Q3 2020 Earnings Call
Ladies and gentlemen, please standby your conference call will begin an approximately two minutes. Once again. Please standby your conference call will begin and approximately two minutes. Thank you for your patience and police continue to hold.
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Ladies and gentlemen, thank you for standing bar.
Welcome to pellets on third quarter earnings Conference call.
At this time, all participants aren't in listen only mode. After the speaker presentation, there will be a question answer session.
I ask the question during the session you will need to press star one on your telephone.
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I'd now like to hand, the call over to your speaker today.
That's VP of Investor Relations Peter Stabler, Sir Please go ahead.
Good afternoon, welcome to Palatins third quarter earnings conference call for our fiscal year ending June 30 2020.
Joining us today on the call to answer your questions are John folding our co founder and CEO, William Lynch, Our President and Joe Woodworth our CFO.
A copy of today's shareholder letter is available on the Investor Relations section of our website at Www Dot one POLATOM dot com, that's been furnished to the FCC on form 8-K.
Before we begin I would like to remind you that our comments and responses to your questions reflect 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 those contained in 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 FCC filings and today's shareholder letter.
Most of which can be found on our website.
During this call we will discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.
That I'll turn the call over to John who will begin with a few opening remarks John.
Good afternoon. Thank you for joining us to discuss our third quarter results.
As a new York City based company, we've seen firsthand the magnitude of the covert 19 crisis and we offer a heartfelt. Thank you to all of those working tirelessly on the front lines to battle this epidemic.
Our top priority has been and continues to be the safety health and wellbeing of our employees members and the communities in which we operate.
As detailed in our shareholder letter released this afternoon, we've made a number of significant operational changes in order to safely continue our service.
Fitness routines yield significant benefits to overall physical and mental wellbeing and we remain committed to serving our members throughout this difficult time.
We obviously were recognized said a tremendous number of businesses and their employees are facing extraordinary challenges at this time.
Our Hearts go out to all of those negatively impacted by this crisis across broad sections of the economy.
As you might imagine however, the shelter in place and work from home realities have created a meaningful tailwind for peloton and the broader ongoing consumer shift towards that home fitness experiences.
Well this tailwind is undeniably positive for our business financially we are more proud of our member growth the increased engagement of our members on our platforms and the feedback we've received from our members about how peloton has helped them maintain their physical and mental wellbeing in these difficult times.
Specifically, we ended the quarter with over 886000 connected fitness subscribers, representing 94% year over year growth.
Member Count is now over 2.6 million inclusive of our 176000 peloton digital subscribers.
Over the past year, we've seen steady gains in member engagement as we've expanded content verticals and launch new member experiences.
With so many members now wonder stay at home orders this quarter, so on even larger gain than expected.
Our connected fitness subscribers log 44.2 million workouts with us in the quarter.
From 18.0 million workouts in the same period last year.
Representing 145% year over year growth.
On the subscriber basis that is 17.7 average monthly workouts per connected fitness subscriber compared to 13.9 workouts in the same period last year.
With this growth the value proposition of our platform has never been stronger.
This incredible engagement with our connected fitness products led to our lowest level of churn in four years.
For the quarter or average net monthly connected fitness churn was 0.46%.
In addition, we now have over 176000 digital subscribers with growth attributed to improvements we've made to our fitness content and software features available on our digital lap or price change to 12 99 in December and the extension to new platforms like Amazon.
On fire TV.
Early in the Kobe crisis, we extended the digital subscription free trial period from 30 days to 90 days, resulting in over 1.1 million downloads of telecom digital in the past six weeks.
We were extremely proud to offer so many people free access to our incredible fitness content. During this time.
I'm also proud of our financial performance this quarter with revenue growing 66% year over year to $524.6 million.
With strong revenue flow through and leverage against our fixed costs. We achieved our first adjusted EBITDA positive quarter as a public company in Q3 with an adjusted EBITDA margin of 4.5%.
Over the past several weeks, we believe we're accelerating our market share gains of the 600 billion dollar global fitness industry.
And increasing our lead as the largest and most scale connected fitness platform in the world.
We believe the current environment of social distancing and working from home is permanently influencing consumer behavior driving more people to discover peloton has the most engaging entertaining immersive and motivating home platform for fitness and wellbeing.
Our scale as a platform is a huge asset but also present some challenges.
With tens of thousands of people on the leaderboard at a time and millions of members on the platform and growing rapidly we continue to develop ways for our community to interact with each other any more personal way.
To that end last week, we launched tags, a new social software feature that strengthens our network by leveraging the power of group's making it easy to feel connected to others, even without existing connections on peloton.
Tags, very simple yet highly flexible way from members to express themselves connect with others and work out together.
Members can create tags that represent their shared interests their favorite sports team College charity employer, geography, and more or browse through the more than 50000 tags that have been created by our community and just one week since its launch.
Importantly, our members can now filter the in class leaderboard by tag, taking a massive global leaderboard and making it instantly more intimate personal and motivating.
Before turning it over to Jill I Wanna mention a few additional milestones in Q3.
