, combining the subscriber growth and the engagement growth I want to point out that last quarter last year Q1, we saw a 7.1 million workouts on our platform.
And this Q1 that number jumped to 19 million workouts from our members representing 171% you're on your growth rate and the number workouts on the call upon platform.
Revenue was up 228 up to 228 million, which represented 103% year on year growth, while gross margin held steady at 46.1% adjusted EBITDA loss was negative 21 million and adjusted EBITDA margin was nine point that was negative 9.2% showing an improvement.
<unk> of 283 basis points over Q1 of last year.
Well now turn things over to Joe Woodworth, our CFO to give a quick review of our guidance great. Thanks, John we remain focused on driving strong connected fitness subscriber growth and engaging and retaining our growing scaled member base. Our subscriber guidance is based on the early success. So calm trial, which was launched on Sept.
Member trial.
Our expectations, where a robust holiday in new year's resolution season, and continued low average net monthly churn of our connected fitness subscribers for Q2, we expect and even connected fitness up about 680, 685000 that represent 88% growth at the midpoint.
The full year 2020, which ends in June we expect and B connected fitness job of 885890, 5000, representing 74% growth at the midpoint.
And is expected to rise slightly but stay below 1.05% in Q2 and averaged below 1.05% for the full year fiscal 2020, it it's slightly increasing.
Our 0.90% churn in Q1, primarily due to home trial and the continued rolling off a prepaid connected fitness subscription.
Revenue, we expect Q2 to come in at a 400 and intend to 420 million that represents 58% growth at the midpoint and for the full year fiscal 2020, we expect 1.4 or five to 1.50 billion of revenue representing 61%.
Growth at the midpoint.
A couple of additional notes on gross margin for Q2, we expect our overall gross margin in the range of 39% to 40%. When you look at it on a segment basis, we will expect for Q2, what connected fitness gross profit margin in the range of 37% to 38% and a subscription.
Contribution margin of 58% to 59% for fiscal year 20, we expect overall gross margin of 41% to 42% essentially flat year over year are connected fitness gross margin for full year, we expect to be in a range of 38% to 39% and our subscription contribution margin in the range.
60% to 61%.
Our connected fitness gross profit margin decline year over year is attributed to the continued mix shifted sales to try and continued investments that we're making to scale our supply chain and logistics platform to meet the high demand for our products our subscription contribution up improvement over the last year are attributed Tennessee.
Nitpicking reduction in expected content cost for a pass to you and to a lesser extent, but continued leveraging of fixed costs.
Producing our content, we will continue to invest in building our brand supporting our growth scaling operations internationally, improving our end to end member experience and recruiting and retaining the best teams across all business functions at Palatine.
With all of that said for adjusted EBITDA for Q2, we're expecting a range of negative 70 million to not get a 65 million of adjusted EBITDA loss, which represents a negative 16.3% adjusted EBITDA margin at the midpoint and for full year 2020, we.
We expect an adjusted EBITDA of negative 170 to 150 million, which represents an adjusted EBITDA margin of negative 10.8% at the midpoint of that range.
With that we will now move two questions. So I will turn it over to be operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on you touched on California. If your question has been answered a you wish city move your cellphone MCU. Please press the pound key maybe you might look like a spin, but you will be allowed to ask one question and one.
Follow up question.
But sometimes we have your first question coming from the line up he Kelly from Goldman Sachs. Please proceed.
[noise].
On the good quarter.
Hey, can you give us a sense of sort of what youre looking for in Q4 as we go to the.
As you go into more direct relationships with the hotel sort of what you're seeing.
And in those relationships or how those hotel relationships or or or beginning to progress just.
Are they are they beginning to have more of a more of an impact on your reliance on a booking and expedia.
Hey.
Hey, that's William Lynch in terms of the hospitality business. If you look at our growth rate year on year its tracking too about the same its about the same rate that our consumer businesses. So as we announced our partnership Palatine partnership with with Weston.
And that was about two years ago and since then we've been country continuing to penetrate a the hospitality channel we get inbound daily weekly monthly from hotels that want to put peloton into their jams, both bikes and tried to differentiate their Jim experience.
