Q4 2020 Peloton Interactive Inc Earnings Call

Good afternoon, and welcome to Palatins fourth quarter in fiscal 2020 yearend earnings conference call.

Joining todays call or John Foley, our co founder and CEO, President William lunch and CFO, Joe would work.

Comments on responses to your question reflect management's views as of today only.

Well include statements related to our business are forward looking statements under federal Securities Law.

Actual results may differ materially from those contained in our implied by these forward looking statements student risks uncertainties associated with our business.

For discussion of the material risks and other important factors that could impact our actual results. Please refer to our FCC filing today shareholder letter.

Which can be found on our Investor Relations website.

During this call, we'll discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

Lastly, I want to remind everyone that we'll be hosting a virtual investor and analyst session next Tuesday at one P.M. Eastern you can find the details on our IR website. We hope you can join us.

With that I'll turn the call over to John.

Thanks Peter.

Hi, everyone. Thanks for joining us to discuss our fourth quarter and full fiscal year results.

What a remarkable year it's been.

We're setting that a global pandemic continues to recurring dormice havoc prematurely, claiming so many lives and bringing profound hardship to millions of others.

But we remain hopeful that human ingenuity, we'll be able to rein in this play before too much more suffering occurs.

We profound we think are front lines healthcare workers and other a central workers continuing to keep us healthy unsafe.

This year is also brought back into focus long standing societal injustices ingrained in our communities.

From Palatins beginnings weve endeavor to create an inclusive and supportive workplace and community forever, one, but self reflection in the wake up this year as tragic events, let us to believe we can and must do more.

Peloton is committed to being an anti racist organization and to help achieved that goal. We have made 100 million dollar commitment over the next four years across internal and external initiatives to fight racial and justice and an equity and promote health and wellbeing for all.

I'm incredibly proud of the hard work of all peloton team members.

It has been another staggering year of growth and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services.

The strong tailwind we experienced in March as the Cobot 19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.

Organic demand for our bike remains strong and member engagement remains elevated despite improving weather and the gradual reopening of the brick and mortar fitness locations.

With the unexpected continuation of these elevated sales trends our teams have continued to grow our manufacturing base, an expedited shipments of products, where possible while scaling delivery I remember support teams.

With that said well, we have reduced wait times for our bikes since may there remains much work to be done.

Amidst all of this we have worked hard to innovate our content connected fitness product portfolio and we are proud to introduce a major expansion of our hardware portfolio delivering on our promise of offering a better best product strategy for both bike and trad.

Bike plus our exciting new follow up to the bike that launched peloton and created the connected fitness category.

As a new 360 degree rotating display enhanced sound and digital resistance controls to providing more seamless and immersive workout experience.

We've listened to our member feedback and kept what's special about our original bike, but added features we know our members will love.

The 360 degree rotating display allows members to easily pivot until the screen, adding strength yoga and stretching to the routine or take our new bike boot camp class series.

With the announcement of bike plus we implemented a 350 dollar price reduction to our original bike, which is now available for $49 per month on a 39 month zero percent a PR financing.

Over the last five years, we've been able to realize significant production and scale efficiencies. We're excited to pass those sick cost savings to prospective members.

As of today nearly all of our 103 showrooms are now open for appointments, where members can see and try or new by plus.

The bike plus is now available in the U.S., Canada, UK and Germany.

On Tuesday, we also announced coming availability of our new lower priced peloton tread.

Our new trad brings all of the magic of pellets on fitness ecosystem from our immersive running and boot camp classes to our interactive software in community to a more affordable smaller footprint.

Despite the smaller size the peloton tread has ample running surface area and provides running comfort on a sleek don't drive.

While we had hoped to launch our new tread more quickly and in greater supply we had to make some tough decisions regarding supply chain resource allocation due to the surge in demand we've been experiencing for our bike.

We also felt it was important to introduced a full bike and tread portfolio of products all that wants to give customers the best visibility to choose the product or products that fit their fitness goals.

As you know we won't cut corners, when it comes to product quality or delivery standards as both are critical to delivering the best customer experience.

We are as confident as ever that our new trad combined with our existing tread now known as peloton tried plus is a better best tread hardware portfolio that represents an enormous growth opportunity for peloton over the coming years multiples of our bike opportunity.

As we view the trend line has a portal to full body workout.

As we noted in our press release, our new peloton tried will be available in the UK on December 26, and in the U.S. and Canada early next year and Germany later in 2021.

It has long been our goal to democratize access to fitness and lowering the price of our bike along with the introduction of our lower priced peloton tread are important steps to achieving this goal.

The heart of our strategy is increasing the value proposition of our platform, including expanding our portfolio of connected fitness products investing in new fitness verticals, adding innovative software features and continuing to improve our overall member experience.

As member engagement rates continue to climb we're lowering our members cost per workout.

In the same Dana providing more value in conjunction with the launch of the bike Clos were excited to debut our new series, a bike boot camp classes and in the coming months well have other exciting new content verticals available on peloton digital.