On March 19th we began broadcasting from our new flagship media compound peloton Studios New York.
Equipped with the state of the art technology, our new 35000 square foot facility has four studios under one roof, allowing us to film all fitness disciplines in one centralized location for the first time.
When it opens to the public Palatine studio is New York will be a destination for a member community to come together.
I'd also like to highlight that our music and legal teams achieved an important milestone in the third quarter resolving the litigation with downtown music publishing.
Since then Palatine is welcome thousands of new music publishers to our platform, adding great New songs that our members love to our already industry leading library.
We also settled our patent infringement litigation with flywheel further strengthen strengthening our ability to protect our intellectual property.
We have a strong patent portfolio, which we continue to vigorously defend.
Lastly, I want to express my gratitude and appreciation to the entire peloton team across field operations member support retail content production or instructors our folks on the manufacturing lines and all of our employees at our headquarters in New York City, London, Taiwan, and Plano, who have all played an.
Important role in supporting our members physical and mental wellbeing through this covert crisis and beyond I'm definitely proud to work at peloton and I Hope you are too.
Now over to you Joe.
Thanks, John we generated total revenue of 524.6 million in Q3, representing 66% year over year growth exceeding expectations across all geography, driven by strong demand for our bike.
On our last earnings call said, we would face a challenging comp in Q2 would be given that our tread launched in the same quarter last year. So we're especially pleased with the growth we achieved in the corner.
I also noted that guidance would more closely mapped to results moving forward as we gained more clarity on key areas variability.
That said, we weren't pacing at the high end of guidance or better for all of our financial metrics in K P. I, but starting in the first week of March we saw spike in demand for our biking tread did a cobot 19.
The significant increase in sales spanned all of our market and has continued into may.
On March 19, we paused activities that require entering the home, including tread delivery returned pickup in home servicing.
You will review music Tivity when it is safe for our employees number and community.
Gross margin for the quarter grew to 46.8% are connected fitness product gross margin was 45.3%.
Exceeding our expectation.
This was due to a mix shift to bike delivery continued improvements in our product costs helped by our acquisition of tonic and the greater than expected fixed cost leverage and logistics due to sales outperformance and the shift to a threshold delivery.
These efficiencies were partially offset by hazard pay for our warehouse and delivery employees.
Subscription gross margin was 57.8% and subscription contribution margin was 63.6% exceeding expectations, primarily due to fixed cost leverage.
Total operating expense, excluding nonrecurring litigation and settlement expenses of 49.3 million was flat year over year, it's a percentage of total revenue.
In mid March we paused all advertising in the majority of our market, allowing us to see the benefits from many years of marketing investments in brand awareness.
And high customer satisfaction dragging word of mouth referral.
With better than expected sales and gross margin.
Operating expense leverage inclusive of lower marketing spend for the quarter. Our Q3, adjusted EBITDA was $23.5 million, representing an adjusted EBITDA margin of 4.5%.
We have a strong balance sheet with over 1.4 billion of cash and cash equivalents and additional liquidity in the form of an untapped 250 million dollar credit facility, providing significant resources to take care of our employees in members. During this time, while allowing us to continue to make investments in our platform.
To drive growth going forward.
Moving onto guidance for fiscal year 2020, we're raising our expected ending connected fitness subscriber range to 1.04 to 1.05 million versus our previous guidance of 920, the 930000, representing 104% year over year growth at the midpoint.
For Q4, we expect average net monthly connected fitness churn to be below 0.75%, reflecting recent trend and an expectation that we will revert to more normalized levels by the ended the quarter.
In Q4, we expect revenue of $500 million to $520 million, representing 128% year over year growth at the midpoint for.
For fiscal year 2020, we are raising revenue guidance to 1.72 to 1.74 billion dollar representing 89% year over year growth at the midpoint versus previous fiscal 2020 revenue guidance of 1.53 to 1.55 billion.
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We entered Q4 with a backlog of bike deliveries in all geographies and sales continue to surpass expectation into may.
The unexpected sharp increase in sales has created an imbalance of supply and demand Unfortunately, causing a long dated order to delivery windows for our customers.
While we are working to accelerate the supply of bike and incurring higher cost in order to expedite shipments, we do not expect to materially improved order to delivery windows in Q4.
Moving onto margin.
Q4, we expect gross margin of 42.5% to 43.5% and connected fitness product gross margin of 40% to 41%.
As previously mentioned this decline reflects cost to expedite product shipments and the continuation of hazard pay for warehouse and delivery employee.
The decline in connected fitness product gross margin is partially offset by a mix shift like delivery.
Our Q4 guidance assumes we continue to pause tread deliveries for the ended the quarter.
We read them in home Assembly sooner that will provide upside to our connected fitness subscriber count and revenue expectation, but modest pressure on connected fitness product gross margin and leave adjusted EBITDA unchanged.
For Q4, we expect to subscription contribution margin of 63% to 64% year over year improvement in subscription gross margin and subscription contribution margin are driven primarily by continued leveraging a cost of content production.