Our member base grows and they go to those hotels asking for peloton. So.
We've got a team focused on hospitality, we define ourselves as a consumer business, but that's that's a good channel for us and as I said, it's over triple digits topline growth. So you know the demand we're seeing from the consumer definitely spilling into hospitality.
Great. Thanks, Bill and then Joel issue as you look at the.
The way that you're thinking about guidance through the rest of the year clearly.
Yes incredible financing in terms of profitability.
This quarter, particularly on the on the gross side.
Gross margin side, but as you is as you look at the way you're thinking about the investments as we go through the rest of the year can you just give us a sense is sort of what's what's implied in terms of the level of investment that you're expecting.
Yeah.
I know with the German launches as well as sort of what you've seen already with.
Okay in Canada kind of should we continue to expect this level of of outperformance as you as you go further further through the year in sort of.
How much leeway I guess would you say are you, giving yourself to be able to ramp up there down the the degree of investment.
Yes. So so thanks Heath I think first off I would describe our guidance philosophy for you. Our guidance is our best current estimate of our performance and as you know our vertical integration does give us good control over our execution.
Both in our U.S. bike business as well as internationally, but we are still in the very early stages of growth in mark to market opportunity, but you can take our guidance as what we believe we will achieve.
And in terms of UBS spend two could grow international I mean, obviously as we prepare to launch in Germany, you know I would say the bulk of of our expenses are in sales and marketing and I think what we're very excited about in terms of what our guidance.
Shows is is that we continue to see tremendous efficiencies and our U.S. bike business from a sales and marketing perspective, and that's allowing us to offset slightly some of the less efficient spend again to launch Germany.
With nascent you know businesses in both the UK in Canada as well as our new product tread. So with all of that I think you know we feel very good that those efficiencies are certainly.
Helping us the the less efficient spend internationally.
Thank you your next.
Yeah.
I'm sorry, Yes go ahead.
Sorry, I was just going out for the next question.
Thank you. Your next question comes from the line of Dog and that's it from JP Morgan. Please proceed.
Great. Thanks, so much two questions first just for John Williams, If you could talk a little bit more about the tonic acquisition, what it does for you strategically and why you thought it was so important to own the manufacturing capability and if there's any color you can give us on the percentage of bikes were overall manufacturing atonic represents today.
And then second Joel can you just comment on how you're thinking about core U.S. flight profitability in fiscal 20 and or your confidence around this year being telephones peak was here. Thanks.
Thank you Doug.
So yeah with respect to tonic.
In order to sell millions of bikes and trends globally in the coming years, we need to be able to make millions of bikes and tread globally.
So obviously supply chain in scaling supply chain is a very important thing for us.
We are we do understand that Apple doesn't own foxconn. So it is a little bit atypical for a company like us to acquire manufacturer, but the reason why we did in the reason why we're excited about it is we need to invest into the supply chain in order to scale it.
And create world class manufacturing capability.
Our contract manufacturers were largely investing but we wanted to do it and have a little bit more control over it.
And based on our strong relationship with tonic, which is one of our two big bike manufacturing partners.
We are we loved them, both we have the longest relationship with the tonic and the team is incredibly strong the beef the founder Andy will do is kind of a visionary in our space with respect to fitness equipment manufacturing. His son has become a force and manufacturing equipment leadership and so we we are excited.
At about it we will continue to be dual sourced so.
You know we're excited about contract manufacturing.
In general, but tough for us strategically to control our destiny make sure that we could invest properly.
One thing I will tell you, we're working on and the coming months launching a brand new fitness facility with tonic that is going to be kind of a greenfield or a brand new.
From dirt.
Manufacturing facility that is gonna be we believe one of the best if not the best manufacturing facility for fitness equipment in the world.
And and we're very excited about that relationship.
Thanks So.
Oh I'm sorry.
Joel Doug I apologize Joe's asking me to take the profitability want as well and I do think because it's on everyone's mind I'll talk about it for US profitability is a managed outcome.