To help prospective members assess how the value proposition of peloton compares to their current fitness routines. We recently launched a value calculator on our website.

We encourage you to visit and check it out so you can see how much time and money your household can save with the Palatine platforms overtime.

Onto our subscriber metrics.

We're thrilled to say that we passed a major milestone this past quarter growing our connected fitness subscription base, 113% to over 1 million.

As of June Thirtyth.

We had 3.1 million global members.

Inclusive of our 1.9 million connected fitness subscriptions and 317000 digital subscribers.

We remain very excited about pellet on digital where we're seeing improved conversion and upgrade rates stemming from a lower price of 12 99.

90 day free trial earlier in the here and our improved value proposition with a broader library of non cycling classes and access points across Apple ROE COO fire TV and Android TV.

As of today, we have grown to nearly 500000 digital subscribers.

While we have seen incredible growth and digital subscriptions, we do expect growth to taper in the coming quarters.

Digital fitness is a highly competitive category with higher churn and lower barriers to entry than our connected fitness subscription and model.

Well, we believe we have the best digital fitness experience with the broadest and deepest assortment of high quality programming. We continue to focus on digital as an acquisition channel and added value for our connected fitness subscriptions and we're excited to say that digital is emerging as our fastest growing lead generation channel.

My favorite <unk> is workouts represented by our connected fitness subscriptions.

In the fourth quarter workouts reached 76.8 million up 333% year over year equating to nearly 25 average workouts per connected fitness subscription per month compared to 12.0 workouts per subscription per month in the fourth quarter of last year.

Our incredibly high engagement levels have resulted in continued low average net monthly connected fitness churn.

Which for the quarter and full year was 0.52% and 0.62% respectively.

Hello, Sawn is a great example of our ability to deliver a breakthrough member experiences the drive engagement, while demonstrating the scale and commitment of our community.

Over the course of four weeks this summer over 325000 members participated in Pelephone.

Logging over 9 million workouts and raising over $1 million for hunger relief.

Before I turn it over to Jill to take you through the quarter an outlook for fiscal year 21, I'd like to extend my deep appreciation to our entire peloton team.

You have risen to every challenge this uncertain world has thrown at us.

And stayed true to our mission of bringing physical and mental wellbeing two I remember community.

As I, often say I'm proud to know you to work with you and to learn from you every day.

Thanks for what you do.

Now over to your Jill.

Thanks, John before diving into the numbers I'd like to highlight a change in the way we report our segment.

With this quarter's release, we have called <unk> and other segment, which includes primarily apparel sales into our connected fitness products segment.

As many of you know a large percentage bar apparel sales are related to pellet times referral program, which helps drive sales bar connected fitness products.

Airport is changing reporting reflect how we think about the interplay between apparel in connected fitness products out.

Oh, so other represented less than 2% of our consolidated sales and we believe narrowing our reporting to to segment operates a cleaner picture of our operating result.

Do you see how does change impacts our prior reported results.

We see the reconciliation table in the appendix of our shareholder letter.

Now onto our results for the fourth quarter.

In the fourth quarter, we generated total revenues of $607 million, representing 172% year over year growth exceeding expectations across all geography.

Performance was driven by a significant number of undelivered bikes carried over from Q3.

But I did bike shipments and strong gain demand throughout the quarter.

Well, we had recently I'm trying to sales in deliveries in some markets towards the end of the fourth quarter tread slot had minimal impact on our revenue in the quarter.

Gross margin in the fourth quarter grew to 47.6% an improvement of 275 basis points year over year.

Our connected fitness product gross margin was 45.3% exceeding our expectation.

<unk>, including 60 basis points of impact from the inclusion of the other segment.

Year over year improvement was driven by a mix shift to bite deliveries and continued product cost efficiencies achieved partially offset by overall expense growth, including expedited shipping of our product.

Uncoated related costs in the quarter.

As of today, we have resumed normal delivery protocols for our bike.

Fred clutch delivery and service calls in nearly all of our market.

Subscription gross margin for the quarter was 56.8% and subscription contribution margin was 64.1% exceeding expectations, primarily due to the leveraging of our fixed cost of content production.

Total operating expenses as a percent of revenue was 32.7 per cent compared to 66.9% in Q4 last year.

We continued deposit the majority of our advertising sad, which when combined with our sales performance drove significant year over year improvement of sales and marketing as a percentage of Robyn.

With better than expected sales.

Better gross margin and operating expense leverage our Q4, adjusted EBITDA was $143.6 million, representing an adjusted EBITDA margin of 23.7%.

We're pleased that Q4 represented our first quarter of positive net income, which was $89.1 million or 27 cents per diluted share.

We're proud of how quickly we've achieved our profitability, but our priorities are unchanged. It will continue to invest aggressively and new product development scaling on manufacturing capabilities, introducing new software features and adding more fitness and wellness programming in order to capitalize on what we believe.

As a massive global market opportunity.

We have a strong balance sheet with over 1.8 billion of liquidity, an uncapped 250 million dollar credit facility, providing significant resources continue investing in our platform to drive growth.

Now onto our outlook.