We expect Q4, adjusted EBITDA of $55 million to $65 million, representing an adjusted EBITDA margin of 11.8 and at the midpoint.
This means that for fiscal year 2020, we expect to earned 30 to 40 million of adjusted EBITDA and adjusted EBITDA margin of 2% at the midpoint.
Our expected Q4 profitability on an adjusted EBITDA basis is the result of.
The double continued high demand for our bikes and all of our global market.
But gross profit margin profile, albeit with additional shipping and kobin related costs.
Significant reduction to sales and marketing expense due to limited media spend partially offset by the costs associated with the extension of our digital free trial period to 90 days.
And lastly, significant leverage across our fixed expense base.
While we are not at this time able to provide financial guidance for fiscal 21, we understand many of you weren't looking for help with modeling beyond the current fiscal year. We previously said, we expected to achieve profitability in fiscal 2023, a goal we have achieved far sooner than originally.
Forecast.
Extraordinary events, taking place over the past two months have measurably expanded our market opportunity and accelerated the ongoing shift to connected fitness.
Our fiscal year 2020 profitability outlets demonstrate the strength of our financial model when scale and leverage our achieved.
However, our underlying strategy is unchanged we plan to continue to prioritize connected fitness subscriber growth.
And invest aggressively behind new products software fitness programming and international growth.
As John noted earlier, we believe coded 19 will have a long term impact on the fitness industry with many people likely not returning soon or at all to Jim's or boutique fitness location.
With over 90 million gym memberships across our four current global market.
U.S.U.K., Canada in Germany, and only 2.6 million members today, we continue to see a long runway for growth in the coming quarters in years.
We expect your provide fiscal 21 guidance in the fall when we report Q4, I will now turn it over to the operator to take your question.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key our first question comes on line of Doug Anmuth from JP Morgan Your question. Please.
Great. Thanks for taking the questions. Firstly, just hoping you could provide some thoughts on how much of the sales lift you think was driven by pull forward of demand versus what might be more durable change to the demand for connected fitness and then second you mentioned the elongated wait times.
On spikes. She just talk about where you see kind of the bottlenecks if that comes more in manufacturing or logistics into liberty were perhaps both thanks.
Great Hi, Doug It's Joe I'll take the first question and then in handed over to William to address your second question around supply chain and logistics.
So great question and you can imagine this is a very important topic for us as a management team to understand as we'd resource plan across the organization for the next several quarters.
I think as I said a in the prepared remarks, we were tracking to the high end of guidance until the first week of March when we saw the spike in demand for our products, which means Q3 outperformance on sales and in connected fitness subscribers as well above the top end of our financial guidance was cold they'd related.
In short, though we believe that we're seeing a significant expansion in our serviceable addressable market.
Oh, we just fine art serviceable addressable market as consumer to web purchase intent for our current products at our current price point.
On a year ago, we measure our sand at 14 million connected fitness products.
With purchase intent largely following our growth and brand awareness prior to co bed. We believe we already had significant expansion of RCM given the progress we've made across our geographies in growing our brand awareness. We are in constant dialogue to with our members. Unlike many companies are working very hard to understand the impact of code at night.
Team.
So while it's a little early to draw some definitive conclusions we have done some recent research on purchase intent of our post coded buyers and we attribute a large percentage of our increase in sale as sales as an expansion of our Sam as they're a large percentage.
People, who previously did not indicate purchase intent of pellets on bike prior to co bed, which we view as a significant expansion of our market opportunity further I would say, we continue to see persistent NC state sustained fail.
Up our bike across all regions today, even with the elongated order to delivery windows.
And most exciting to us is that our newest buyers are engaging even more with our product than any new buyer <unk> cohort has done an engaging more than some of our older cohorts and we believe new at home routines are continually are going to continue to stay intact, even a win win.
<unk> has passed so.
We're very excited about our growth profile moving forward and we think that a lot of this is just validating our long held view that the peloton experiences like no other and once people try it for themselves.
They get converted so so we're very excited about the expansion of our market.
Hey, Doug Thanks, it's really in one's thanks for the question [noise].
So in terms of the constraint on the supply chain its bike inventory with the way we weekly first of all we aim to get our products. The members as quickly as possible typically we're on a shopping and buying Dave order to delivery.
And Ah and we perform extremely well in that regard in this case.
We planned inventory levels based on sales forecasts out number of days any X number of days Q4's, a seasonally low period for us historically and so as we planned out a number of days, we wanted to carry with the sales acceleration that here.
And and created the imbalance that a the Joe referenced in the initial statement and so the good news as we've gotten incredible supply chain team.
One of the best in the industry and so we've worked quickly Q expands.
Within our existing facilities and then if you just look at.
Well, we're producing today versus what we were producing in early March we've been able to more than double the output.
And then as we look to the future to the point on sort of structural changes and our growth going forward and moved connected fitness.
We mentioned we are investing in a new factory and this is part of the tonic acquisition, a big New factory in China on in a in an area called Shinji and that'll come online.