We have said this before our bike business is profitable.
And because of our gorgeous unit economics that you guys know well it will continue to be profitable. So the the investments, we're making in international and new products and digital on content and more more retail locations are just that their investments, but I think based on what you guys. Just saw which is our Q1 performance.
So triple digit topline growth single digit EBITDA loss, we are within striking distance of profitability. It's a managed outcome I believe if we pulled back on growth we could be profitable tomorrow, but that is not what the board and the leadership of peloton believes we should do we think this opportunity globally is so big.
That we think we're right on the right balance of investing for future growth.
Great next question please.
Thank you. Your next question comes from the line of Justin Patterson from Raymond James. Please proceed.
Great. Thanks, so much at all resist asking any online travel question. So I'm curious I know, it's early but could you talk about how the home trial and marketing campaigns are performing against expectations.
Thing any differences on the demographics and engagement among new customers versus where you shift you previously and then how do you get comfortable with forecasting that around the holiday season.
Hey, Justin it's it's William Lynch I'll take both of those on home trial, it's still early days as John and Jill said, we launched at September 12, So it's really last two weeks of the quarter.
So the impetus for home trial is our brand marketing team led by Carolyn tissue pause. It does a a lot of great research around the biggest barriers to purchase or bikes and treads and what we found where the two biggest barriers were price affordability and then and then we'll I use it and so.
We did a test we don't guess, we test almost everything in terms of major programs. We did a test earlier earlier this year around home trial and what it showed a substantial lift in the markets we tested it in.
And since launching the 30 days free bring it home try it we've been really encouraged by the result so.
Again, both and then secondly on the marketing our big push this holiday is both home trial as well as.
For the first time ever promoting at $58 bike, so with our 39 month financings zero, a PR consumers have the ability to get a bike for $50 a month and we're underwriting all the cost. So it's an incredible deal. We think it's the best stealing fitness interestingly that goes right against the gym average gym membership.
Most people pay which is on average $50 a month so.
Between attacking the affordability.
The perception with with promoting the $50 with heavy TV weights and then early results on home trial, we feel great about holiday Inn and again, we feel like we're attacking the two biggest barriers to purchase.
If I might just add on to that I, just want to remind everyone. If you look back to fiscal year 19.
We had a very strong holiday period, and so our Q2 guidance.
8% at the midpoint for our connected fitness subscribers.
We're lapping up a pretty big holiday period, and a lot of that was driven by some program changes that we had made to our financing program.
We commonly referred to as Debundling, where we stopped financing the subscription.
With our equipment, which created a pretty significant uplift in conversion so.
I just wanted to remind everyone of.
That from this time last year for holiday.
Could we get the next question.
Thank you. Your next question comes from the line of Eric Sheridan. Some GBS. Please proceed.
Thanks, So much maybe two if I can one coming out of the IPO did you see anything around the halo effect of either better or effective marketing channels were better gross additions coming out of the IPO that might sustained into fiscal Q2 fiscal Q3.
As to where we're sure that dynamic in the marketplace.
Secondly, one year into the opportunity of the UK in Canada, and he said you can give us around gross curves are unit economics, or how the international opportunity might be developing that might contrasts with what happened to the U.S. Thanks, so much.
On the IPO, we definitely saw a bump in traffic.
And in sales, but it was fleeting we saw it for about three or four days and then what typically happens which is we are able to project by marketing channel and it got to steady state in terms of traffic conversion and sales and then on international what we've said is the UK in Canada our.
Tracking ahead of where the U.S. was at the same period, one of our leading indicators actually on sales as awareness, we measure unaided awareness unaided awareness and what you see what the benefit of the marketing spend and the investments Joe was talking about internationally in Canada in the U.K., we've been running advertising there we've opened up retail.
Is that is that the markets are developing faster and so they are ahead of our expectations. There ahead of where the U.S. was it actually gave us confidence to invest in Germany, which launches as Joel said 11 20 that's.
We'll see that's our first foreign language market, but that's the answer in terms of unit economics, they're not substantially different than the U.S. and so I wouldn't spend a lot of time. It you know it it's really about in terms of business model. It's about that upfront investment that we had to put into the U.S. and again on the curve they're tracking ahead.