Given where we are in the quarter slots are significant backlog of like delivery, we have a solid into our first quarter result.

Do you should expect our Q1 results not closely to the guidance that we're offering you today.

Looking further out into fiscal <unk> 21, we've had to make important assumptions regarding our performance as well as the sales mix of our new product.

And while Cobot 19 is clearly had a positive impact on our performance to date, the duration of the crisis and macro economic impact remain unknown.

While we aim to offer a realistic range of anticipated performance for fiscal year 21, We're also with knowledge gene that projecting more than a quarter out does present uncertainty.

When we reported Q3 results could may we'd expected demand to moderate in Q4. However, the unexpected increase in coated 19 cases in many states starting in late June had sustain the imbalance of supply and demand in many geographies for us if it made it challenging can meaningfully reduce.

He is our order to delivery time frame in the U.S.

Well, we have materially increased our production capacity in recent months and continue to grow our manufacturing capabilities. We do not expect to return to normalized order to delivery windows in the U.S. prior to the end of Q2 fiscal 21.

In Q1, we expect revenue up 720 million to $730 million, representing 218% year over year growth at the midpoint of the range.

At the end of Q4, we had 230 million of connected fitness deferred revenue associated with bikes ordered but not yet delivered.

The price reduction of our bike yesterday will impact revenue in Q1, as we are proactively refunding all customer to receive their bike, but are still within the 30 day home trial window. We are also refunding customers waiting for delivery up their bike.

Those customers pending delivery can also opt to upgrade their order to bite class for an additional costs.

Our guidance reflects the substantial refunds, which reduced revenue for the period. We believe these automatically funds are the right strategy propel a time as a member its first organization.

Also current U.S. bike owners are eligible to trade. It in her bike plot and received $700 in cash a free yoga and Tony accessories package and pre pick up.

We were able to make this compelling offer because of our incredible logistics platform and partners were able to perform reverse logistics at scale.

Please note that the buyback program does not impact the piano only the balance sheet.

For fiscal 21, we're estimating total revenue in the range of $3.5 billion to $3.65 billion, representing 96% year over year growth at the midpoint, we're incredibly excited at or near bike, plus and lower priced peloton tread into our product portfolio.

Which will drive additional growth for us going forward.

The introduction of the new peloton tread will have minimal impact on our revenue in fiscal 21.

And what impact growth more meaningfully in fiscal 22 wouldn't be on as we ramped production and ensure a high quality rollout as John noted earlier.

In Q1, we forecast end of period connected fitness subscriptions of 1.32 million to 1.33 million, representing 135% year over year growth at the midpoint.

For Q1, we expect average net monthly connected fitness churn to be below 0.75%, reflecting recent trend.

For fiscal 21, we forecast 2.5 million to 2.1 million ending connected fitness subscription representing year over year growth of 90% at the midpoint, an average net monthly connected fitness churn to stay under 1%.

For Q1, and the full year, we expect a gross profit margin of approximately 41%.

In Q1, and full year, we expect connected fitness product gross margin to decline year over year to roughly 37 and 36% respectively.

This reflects the price change of our existing bike a mix shift capella time, tread climber and further investments we plan to make as we continue to scale, our manufacturing base and logistics platform.

Subscription contribution margin in Q1, and the full year will be roughly flat year over year at 63% and 64% respectively.

With the massive opportunity in front of us to grow our global fitness platform, we continue to invest in fitness content, while we expect some leveraging of content production cost.

There should piece will largely be offset by increases in variable costs, such as music associated with the continued high engagement of our members.

A mix shift to digital subscription given the price change and performance of 90 day free trial.

Additional investments in new content verticals, and increasing our library of international and foreign language classes. However, our long term target of achieving a greater than 70% subscription contribution margin remains intact.

At this juncture, we expect moderate advertising spend in Q2 and more robust spend as we progressed through the fiscal year.

With light marketing spend in the first half of the fiscal year, we will be able to deliver significant year over year, leveraging in sales and marketing expense.

The percentage of revenue in the full year.

We will also continue to invest heavily scaling our platform to people and technology, but expect general and administrative expense to show significant leverage as a percentage of sales.

Research and development expense is expected to be flat as a percent of revenue year over year.

Despite the reduction to gross margin in Q1 due to the price reduction on our original bike and mix shift to tread plus we expect strong sales flow through leveraging the fixed costs and reduction to media spend actually produce Q1 adjusted EBITDA in the range of 80 million to $90 million.

This represents an adjusted EBITDA margin of 11.7% at the midpoint of the range it.

For fiscal 21, we expect adjusted EBITDA of 200 million to $275 million, representing an adjusted EBITDA margin of 6.6% at the midpoint of the range.

I will now turn it over to the operator to take your question.

Thank you to ask a question you will need to press star one on your telephone again Nexstar wandering your touchstone telephone to ask the question to withdraw your question press the pound Q.

We asked if you please limit yourself to one question and one follow up please standby won't be compiled the culinary roster.

Our first question comes from a line of Doug Anmuth of JP Morgan Your line is open.