In December and will help fulfill holiday demand it'll actually help production for holiday and beyond and so we feel like we're really well position, it's worth noting that in terms of supply the guidance that we provided for Q4, we feel very confident and comfortable that we have we have supply.
Hi against that guidance and we're doing everything we can short mid long term to ensure we have supply capacity going forward, but it is absolutely like inventory.
Great. Thank you both.
Thank you.
We also ask that you. Please limit yourself to one question and one follow up you may get back into queue. As time allows our next question comes from the line of Justin Post from Bank of America. Your question. Please.
Great. Thank you, obviously unusual time looks like you're handling demand as well as you can I just wondering I'm on the product development side I.
I know this new studios opened and it's hard to tell what impact, but maybe you could talk about when things get back to normal how that's going to help with the content for peloton and then secondly, as you already has got to start thinking about next year. How is the pipeline on on new products right now and has there been any impact on on product development from outreach.
And trends thank you.
Yeah, I'll take a Justin this is John fully thanks for calling.
I will take the new product one and then William you ought to take the content.
So with respect to new products.
Oh, we did teas are in the last couple of quarters that we had some innovation and some new things that we were going to bring to market. This year.
You can imagine like every other company I'm in the world that Koby crisis has.
Forced us to rethink rolling out anything new obviously, our retail stores are close right now a william alluded to the realities of the supply chain.
Well, we're working through with our current product portfolio.
So a we did have to rethink the timing of new product launches its unfortunate, but but real I'm in a good way a in an exciting way I it feels like or we do at this point have a significant backlog of innovation in R&D that that we are book.
Going forward to bringing to market.
As you can imagine so a lot of that stuff has been taking place over the last year or two continues to take place even in a shelter in place reality and so we do have a backlog and we will.
We will bring those products and those innovations to market. When we can we're obviously not going now whats the timing today, but we are very excited about it and it's a it's gonna be impressive I believe.
And then just in tier one of the content inside the studio sets us up.
To do exactly what we what we expressed both in terms of to investors, but most most important to remember switches expand the types of content, we offer and increasingly add more and more utility to the peloton membership, which is why if any and some large far worse.
See engagement that the Joe mentioned engagement growth and Joe and John mentioned in the beginning just getting the last few months, we've launched new fitness verticals like.
Family, which was actually and development before coded started and getting incredible engagement 200000 classes and workouts. That's something that's part content team put together so the whole family can work out together in a super topical during that that's turned where everyone's sheltering in place things like dance cardio, which has had close.
The 650000 classes and we just launched that.
You know a month ago and so these new studios will continue to allow us to expand that fit the system once it's becoming more and more important which she.
Adoption of non cycling fitness classes as exploded.
So things like strength training, which is massively strategic to us we believe the cardio and strength of the two pillars of a fitness and so we feel great about cardio with our bike line in our trend line.
And then and then on strength is something that is is a super fast part of the growing part of the portfolio and that people continue to invest and so.
So studios coming online will allow us to just keep expanding expanding that content.
Great. Thank you.
Thank you. Our next question comes from a line of Edward Yruma from Keybanc capital markets. Your question. Please.
Hey, good afternoon, and thanks for taking the question and that Robyn lives.
Astec two quick ones for me I guess first.
On marketing longer term given that kinda power of word of mouth here.
We think to kind of how long it'll take you to achieve kind of longer term marketing objectives from a leverage perspective kind of current period.
Ending.
To are you seeing any changes in underwriting standards.
From your finance partner Thank you.
Yeah, I will take the first Oh actually take both questions, but I'll answer. The second question first and the answer is no we have not changed any standards.
Our partners have not changed any underwriting standards to our knowledge, we feel very good we've had very consistent a financing penetration over the last couple of months and as you can imagine I think we've talked about this before we've had to date extreme.
Keenly low default rates in a fairly healthy credit profile of a lot of those that participate in our financing program. So.
We feel very good about that and again the consistency that weve seen on financing penetration, we think helps us support that.
The second question on sales and marketing spend I'll kick it off and then maybe turn it to William as well to add anything that I've missed but 100%. This is been a really interesting time for us.
Where we've reduced media spend because of the organic demand that we pad.
And we're continuing to pause that media spend and in most of our markets and what's been interesting is to see the years of investments that we put into building our brand didn't building product awareness and the investments that we've made to create the best experience member experience and customer journey.
We can.
So we're seeing you know really great word of mouth I can say that as our membership gets larger what's interesting is with the engagement growing the base getting larger we do think we're going to see some bible effect of word of mouth, becoming increasingly more input.
Martin.
And it does lead us to believe especially given the pay off we're seeing today in terms of again <unk>. The increase sales despite having zero marketing media dollars deployed we do think in fiscal 2001 and beyond we should expect to see much more marketing of fish.
I see than we originally forecast I'll, just say with that said, we're still in the very early engines of growth as a platform and we're going to continue to smartly grow sales and marketing spend so that we stay top of mind with consumers.
Yeah, nothing on the upside to that I.
Actually the word of mouth point as is its its two point and we've seen word of mouth grow we do a post purchase survey task our new buyers were the first heard about telephone and what's influencing their decision shooting word of mouth grow during this covert period.