Great next question please.
Your next question comes from the line of Edward isn't there some keybanc capital markets. Please proceed.
Good morning, Thanks for taking the questions I guess first you guys have added a lot of functionality.
To the App and you've added a lot more activities in touch with past six months I guess, how would you score kind of a customer acceptance and usage of some of these non.
Non spin activity and then second and maybe a broader question.
The competitive environment continues to intensify you guys clearly have a big lead but you had a competitor that rolled out a bike that use your likeness.
So there are there are other connected fitness products starting to emerge I guess, how would you how should we consider the overall competitive environment. Thank you.
Yes, so we love the digital business.
We're very excited about digital it's not a big driver of our top or bottom line growth as you may see Ed, but we just that we have a new head of digital and create a kogan who is a monster.
She is you're going to hear more about her in the coming years. She is one of our strongest young leaders.
But we we like digital for what it represents for our connected fitness subscribers.
And giving more engagement and more content.
And more utility to a connected fitness membership.
And then we'd like it for its own business, which is a great driver of.
Customer acquisition for Us, it's a way for the 34 million people in America that have a treadmill and their basement today to engage with our boot camp classes or to take our app to the gym and ride a bike from the gym and get to know our community and our instructors and our and our content.
We we have launched a lot of features to your point Ed we're going to continue investing that software, we're going to continue investing in that content and we think that.
The digital businesses and Acorn that could develop into its own mighty yolk akin to our connected fitness business, which is gorgeous as you know.
With respect to competition.
Youre right, we have a seven year head start we created the category.
I would say at this point, we do not have what I call Likeminded competition, which would be a very well capitalized technology company.
To our knowledge that company doesn't exist yet but.
It may at some point it in the coming years.
But I will point out on the competitive from a competitive perspective, what we do is very very hard we have invested we we've raised as you know $2.2 billion, we are investing it very aggressively very smartly.
Hardware back to the manufacturing we bought the manufacturer.
We are investing in hardware software media retail logistics music community apparel, there was a lot to the peloton business and we believe it all works in concert.
And that is vertically integrated direct consumer.
Multichannel marketing approach that we have I wouldn't say perfected, but we're working on perfecting it and talk to Williams point, we're getting better at.
We've cut our teeth in the U.S., where smarter in the UK, where smarter in Canada, we're going to be even smarter in Germany in the coming months as we roll out that market and so we're building a global technology platform.
We believe is going to be pretty hard to compete with them pretty formidable.
I guess, we'll cut cut to the next question.
Okay.
Your next question comes from the line of Michael Graham from Canaccord. Please proceed.
Thank you.
It could fitness product gross margin. It was a lot stronger than we were modeling for this quarter and youre guiding to come down a little bit sequentially, just what were some of the things that.
But help to be strong this quarter and Conversely on the other side, you know what might happen to kind of bring it back down to your normal sort of outlook level and then I just wanted to ask also on the German local language content.
How long do you think it's going to take until that catalog sort of gets to a density as local language classes. So that that's the majority of you experience for those for those subscribers.
Great. So great question on connected fitness gross profit margin and just to remind everyone for Q1.
The connected fitness gross profit margin was 43% that was versus 46% last year.
Obviously the year over year differences were primarily attributed to two things one is the mix shift.
To tread, which currently carries a lower gross profit margin and secondly, some incremental investments that we've made year over year in our supply chain and logistics platform.
Think of you're referring to kind of the expectation of consensus versus what we achieved in Q1.
I'll say that we really had a lot of factors that are moving in our favor.
And again just to remind you we.
We achieved 43%, but for the balance of the year, we expect our connected fitness gross profit margin for full year to be 30, 839%. So.
For the first quarter, though what I would say is again better than expected supply chain and logistics.
But again the balance of the year, we'll continue to make investments there there'll be a little bit more backend loaded perhaps.