Thanks for taking the questions one for Jill and then one for John Jill just on the 41% gross margin you talked about for fiscal 21 computers and 37% connected fitness.

He just help us flush out a little bit more around the gross margin profiles across before pieces of hardware going forward, maybe just a little bit more on the puts and takes and do you still expect connected fitness product gross profit to offset sales and marketing spending.

On a more normalized spaces and John you're clearly talking about strength and boot camps, a lot more here and let me see that with the rotating screen on bike plus and then also the trend is a gateway to strength.

What are your current views around the specific hardware product that's strengths focus thanks.

Great. Thanks, Doug So first on gross margin as you can imagine as we introduce new products were naturally faced with a higher cost structure until we can achieve quantities that allow us to take our cost down for us. It was really important to lower the price of our bike by $350.

But obviously that has impact to our connected fitness gross profit margin, but does represent a really important step for us in increasing the acceptability of our products.

I would say in terms of your your question around is our a deterioration in gross margin.

Offsetting still our sales and marketing expense or what we have often referred to as Mac CAC. The answer most definitely as he asked and you're correct. We focus very much. So on gross profit dollars not gross profit margin.

Allowing us to do things like lowered the price Oh the bike.

The only other color I would give you is it if you look across our bite portfolio now that we've dropped the price of original bike I would say those two products have similar gross margin and our new tread and our existing I'd tried plus have very similar gross margin profiles as well.

[noise], Yeah, Doug How're, you doing a good to connect yeah. We as you know we loved strength, we need to wins strength from my perspective.

We are going to with Arden bike true line, a better best NR Trendline better best we're clearly going to win cardio and strength is an important vertical for us to.

To put a upside down on a clearly if you're going to move all of your fitness programming into the home.

Strength strength is another complement to your cardio that we need to win a I will remind you I think you know this dog <unk> with our New studios in New York in London, we have dedicated strength.

Studios within those broader studios, we're going to have more and more.

Programming for strength training not just the bike boot camp, but a with the with the lower price tread the treadmill workouts.

And tread boot camp, which I've said in the past I think are the best to get a best workouts, because they're both cardio and strength and so we think that all were approach here is going to be a winning approach yeah with respect to other products in the marketplace. We haven't seen anything that we are.

I personally that I'm not excited about I like to work out with free weights and bands and and body weight and we're going to offer that in such volume that we think we're gonna be able to win with a with our current approach. So does that answer your question.

Yes that helps thank you appreciate it.

Thank you. Our next question comes from Heath Terry of Goldman Sachs. Your line is open.

Great. Thanks, John back back in May you, all talked about doubling production capacity.

Can you give us a sense of what you've been able to do to increase production capacity. Since then as demand has stayed at such a.

An elevated level and how you envision managing meeting the incredible demand that you're seeing now versus the the risk of Overbuilding ahead of you know what hopefully eventually become sort of more no normalized demand as we get back to whatever version of normal we're going to we're going to get back to.

And then I'm jealous, we as we look at the margin guidance for.

The current quarter and for the for the full year can you give us a little bit more detail in terms of what role advertising plays within that obviously a lot of the outperformance in this most recent quarter was delivered was driven by.

Not really being on the air and marketing the way that you were it at what point do you see a the company coming back on to drive demand in Europe in in that way in your financial forecast.

Hey.

Thanks for the questions I'm going to pass it over real quick to William land shut President, who I know you know.

And just a second but I do want to say two or to your idea, but we were building supply chain capacity. That's that's they turned this never been <unk>, it's never come up and the called on senior leadership a rooms are boardrooms.

The what do we do to me to meet the current demand is absolutely a top three priority and William can give you little bit more color, but we believe this opportunity globally I'm in the salmon Tam in the in the new markets, we're going to go into the in coming years on the and the existing markets. When we feel like there was such in May.

Massive opportunity that we need to invest heavily in supply chain for years and years to maintain it we don't think that it's going to when you say normalize coming out a cool good.

We don't we don't see that we see that we're gonna be able to market into.

A massive opportunity there, we're going to need supply chain capacity for years and years, so but with the short term Oh dynamic, which is real I'll pass it over William real quick.

Hey Eve.

Well as you noted we we mentioned we were going to double our capacity.

And we've done so thanks for the teams for being able to do that as we think about are going forward. We're both expanding in investing in our own facilities as you know we acquired tonic.

I've been investing both an expanding existing factories as well as building a new factory in Shinji that comes online in December.

As well is working with our third party partners to ramp up both bike in tread production.

And so we feel very comfortable that against the guidance Joe communicated.

We will be able to deliver products and we also understand that the order to delivery through the first half's, which is the end of the calendar year isn't going to be longer than as our standard.

As we look forward that's changed the build out and that coming online in December is going to be a big big deal for us It's got flexibility for both biking trad.

Significant unit capacity.

And and so we're excited about that and that's going to give us continued growth.

We're on our production.

Great and and me I'll I'll take the second part, which I believe was how we're thinking about sales and marketing expense in fiscal 21, you can imagine its a bit of a delicate balance for us of course, we had some new products that are now.