As a percent of the what new buyer side. It is influencing that the purchase decision faster than we we've ever seen it so.
Clearly this experience that's unmatched the way we treat members the investments we've put towards things like or delivery and member experience post purchase service. We'd hoped those would pay off we believed they wouldn't and we're seeing that in terms of marketing viral.
Great. Thanks, so much.
Thank you. Our next question comes from a line of Ron Josey from JMP Securities. Your question. Please.
Great. Thanks for taking the question and amazing numbers. So I wanted to ask John maybe bigger question, just given your commentary around social dispensing and and obviously the natural demand were seeing just to give you give us some insights on how you're thinking about the retail strategy I think all stores and showrooms are still closed and you're still seeing significant demand and and also if there's any update on on what you're seeing.
Digital subscribers potentially converting over into a connected fitness subs. Thank you.
Great actually did that William do you want to take the question on retail and then John can take the next question I was answering the question on mute. So I'm glad you and Oh God. It [laughter] I thought you might have.
Hi, Good last year no no let me, let me way and real quick and William can definitely provide more color on probably those answers, but Ron with respect to the retail stores. As you know we've closed to 100 <unk> retail stores across four different countries.
And the good thing about our retail stores, we love them, we love what they do we love up people being able to try the products. We would look forward to launching products, they're kind of a hub for their local community, but as you point out we don't necessarily need them and <unk> sales have been strong without them for the last few weeks a couple of months.
But what we're excited about when you think about reopening them is that we don't have to be on the bleeding edge. Unlike other retailers in studios for that matter, who other tire business depends on getting back open.
We are going to be able to be a little bit more cautious and a so called the trailing edge of opening back up.
Because our retail folks are actually adding value from home.
Helping out with member experience an inside sales, but we are committed to retail we love retail in this environment, a you could actually see us with some retail struggling.
12 months from now, having even better leases a better locations.
And so a retail has been and we'll continue to be an important part of or strategy and our multichannel marketing and the efficiency of Oh.
Oh for how we we go to market and we didn't break or we engage with their consumers and in the second thing around digital conversion. It's a it's obviously too early to say on how the 1.1 million trialers are going to convert because they haven't come up to the a the 90 day.
Gate, where they would have to decide or to be come a digital subscriber, but you can imagine that with engagement, we're seeing from those people and the quality the content that that has Justin.
Brought up is going to continue to get better as Pelephone Studios, New York comes online in next year as peloton Studios, London comes online to more content more verticals more ways to engage with that content. We expect that a lot of there was 1.1 million will either.
Become a digital subscriber or eventually become a connected fitness purchase or which is obviously the golden goose for a business and but we would welcome both of those but at this point, we don't have any data on the on the conversion.
Thank you.
Thank you. Our next question comes from the line of Jason Helfstein from Oppenheimer. Your quell question. Please.
Okay, Anthony I can Jason given what you've seen the past six weeks on around the digital only subscription or do you believe that can be an attractive LTV business at new users don't convert connected fitness clubs remain digital only after the promotional period expires.
Yeah, I'll take that in Joe's William you can do you guys can weigh in.
We haven't seen a the type of explosive unit economics in that business would lead us to believe that it's going to be a meaningful driver of the bottom line for peloton in the next couple of years that said, we've seen a great increase in LTV and a increase in LTV to CAC race.
I show with our lower price going to 12 99.
Some of the new engagement touch points like Android TV.
And so are we love the business. We are we've said this and we continue to to do it is kind of run of the unit economic breakeven and just try to get as many people on the platform as possible because.
We do like introducing people to our content before and let them letting them trial it before they buy.
But right now, mostly we're thinking about it as a lead gen for our connected fitness.
Platforms as we bring a as we execute on or better best strategy, and we potentially have lower price points and and are different lines, you could see more of those digital trailers and more of those digital subscribers engaging in buying our products. So it is a beautiful wheel house or virtual flywheel at this.
Point, but we we still aren't saying that it's going to be a massive standalone business yes.
Then I think you actually yeah.
Thank you. Our next question comes from the line of James Hardiman from Wedbush Securities. Your question. Please.
Good afternoon, what's your strategy to keep up the connected fitness.
Turned down once the gyms actually reopened it sounds like you know, it's safe to say that the upside versus versus your numbers for Threeq, you and potentially for Q R are largely people, but that didn't have access.
Two there Jim how do you keep those people in in the full.
It helps if they get bought a $22 piece of equipment, but is that sort of when we should think about sales and marketing resuming as Jim's begins to reopen and there's no increasing options for people looking to sustain shirt.
Yeah, maybe I'll start and obviously, John chime in but I think what's what's been the most encouraging aspect.
Some of the data that we've collected from our post coded 19 buyers is that they're incredibly engaged with our product and no doubt a large percentage of them had fitness routines that they can no longer do but we've heard countless stories.
A lot of our newest members, who again did not have purchase intent for the peloton bike prior to code at night team, who are complete converts right. I think so many people are now able to experience the immersive Miss in entertainment and software features and community and.