Then, perhaps what what is reflected within consensus secondly, we did have a onetime favorable inventory reserve benefit and we're piloting a resale program for a small amount of returned inventory, which resulted in a onetime benefit to our inventory reserve in Q1.
We also are seen product cost efficiencies in both bike in tread.
That were better than expected and then lastly, I would say our warranty utilization on both a bike and tread were lower than expected. So it was just a lot of positive news in our favor, but again for the full year on the 43% we'll continue to decline throughout the balance of the year given.
In the mix shift in tread and again that the supply chain investments, we plan to make throughout the year.
I can't I can take the German catalog question, just very quickly so interestingly.
If you look at the UK some of the most popular instructors are actually out of the U.S. Our two you can't structures are doing really well, but it talks to the fixed cost nature of our content in the instructors, which is exciting as we think about expanding globally, we have hired to do.
German instructors.
We're not going to announce them on this call there'll be an out shortly John Carter, our chief content Officer, and Kevin Cornelis who is our managing director of international have done a phenomenal job priming the pump, but we're going to have substantial German content at launch, including including we're also going to subtitle because in our testing again we.
I tried to test everything in the spring German consumers that we tested with actually wanted to take US language classes subtitled. So we think thats going to be again, a competitive advantage given our catalog in the U.S., but also really bolster the catalog is as Germans are curious to take us language.
Second classes, so we'll be well covered from a German catalog perspective.
Next question please.
Your next question comes some delay and Deepak Matthew by name from Barclays. Please proceed.
Great. Thanks, guys.
Ask you to elaborate on the connected devices gross margin comment specifically for Twoq you I think you noted 37% foot to Q.
Turning to men does step up from current levels in terms of logistics investments sequentially and how should we think about the promotional strategy during the holiday season.
Second question is can you also provided an update on timing of some other big investments that you're looking to making the next few quarters like the headquarters in studio launches in New York City in London.
Timing and then the cost flow through into the piano also happening at the expected cadence. Thank you very much.
Yeah, I might ask you to repeat the second question in a minute well I address your first question on the sequential.
Decline from Q1 to Q2.
Yes, we historically see a decrease.
In our connected fitness gross profit margin between Q1 in Q2 in.
That is one of the drivers there is is how the holiday season in any promotional activity that we do tends to fall in that time period.
One other thing I might know in and I think you perhaps saw this in our advertising, which.
Happened over the last couple of months is we've also been highlighting in our marketing. The 58 dollar bike until we have over the last few weeks began to see an uptick in our financing penetration rates, which as you know impact.
Yes impact our gross margin on our connected fitness CNS and the other thing I would say as we recently launched 39 months zero a PR financing for trad just in time for the holidays. So and that is another driver of that sequential decline if you will and again.
Just continued investments in mix shift to tread and continued investments made in supply chain and logistics capex.
Sorry, and then if you could just repeat the second question one more time.
Yeah.
Just asking about the cadence of some of the big Opex and Capex related investments that you're planning to make specifically alone.
Sure lunches.
And those added Medicaid and expect to be as you previously anticipated in terms of just the flow through into the being that over the next few quarters.
Yes. So in Q1, you you know again versus.
Perhaps what what was there for consensus.
Obviously, there is there's been a little bit of a timing shift in some of the capex.
With respect to the new builds we have going on for peloton Studios, New York Peloton studio, London, and our new headquarters.
Near Hudson yards so.
All three are 100% on track with respect to tip budget.
There is some timing differences as to when we will be.
Impacted by that Capex spend but the overall budgets are completely on time the other aspect of Capex as you know, it's a continued growth.
Of our show room footprint.
So so that's kind of the incremental balance.
But everything is on budget.
Next question.
Your next question comes from the line of Justin Post from Merrill Lynch. Please proceed.
Great. Thank you a couple follow ups, you mentioned that tread mix shift a lot can you give us any update on how tread sales are performing either just an absolute or or versus your expectations and then secondly in your guidance for the second quarter and for the year can you talk about your your marketing.
Cost of acquisition do you expect your gross profit on your hardware to cover your your marketing cost of acquisitions as you look out over the next three quarters. Thank you.