Sellable bike plus available now and obviously tried coming later this year the UK into the U.S. and Canada early next year. So for US we do think it's important to let the world know about our new products, but obviously need to pay attention to order to deliver.

So I think what you'll see from I thought you see the guidance in Q1 reflects my marketing spend similar to what you saw in Q4.

Moderate marketing spend in Q2, and then probably a more normalized.

Run rate as we move through the year, what that will obviously due to adjusted EBITDA margin is make it a little bit front, a front half loaded for us, but again, we're excited to get back.

To add to being on air and then the last point I would make it is as we think about the long term, we do see a us getting more efficient we now have a growing product portfolio, which provides us with potentially some marketing marketing synergies down the road.

We also had been studying the organic demand that we've been able to generate over the last six months as well. So we do think coming out of all of this we will see additional efficiency in our sales and marketing spend as we move forward.

Great. Thanks.

Thank you. Our next question comes from Justin Post the Bank of America. Your question. Please great. Thank you first of all thanks for providing full year guidance. Most companies are not doing that its brave I was wondering if you could talk about the new products contribution to the year how your.

Thinking about how much it maybe units and how the effect asked piece and then second was wondering you do have the ability to return your bike I guess for $700 credit.

What are you going to do with those and are you thinking about a refurbish program. Thank you.

A great I will take the first question and then maybe William if you want to talk about the buyback program that could make some sense. So first off I would say in terms of product mix. You know, we don't like to get very specific makes him.

Formation, we've obviously done.

Done a ton of research over the course of the last several months to come up with some assumptions for our motto, but I think what I would.

Say is that we believe our original bike will continue to be our largest skew. We again, we're very excited to lower the price of the bite to make our products more accessible and at $49 per month for 39 month financing, we think that will be a very compelling offer and really help us expand our service.

Couple addressable market.

We're also excited that we did reignite our trend bus deliveries and at the and a very tail end of Q4. So we do think throughout the year, we'll see additional sales now coming from from tried plus in and obviously towards the backend of the.

Sure as we launch are lower priced tried we will see some mix shift very backend loaded into the model and as it relates to to bite plus again I would say in pecking order it probably would come behind our original bike in terms of volumes that we expect for the year in terms of lower price tried we.

Really think that'll be a major driver in fiscal 22.

[laughter]. Thanks, Joe on your on the point on trade and we'll just to reiterate a bit joel's opening remarks that we are responding every single consumer a weighted delivery of the bike. So currently awaiting delivery $350 with the price drop as well as those that were within the 30 day.

Okay.

Return window, and we feel like that's extremely members first in fact, we've been out there's a long time and.

Most companies don't don't do those types of things, but we feel like.

No substantial refunds as Joe noted our degree.

Investment in optimizing member goodwill.

So those will be substantially completed by the end.

End of this week and we appreciate I remember experienced in getting getting as refunds to consumers.

Your point on trade and we're excited we feel like that's a rich offer itself. So in terms of ease it's fairly frictionless to to trade in and get the $700 plus the accessories bundle. It also we will pick up your bike.

And then as you noted we do have plans to offer a CPM program, we are not announcing and that will be in the future and we're not announcing that today.

Great. Thanks, Let me, let me say just real quick as a complement to that.

One of the beautiful things about this global platform. We're building as you think about the logistics footprint. The we are delivering the majority of our bikes and tried to globally at this point, including UK, Canada in Germany.

That logistics footprint becomes a pretty powerful reverse logistics platform.

For this [noise].

For the toward the buyback program and the eventual certified pre owned a product that we will offer their consumers in the coming years. So we're excited to get.

Have a future announcements about that opportunity.

Great. Thank you.

Thank you. Our next question comes when a line of John Blackledge of Cowen Your line is open.

Okay, great. Thanks.

Good question, just given the ramp in production as we head into kind of what are typically the biggest seasonal quarters to halt on twoq and Threeq you.

Could you discuss a health ones ability to meet.

The holiday demand and then second me.

I don't I know the 10-K is not out any update on the material weaknesses and reporting around controls. Thank you.

[noise].

On the holiday demand.

I'd mentioned it earlier, we feel comfortable that weren't a position to me.

The holiday demand on bike and trad, that's within a forecast of course as we've seen with coated and we noted in our statements Palatine seen a surgeon demanded so.

We've been busy expanding capacities in the ways I discussed earlier, we feel like we've had a great team.

Making investments as Joe noted aggressively to expand the supply chain and so at this point.

We feel like we've got a great plan in place and.

And we've got to demand forecast and and so.

And we expect to fulfill that demand, albeit with the longer order to delivery. Then then we'd like water custom too that will start to abate.

Based on our projections as we get an acute during Q4.

Great and on the second question, John as you will see I when our 10-K does come out tomorrow that our team I've worked very hard but successfully to remediate all of our material weaknesses. We have made incredible progress across the company bolstering systems people country.

Roles and just wanted to say I'm incredibly proud of the team and their accomplishments here. So we're excited about it thank you for asking.