And we believe so strongly in the value proposition of our product that we think that we are permanently changing the behavior of many of these new members and and again I think you know just based on you know our own research you know, we do think it'll be a slow Cline you know for.
People to get comfortable in environment pitches, gyms, and boutiques and so I think we feel very confident we're gonna be able to keep these numbers engaged it and I think William pointed out very well.
You know when when we think about our our sole aim at this company. It is to drive engagement of our members and everything we do which should drive engagement. So the better we can make our software features like tagged the better weekend you know the more content, we're creating them work fitness verticals.
We're going to continue to do that over the next several months I I think we're going to be able to convert and continue to attract a lot of our newest member who we think might be hesitant to go back to the gym anytime soon.
Great and then sort of a follow up as weak as we think about.
Reopening the economy forget who made the comment in the prepared remarks about.
Not being able to go into People's homes.
Particularly to bring treadmills is actually holding back connected subscriber growth obviously, it takes longer to deliver <unk>, if you're going into people's homes, which would seem to suggest that that the delivery.
Function is not a bottleneck in anyway can you just talk us through how to think about when we get back to sort of a normal delivery process, how that actually helps the throughput.
Oh.
But I think the rate limiting factor for Q4 is really supply chain. It it's not delivery capacity, but but well you maybe you could walk through some of the efficiencies that we gained over the last couple of months and and trend delivery as well.
Sure. It's it's important to note that tread was had before we had to parts deliveries tread was tracking ahead of our forecasts. So we feel great about shred and interest our ability to gain traction what is still a relatively new category.
For Pelephone and as as I as I mentioned earlier in terms of cardio, we feel like treads, an important beachhead for us so.
We were definitely tracking ahead, we were able to take what's the explosion in bike demand, we were able to take some of our field alter a credible field ops folks and and ship them over from what had been tread deliveries to bike deliveries. So it's one of the many benefits of our vertical model and we.
I actually had seen that's across the business, we do a lot of a lot of things ourselves here peloton and so.
Whether its retail and shifting some of those retail folks over into inside sales since we closed the stores to be able to take phone calls and all the inbound demand and orders retail or retail folks led by Jeff Parker and her amazing team also helped on the member exterior side answer froze.
It's the macro point is our vertical model really gives us flexibility in our great management team to your specific question. That's what we were able to do and that's the efficiencies. We saw we were able to take we were able to take the feel about capacity, we wouldn't put to tread and we were able to factor that into this incredible spike and growth and.
Yeah like demand.
The only thing I would add and I mentioned this earlier is that it if we are able to resume trend before the ended the quarter, we will 100% have the delivery capacity for that.
But obviously the the current guidance assumes we are not resuming trend deliveries before the end of Q4.
Okay.
Thank you.
Thank you aren't next question comes from a line of Heath Terry from Goldman Sachs. Your question. Please.
Great. Thanks, just wanted to dig a little bit deeper into the into the supply chain discussion.
If I look at the the backlog that you had reported on the balance sheet in Q4.
For the for the March quarter.
It would have here that you you had about 95000 bikes I'm on ordered at that point.
And compare that to the roughly 165000 that better implied in the guidance for the I'm sure that for the June quarter.
Got to imagine you guys are going as a whole lot more and probably already party have trusted month April well a lot more than 65 or 70000 70000 bikes.
Is that isn't the guidance for Q2, an indication of sort of what that hundred 6500 70000.
Where the supply chain sets now or sort of where the capacity of the supply chain sets now and could you give us a sense of sort of all of these efforts that you have to expand the capacity of the supply chain sort of where supply chain capacity could be and.
In September and December you don't particularly ended in December given that you won't necessarily have the ability to pre build to the way you normally would have had a back out of a typical holiday season is there is there a number you can see yourselves getting too in terms of the.
Ability to deliver or the supply chains capacity to deliver you know over the over the next six six months or so.
I'll just take I just want to make a couple of point of clarification and then I think William can do a deeper dive for you on on what we're doing from a supply chain perspective, I think I've said in the past that.
It's hard to look at our inventory and get an accurate picture of how many bikes right. We have available for sale and as you can imagine order to delivery times I'm very significantly across the different markets. It depends on kind of where we're seeing certain spikes in demand and as you know we have.
Two and a half dozen warehouses across the country and and now warehouses in Germany in the UK, Canada, So I'm Lucky and Anders tried inventory there so I wouldn't necessarily look at inventory.
Yeah, I wasn't looking I spent a great story I was looking at the I was looking at deferred at your deferred revenue line.
Yeah, and and so on and on deferred revenue.
Yes, we we 100% entered Q4 with they would they pretty decent backlog and then remember any sales that are occurring in Q4 are also going to be a you know a backlog for fiscal year 21.
So.
With that I don't know with William you want to address some of the specifics around what we're doing in supply chain, but it there. It definitely is is you know we feel very what I will say as we feel very good about the sales and subscriber estimates that we're giving for Q4.
That those we feel very confident we can deliver on from a supply chain perspective.