Yes, just and thank you John .
Tread is doing very well.
We have to your question. It's it is exceeding our expectations were very proud of it and the sales are out in front of what we anticipated.
Probably more important than that is that our net promoter score for that experience is approaching 80, which you might have heard us talk about net promoter score is kind of our truenorth delighting, our members and creating a one of the most special consumer brands of our day.
And to the extent, we're getting close to 80 with our trade experience. It just speaks to how how great that that platform is.
In providing boot camp experiences in circuit training at home, which was the goal.
The content.
Continues to get better William brought up Gen Cotter, who is our new chief content officer, and her lieutenant Kevin Shorelands not to be confused with Kevin core Nils who is our empty of international but.
Kevin Amgen are really investing in the content and doing a lot of innovation for the tread content in the bouquet content that so that platform continues to get better just at the software continues to get better. So when you buy one of these.
Connected fitness platforms, either pellets unbankrupt on tread every month the experienced gets better so no different with the trad and then as Joe pointed out the zero percent financing that we just launched on a 39 months gets the tread to $111 a month, which you divide by two for your too that the two adult.
Living in your home you're live in partner your spouse or whoever which becomes you know $56 a month, which.
Our person, which we believe is a screaming deal for the quality of that platform. So we feel very good about the tread.
I don't know who wants to take yes. So I'll just briefly mentioned I think you're referring to.
Measurement that we look at where.
In our unit economic model.
That are connected fitness gross profit margin offsets the majority of our sales and marketing expenses and so if you look at what's implied based on our guidance for full year.
Our net customer acquisition costs again that taking our adjusted sales and marketing expense less are connected fitness gross profit margin is about $86.
Based on the midpoint of the guidance range.
For.
For the full year, so very much our unit economics are very much intact, what that means is that.
Essentially acquiring a new sub for $86 and then thereafter enjoying a very long lifetime.
Subscriber so very much intact I would say just overall again, we continue to be very encouraged with the.
The efficiencies that were seen in our U.S. bike business in terms of sales and marketing and word of mouth.
Next question.
Your next question comes from the line as John Blackledge from Cowen. Please proceed.
Great. Thanks, two questions.
Some contribution margin was better than what we had just just curious about the key drivers and any thoughts on the contribution margin trajectory longer term and then secondly, any any color on pause subscribers not sure. If you could quantify as a percentage of total subs. Thank you.
So on some contribution margin again, our our guide our our guide for Q2 was 58 to 59.
Versus what we achieved in Q1 of of 63.
The beat was primarily due to.
A significant improvement in content costs for past you.
And then obviously given our strong topline growth in subscriber adds the balance was just fixed cost.
Leverage of our content production that is produced as we you know.
As we scale our subscriber base.
In terms of going beyond 2020 were not really guiding beyond that at that point, but.
I think what at least Q1 demonstrates is that overtime as we scale.
Our subscriber base, we will most certainly be able to leverage a lot of the fixed costs of the production of our content. So that is something we remain very confident about.
In terms of.
Your second question.
Would you mind, just I just want to make sure that I answer all of it would you mind repeating.
Todd is on pause.
Okay, sorry here on mute so I think I. So great question. This is not something we plan to regularly disclose.
What we can say is that at any given time, our paused subscribers are in and around half a percent that that is.
Well below 4000 based on current levels.
And just to remind everyone.
That a pause subscriber can pause for up to three months that that person is still included in our connected fitness subscriber base and what we see and for up and they can pause for up to three months and typically a member of positive due to pregnancy injuries are moving house. So.
And then the last thing I might add is that even if someone positive our data shows that they are no.
More likely to churn off of our subscription so thanks for the question.
Your next question please.
Got it comes on the line does that lead to higher went from Evercore ISI. Please proceed.
Great. Thanks, Thanks for the question.
Given that you disaggregated this financing from subscription last year, how if at all as your full year outlook for churn being impacted by those cohorts rolling off of their finance agreements and potentially seeing an impact to churn as their financing agreements lapse and then another one I guess, maybe bigger picture on the macro environment obviously.