Okay. Thank you.

Thank you. Your next question comes from Scott does it.

People your line is open.

Thanks, I had to the first one I just an additional question on manufacturing dynamics was curious how much is now being done in house versus third party, and where you're expecting that to balance out overtime and then secondly.

Theres a lot of user data that you collect that can be economically beneficial to the community I'm, especially if corporates and health providers and life insurance companies are willing to offer premium discounts.

In exchange for confirmed efforts, maintaining health and it seems like a pretty big untapped opportunity for the company was when if you could talk about any efforts in this area. Thank you.

We don't split out the inventory.

Own factories for sleep.

We've said the majority are now with the tonic acquisition coming from.

Our own factories.

Our manufacturing partners are valued and we wouldn't be able to fill the told the demand without them just a point on that as well it's not just production when we think about our logistics.

For holiday.

The warehouses, we've expanded the number of bands for deliveries both in the U.S. and our international markets.

Well as our field ops games as John noted our logistics team, we feel like it's a real competitive advantage that we.

And then are hiring and have been training for awhile. So we feel really good about that.

And then I guess I'll turn it over to Joe on the second question.

Yeah, Oh, Oh I've been here.

You're absolutely right.

About the opportunity, we see with corporates and ensures we think that this is a massive opportunity and potentially a very big growth vector for us in the coming years, we don't have anything to announce right now, but I like where you had is.

Specific to data sharing data is a very tricky thing in this world and something we take very seriously so.

With respect to our customers data, we do not have any plans to share it.

And then any scary way that that would be upsides and beyond the wrong side to align with our members. So I put the asterisk on the opportunity, but not with respect to sharing data because that's not something we're going to run headlong into even though that comes up a lot of feel like for eight or nine years I've been being asked about what our.

Plan is with the data and we've never had a plan other than to protect that but but we do see a big opportunity with corporate insurers and I'm sure in the coming quarters, we'll have something to talk you about.

Thank you.

Thank you. Our next question comes from burning the Caribbean Rosenblatt Securities. Your line is open.

Great. Thank you for doesn't have the question I was just wondering if there's any update on the 14 million serviceable addressable market last guys last quarter. You guys said it was bigger now with the lower priced products Im assuming there is impacted how we should gauge I in fact between cutting the price on the bike personal or price trends and then also churns come in below.

Our expectation for the past few quarters can you isolate the benefit of Reactivations versus normal disconnects.

Sure Hi, So first of all thanks for your first question of course, we long believed that our price points have represented a one of the biggest barriers to purchase of our products and obviously weve done things in the past to move the needle and grow our market like financing programs and obviously.

Last year in the fall when we launch 30 day hung trial.

As you can imagine this has been a bit week for us because making our products more affordable without sacrificing quality or member experience has been our goal from day one.

So I think the short answer is yes, we do believe of course lowering the price of our product will have an impact.

On our serviceable addressable market and obviously the introduction of the lower priced tread. We've said this before we think is two to three acts the opportunity a bike, but if you join next Tuesday at our Investor and analyst session. We have been working hard on updating this analysis.

That we presented around the time at the IPO. So we will share that next Tuesday.

In terms of churn.

You know I would first and foremost say that the largest source of churn in any given month is soft churn but of course, what we've seen over the last several months. It may be people that have been idle for some time and then they'd been sheltering in place and what we've seen it is a an up tick.

Over the past couple of quarters of reactivation of those members, so, but I will say first and foremost the biggest contributor to churn is soft churn, which is credit cards getting declined most of the time unintentionally.

Thank you want next question coming out in the line of Ron Josey of JMP Securities. Your line is open.

Great. Thanks for taking the question I won't ask a little bit more of the demographics year and Joe and John I think we've talked about this in the past with 35 under 35 years still the fastest growing wondering is still the fastest growing I think that was like 20% a new sales last quarter and you can just talk about the demos that you're seeing in terms of years and then household income and then John when we talk about.

Digital you know what digital subs to growing as fast as they are the free trial going back down to 30 days or can you talk about conversion rates from free to paid but then ultimately into purchasing a product and and why not keep it at 30 at 90 days why come down to 30 understood. There's a cost there, but if it's a large acquisition tool maybe that can help thank you.

Great Hi, I'll take the first one and then John if you want to chime in on digital.

We continue to make a lot of progress appealing to younger and less affluent households, which has been a goal from ours, a a vars over the last couple of years.

I'm happy to report those under 35 are still the fastest growing segment. When you look at the data from full year fiscal 2020, and again in terms of reaching a broader socioeconomics range, we estimate that households, earning less than 100000 in income annual income.

Our around 46% or so of sales. So we will also I feel like you guys. You're reading My mind, we will also address more specific around demographics during our investor and analyst session next week, but we're very excited about the progress we've made and obviously I think.

With the price reduction I think we're gonna see that needle move even more.

And and like you said, we are I think as you heard of my preamble that we have close to 500000 paying digital subs right now, which is fantastic and kudos to the team.