Sure Yeah.
Just to add here.
We've done a lot to de risk the supply chain and support this a this growth, including yeah, and just where we put our manufacturing with two terrific manufactures and topic.
It is now as you know last fall we acquired.
Topic and is now part of pellet talk and then Brexit and he was a third party manufacture also in Taiwan. So we are dual sourced on bike and most of the major components. That's de risked their supply chain a lot on the manufacturing side.
You know as well on the delivery side, we're able to we've got great Threepl delivery providers. In addition, our own feel Bucks a team we've got Exzeo when we've got a JV Han and so we're able to flex volume there and we think there's a long term we are a growth company and we.
You mentioned holiday.
We are coming online with a new factories and made significant cost action that factory, we sought coming we saw this growth coming not that's not in his commentary, but but in terms of our mid to long term growth and so we've got that new factory coming on line I'm not going to talk about unit capacity, but that is substantial addition to our ability to manufacture.
Connected fitness equipment that it's both bike and tried out about new factory. So we feel like we're going to be able to support the growth in the business and that's true across areas like member experience, where we've been scaling up and Brad Olsen and that team.
I've been able to service members.
In a terrific way out of our Plano HQ too so.
We're comfortable.
[laughter] come when when you say when you say comfortable William living is there is that a is that a suggesting that you don't feel like the this is like you're going to be able to get to a point by the holiday season, where you feel like <unk> supply yeah. We're not that he is not a limitation of growth we do yeah, we're not giving guidance and.
Hey, good management, a lot harder he and this that you. If you look at our forecast variability. We're we're pretty tight we had been I don't think anyone could have expected. This period were in as you fully realized as we think about the X factor is sort of what does the baseline looks like coming out of this and so we're not going to give guidance, but I think Joel.
Chipping away to our view, which is we believed that this whole thing it's accelerated to move to connected fitness we're.
Obviously feel great about the business mid to long term and so we feel like we've got plans of places for growth.
Great all right I'll leave it at that thank you both.
The Q. Our next question comes on the line of Jonathan come from Baird. Your question. Please.
Yeah, Hi, first just wanted to ask about more tactically the thoughts around marketing Joe I don't know you're willing to share how low you may be planning in the current quarter and then how you're thinking about when you. When you had short in the quarter the delivery lead time it for any marketing back on kind of any any initial thoughts on the levels, we should expect.
And even some of the tactics you're planning.
Yeah, So in Q4.
The assumption right now is the majority Oh the majority of our media spend is turned off in most of our markets. Obviously, there is still very nascent markets for us like Germany, where you're now we're still in the very early stages of a brand building, but predominantly <unk> for the U.S.
<unk> and UK, we are turning off the majority of our media spend which I think we set in the past is has been roughly call. It huh.
Some of our cost structure in sales and marketing and so in terms of the one other thing I would point out is we do have a slight offset to that in Q4, which is the the cost that it require it was required for the 90 day free trial.
So there was 1.1 million members streaming music cost that is a slight offset to sales and marketing so emps production in sales and marketing in Opex.
Or isn't off that Phil.
Oh, I'm box media spend but yeah, I think William if you Wanna mention when we might think about turning that media on over the next several months.
But yes, you are for just say you know yeah. It's it's it's assumed in our model. After the end of Q4 for sure what the elongated order to delivery.
Yeah. Joe noted, we we feel like these investments in creating awareness around peloton and new products foods in asset for us and we think we're reaping the benefits of all this awareness building our leadership in connected fitness now in a time, where we're off you could envision.
I've talked about the innovation pipeline of new products you can envision.
Substantial marketing going behind on future quarters again, we're not gonna now she thing, but we feel good about that as Joe noted, we're still on in Germany, where we feel like we're we're.
You know, we just launched Germany were still on TV and digital marketing activities. Another other marketing channels to create awareness. So that's how we think about it we will come back on with marketing we will find if your shaky as Joe noted this we get into 2021 and beyond.
We don't think will be off forever, and we're going to invest find new products and the G.S.J. <unk> to continue believe connected fitness.
Okay, Great and maybe just one follow up and the Joel that study that you mentioned, a new connected fitness customers, who were previously considering purchase as well as of the 1.1 million downloaded the app for free.
Any more details on the characteristics of those customers either demographics or you know what their business for teens weren't previously just because anymore insight on those two a big since the new customers potentially.
Yes, no. That's a that's a really great question I'm glad you brought it up in terms of the post co bid buyers specifically one of the boat. Most notable changes in demographics is that they're a that see cohort of age under 35 has significantly grow.
And even before that I know, we previously set in the past that our fastest growing demographics are those that make under 75000 and those that are under 35, we've seen a huge acceleration of that lower age group and we've seen very consistent household income.
Data over the last call. It couple of quarters. So we're really encouraged by that our average age of our customer is going down pretty significantly and I would also say again back to the engagements data, which we think is always the bass leading indicator.
Is that our most recent buyers are working out with us more than any other nucor cohort that weve seen obviously there is the shelter in place that is probably driving some of that engagement, but we're very encouraged by that.