In the UK moving into Germany, how is maybe macro impact for the business in anyway, and how are you may be thinking about your marketing investments into perhaps softer macro environment in those growth markets.
Great. So I'll take the first part of the question and then handed over to Williams. So in Q1, our churn did remained low at 0.9% average net monthly churn. The main impact I think this is.
What you're getting that all though.
We used to offer two things, we obviously used to bundle our financing and we used to also offer pre paid subscriptions and so the main impacted churn in Q1 was really the roll off of pre paid subscriptions on to month month to month.
That said, we did see higher than anticipated retention rates for those subs that came out of their prepaid period now over 90% of our subscribers are paying month to month, and we expect that number to slowly climb throughout the year.
As you look at our guidance for Q2, and the full year at keeping our churn below 1.05%. One other thing to note is that Hum trial will start to impact churn.
In Q2, if a customer returns a bike within that 30 day period, they will be accounted for as a churn customer.
And we recognize that churn immediately so.
If if to the extent, we see an increase in our return rates over time.
That could create a little bit of upward pressure in churn.
Hi, its William I'll answer the sales and marketing investment against a macro environment. We on a day to day in week to week basis, the macro environment doesn't impact our sales and marketing investment at all our acquisition team led by Tim Shane and Johnny Jang and Alan Smith look at what we can acquire a customer for.
And what is the LTV of that customer, it's sort of the net CAC calculation.
Calculation that killed talked about and so we're really disciplined in our performance marketing.
As it relates to internationally, how we think about those upfront investments the decision to go internationally and the markets, we select or it's very deliberate and so we make those decisions 18 months in advance of actually going into the market and so we assess sort of the rate of expansion against market risk.
And as I said.
UK in Canada gave us a lot of confidence to decide to go into Germany, and once we decide to go into the Mark those markets, we're going to invest to win and that means really sales and marketing upfront to get primarily awareness up this product we know.
Hi delivers a great experience, we know there's unit economics that so it's really about educating the market.
From in someplace in some places a cold start or awareness is very low in Germany to get that awareness up what we've seen as we've done that in the UK and Germany sales follow so thats, how we think about Thats, how we think about sales and marketing.
Great I think we have time for one more question.
Your next question comes from the line as Jason Helfstein from Oppenheimer. Please proceed.
Thanks.
Due to thanks, John you made a comment about using IPO proceeds to fund the pipeline a product any color you want to share on that and then opex was meaningfully lower than expected I think in the quarter on how much of that was timing versus other budget decisions that you're making.
Right.
Yes, yes, maybe I'll just to the second one is a very quick short answer and then I'll, let John take the first part of your question. We I would say about 10 million of our Q1 beat was timing related which we will flow into subsequent quarters.
Yes, and with respect to new product pipeline.
I can say and I've said this before we are a technology software innovation company at our core we created the pellet on bike was pretty innovative the treadmill is at least as good of a product replatform potentially better for for full body fitness obviously.
In the coming years, there will be new.
Platforms, new products, New innovation that comes out Palatine that will I believe surprise people and delight people and.
We're having fun innovating and R&D lab is.
Is very busy.
That's one answer the other answer is we're also innovating against software features against our core platforms right. So new cool things that every month, new features to delight, our existing bike owners in our existing tread owners launching new digital features that we talked about earlier, there's all kinds of innovation we.
Listing platform that would potentially new platforms that we're obviously not going to announce new products today, but certainly in the coming years. I think you guys will be impressed with some of the stuff that we're working on today and the R&D lab.
I guess that said everybody I'll close out.
So I do want to again, thank the team all the Palatine team.
We believe we've got one of the strongest teams into and consumer Tech. We're very proud of it. Thank you all for your hard work.
Thank you to any members listening I know some of your analyst buy side and sell side or are also peloton bike owners or try to owners or digital subscribers. So thank you for your business.
And I will say, thank you for the investors on the call who believed in US we will continue to work hard and your honor.
Anyway have a great holiday I'm confident that we will and we look forward to talking to you on the next call. Thanks, everybody.
Everyone else has left the call.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you May August .