With respect to metrics conversion and cohorts and all that stuff the annoying thing about our digital businesses. There's so much fantastic innovation.

Including just in the last few months that adding Apple TV Amazon fire TV late last year, Android TV Roku TV, a couple of months ago.

And so many changes to the conversion funnel and the the software on the at adding content that it gets better with every cohort. So it's hard to look at the trends in that business because it's just moving so quickly.

On a pro consumer way so in the coming quarters I think we can have more clarity for you, but at this point, where it's a nascent business we run it at breakeven, it's not it's not going to be a big driver of a bottom line.

And like we said in our preamble are the most exciting thing for US right now it it's become our fastest growing conversion to connected fitness subscribers, which is what we what we were hoping for.

Great. Thank you guys congrats again.

Thanks.

Thank you our next our next question comes from the park methods on him of Barclays. Your line is open.

Hey, guys. Thanks for taking the question. So you had 47% gross margin on the connected fitness segment and based on the rough math approximately the price reductions on the on the bike accounts for approximately 10 to 12 points of margin impact. Just you noted that the new bike plus also has a similar margin I believe interest.

He wants to Doug's question is that just due to higher bill of materials or is it also higher cost and production operations.

The new bike plus I guess, what I'm trying to understand as you know can we expect this 37 38 or high Thirtys gross margin to kind of go higher over time as you achieve efficiencies on the production site.

Yes, I mean, if you look at our track record on our original bike I mean, if you look back to our gross margin a five six years ago. When you look at the progress. We've made is it is it cost us a dollar.

Five six years ago. It now constitutes 30 to 40 cents to make in so what what is so exciting about pellet tons businesses at where business is very few skews and in the world and fitness that is relatively unique and for us as we as we grow and scale.

Each of our products and again, we're gonna have a very prudent portfolio of products, we're going to be able to achieve these these efficiencies overtime. So obviously the stake I put in the ground was was really around you know that that's the original bike today and.

Plus carrying similar gross margins, but again as we continue to build a million 2 million threemillion, we're going to realize even more product efficiencies, but again you. We love. This idea that we're able to give a lot of those efficiencies back to the customer to continue plow that into country.

We need to grow the topline.

Got it that's very helpful. And then maybe one question for John So would the gym get integration obviously the user experience is grade where else do you see opportunities to partner with large ecosystems like Apple over the long term. Thank you.

Well.

That's a good question I wish there were more obvious integrations.

No we were trying to partner with all the big platforms, but again, but with respect to data it becomes pretty tricky of who's getting whose data and how does the member feel about it. So we were very happy about the Apple integration Apple watch integration and to be totally honest I would've thought that came from our members like a lot.

Of our R&D and a lot of our or new products and new new features our ideas that are members are out in the table thing we need. This we want that so that was a big one and we were excited to offer it but at this point, we're not going to announce any any other ones other than there is tons of innovation I'm taking.

Place, where we're trying to keep our R&D dollars at some meaningful percentage of our of our top line. So we're investing in software engineers and hardware engineers as you can imagine so that there's continued innovation and the coming years.

Got it okay. Thank you so much.

Thank you. Your next question comes from Lee Horwitz of Evercore ISI. Your line is open.

Great I should the question two if I may John has the best of adoption of the connected fitness category.

During this call that change how you're thinking about the timeline towards geographic expansion say beyond your current footprint and then Joe maybe touching on some of the comments around digital only does for your guidance assumed that this improved conversion of the digital only subscribers for connected fitness subscribers maintained throughout the year slow.

As down or how should we be taking about that sustainability throughout the year. Thanks much.

Yeah with respect to international to be honest it hasn't changed either our ambitions are our plan Luckily cabin corners, and the leadership over there.

Been doing a fantastic job preparing for new markets that we we hope to get into in the coming years, a new languages. We're also excited about Gen Cotter and Kevin Shorelands on the content side, our thinking about.

Language specific opportunities. So we we've been fortunate that those leaders and those teams have been ambitious and relatively on hindered by the realities of could that have impacted some of other parts of our business. So we hope in the coming quarters in years to have some more updates there specific but like we said that.

As we have global ambitions and.

We're excited to get into more countries and more languages as soon as we can.

And just agree on John's point on International you know with Germany, and the UK, where in the number two and number three.

Fitness markets in the World and <unk>.

As you know we're also in Canada, we feel like we've got great momentum there so.

In the short term, we're really focused on continuing to invest in both those markets in Germany. For example, which is our newest market. We continue to invest in marketing and opening new stores during cold, but when we were largely awful marketing in the U.S. and that was too quickly established leadership and the connected fitness.

Markets. So we feel like we still have a lot of upside against our current international strategy acknowledging.

Our ambitions that John just mentioned.

Great and on digital as you know digital is still a very nascent kotick for us and we know Standalone hung fitness content is a highly competitive high churn business.

Although we do understand that our churn is much lower than other fitness apps and we do believe we have the best content available.

Given this where were we don't really a guide on on digital subs. We did no earlier in the call that we have nearly 500000 paying digital subs today, that's largely the result of our pricing change, we made last year and obvious.