Okay excellent. Thank you.
Thank you and our final question for today comes from the line of Youssef Squali from Suntrust. Your question. Please.
Great. Thank very much two quick ones one the first one just a quick clarification on new product does the what's happening with Kohl's is ultimately the lyrics ciliary the potential rule out of a lower price trend as you guys have talked about earlier, just considering some of the issues you've had with the heavy kind of.
On a that you're selling right now and John So can you guys, obviously on hitting profitability that he's milestones, but with the with the very comfortable cash on the balance sheet and and profitability can you just speak to your capital allocation Uh huh.
That's covert changed any of your thinking around.
Maybe M&A, maybe international expansion doing it little faster than initially anticipated any color there.
Yes. Good question we are.
We are absolutely 100% committed to having a.
I'd say the best treadmill at a lower price we've talked about that a lot. We were committed a last quarter the previous quarter, where we're more committed today.
We personally I love that experience that boot camp Cross training circuit workout.
On the tread off to tread strength training.
Program that that had boot camp and a peloton tread offers in the Palatine tread current owners love and bringing that at a more affordable price point is a massive priority for our entire team again discovered world has has forced us to re look at how we how and when we launched products. This.
Here or next door, you know or whatever but but we remain 100% committed to it and we're very excited about that category and owning.
The tread category globally that has a high priority for pellet on I know, it's a high priority for you guys.
Or <unk> for your investors.
You know if we're not a stationary bike company I know it looks like out right now because we've had to pull back and just deliver bikes for the past few weeks, but please don't take that as anything around our focus or the importance of the tread category for pellet on it it remains a super high priority and we're very excited about the lower priced product in that.
Category. The second question was around or balance sheet and profitability and [noise].
How we think about a growth and investing at this point yourself.
I can't say, we're going to change much about our strategy, we've been pretty aggressive with growth I'm. You know this is.
We're going into.
Another 60 year of triple digit growth on the subscriber growth and we're very proud of that.
And we are proud of our balance sheet, we think it could become strategic with respect to M&A.
Unfortunately, we don't see anything awesome that would really or change the trajectory of what we're doing so we're <unk>.
One two <unk> first second and third priority or organic growth. We are we have a great M&A team and we're looking at smaller things that might accelerate one or two things we're doing but for the most part M&A doesn't look like it's going to be a big part over next few quarters or maybe even for a couple of years, but we we.
We like our balance sheet.
That's a sleep well the profitability you're right make up for from my perspective allows.
Investors to start to see the power of our of our model I'm. So I'm more than anything we've been talking about the power of that we've been talking about how palatine as one of the few companies where growth first as profitability is not a trade off obviously you just saw that I think you'll continue to see that and so we aren't a we aren't changing anything.
You know Covidien ER.
Is changing the operations of ever working from home, including our teams and shutting down our stores and I'm, having to do creative stuff on the continent side. So there is operational changes we've had to make but strategically we're still we're still on track we will enter new markets to your point into a new international markets to your point in the coming years, we will bring new products to market, but.
All of it has been a the same strategy we've been executing against for the past couple of years.
Great that's true.
Yeah. Thank you. This does conclude the question and answer session of today's program I'd like to and the program back to John for at least for any further remarks.
Yes, so in closing I didn't want to loop back on the macro here coming off of Q3 in Q4.
Like everyone a with respect to covert 19, we are hoping for a speedy recovery back to normal we're pulling for society. We're rooting for society, we're pulling for science, we're pulling for New York City by the way, where <unk> or a lot of us live on a personal note I.
I never realized how social I am I'm literally can't wait to go to a buzzy fun packed New York City restaurant with good friends in the not too distant future God willing so we want to get back to normal like everybody.
But that without said I want to talk about pellet on future outlook, and whether or not you want to own our stock.
We believe the Palatine is the future fitness independent of when we get back to normal.
I must point out that like I, just said, we're looking at EUR six consecutive year of growing or subscriber count by more than 100% six years of triple digit growth would hopefully lead you to believe that Teton is not a covance story.
Instead, we believe Palatine as the fitness the is the future fitness, because we offer better experiences at better locations on better hardware with better instructors at a dramatically better value on a per work out basis, and you're going to hear more about that for those of you don't see the value as part of what we.
We offer we're we're releasing a value calculator and the next couple of weeks an updated value calculator on our website I encourage you to play with it yourself to see when you're working out close to 18 times a month, what type of value you're getting vis-a-vis other options in the marketplace boutique fitness or high end, jim's or even value gems.
On a per work out basis, but we are a better value today and with increasing engagement I think I'm gonna remind everyone. In Q2, you saw increasing engagement in Q3, we just talked about increasing engagement and with more affordable products over time, we believe that peloton will always be the best value and fitness better experiences at a better value.
That is covered proof that is recession proof and that is 100% where the entire peloton team is focused.
Speaking of our team won last thank you to the entire peloton team for another fantastic quarter of delighting, our members and outperforming expectations.
Not everybody. Thank you for tuning in.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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