Say that success as a 90 day a free trial that we operate in March and April this year, but don't expect that level of growth to come through in the balance of the year I'd also highlight where it really has a impacted our outlook for fiscal 21 is on our digital shot that 12 99.

Is less profitable than our connected fitness a subscription business and so on because we're seeing numbers that are much larger today than they were a year ago. It is it a little bit a have a drag it's one of the offsets to some of the fixed cost leveraging that we're getting into should scripts.

In business.

But you know again as John noted earlier, we're so excited about it as an acquisition channel.

And we're excited that the content and the platform keeps getting better and better and so we still see it as an incredible value that we're getting to work connected fitness subscribers and again this great acquisition channel.

And I guess that acquisition channel I guess the conversion meant to hold throughout the year. This uptick in conversion, you're saying to to full connected fitness.

Yeah, we eat that sorry go ahead William.

No worries you know we're getting better.

Converting and that has us excited if you look good.

We measure classes in cohorts. So if you look at the classes of digital subs from three years ago and month, one three months six or 12.

24, we.

As you might imagine we measure the upgrade to to connected fitness on a daily weekly monthly basis and well we've shown is that.

Every month, and every year and and frankly and a more accelerated way in the last 18 months, we've been getting more and more effective on those upgrades and so that helps US excited John noted some of the tactics were using to enhance that some of the it out getting to understand the digital sub better what hardware platforms are interested.

Well, two surgically get them into content.

Turning them into connected fitness, so well, we're not guiding to it we are focused on it we've got a whole team on it it's a big deal for US It's why we think.

Its why we think that the App and digital is such an effective weapon in our marketing Arsenal and why frankly, it's a it's a leading lead source for connected fitness new connected fitness customers day.

Great. Thanks, so much question.

Thank you next question comes from James Hardiman of Wedbush Securities. Your question. Please.

Hi, good evening, thanks for fitting in so the connected fitness sub growth has has obviously been fantastic.

But if I look back you guys cross that million sub mark less than halfway through the quarter I'm doing my math right then that pay slowed a bit during the final a couple of months I guess, a math right.

And the why would that have been the case given given all the investments made in manufacturing capacity.

It's it's precisely that I mean, I'm, obviously, we have you know about an eight week lead time, when we put in a purchase order or when we.

Decide we need a product to the time, we can get that product landed here. So.

For US we started to see as you can imagine towards the end of the fourth quarter I'm much more constraints on supplies. So it's precisely that it was you know we just you know where were constrained by supply.

Okay, and then maybe if I can dig in on the margin side, just just a little bit here, obviously margins have been the arguably the biggest area of upside versus expectations I'm just trying to figure out how much of that is it's still a function of the pandemic.

As we look to future guidance. How much is just you know you're you're able to leverage your fixed cost to a much higher degree. So maybe speak to I guess, a deep do you think you'd be profitable today on the EBITDA line, yes, if we were at more of a normalized marketing spend and.

Yes, I think about the guidance for fiscal 21, you expect to be profitable and in each of the four quarters. Obviously, the first quarters sounds like it's going to be the best of the quarters, but how should I think about the final three quarters of <unk>.

Sure. So I think first off I think there's there's a lot in there you were talking I think initially about gross margins and probably more so the upside surprises as Dan in connected fitness and then maybe go back into EBITDA that makes sense is that correct.

In terms or.

Yeah, I mean I.

You can connected fitness the first thing to understand is obviously, that's you know that's everything from product cost to logistics and so there's a lot that moves the needle within it I will say in Q4, our expectation was that we would have to.

Expedite more shipments bikes and we ultimately didnt need to do that and so that was a big driver of.

I exceeding our expectations there and of course as you noted.

We do we did see again as we continue to scale our products, we are seeing more product cost efficiencies than we expected as well. So it just happens to be an area, where there's just a lot going on it sometimes can be I'm, a little bit a challenging to predict given that things.

Our moving often in different directions are they cannot move in the same direction and provide a bigger swing to the upside. So certainly take your point that that was well ahead of expectations, but I would say we were you know really expecting more more shipping costs and then we needed to have in the model.

As it relates to EBITDA I said earlier I think if you look at how EBITDA first half second half clearly with us ramping our marketing in Q2, it's it's really more weighted to the first half but at the at least for the time being our belief is that we.

We'll be profitable in every quarter, we're gonna be unlike other years, where we're very heavily weighted in Q2 in Q3 because of cold there because there's a new products because of the lower price on the original bike you're seeing more cereal.

Quarter over quarter growth, which for us is very different from previous years, where Q2 in Q3 are typically bed quarter's for us in so I think you're gonna see a little more smoothing this year in revenue than in previous years.

Thank you at this time I like to turn the call over to John Foley for closing remarks, Sir.

Thank you everyone. Thank you Jill.

In closing I want to propose a pretty simple concept.

That fitness is moving into the home because home is it better location.

With roughly 35 million treadmills and U.S. homes today.

American consumers have said that they want fitness at home.

It just hasn't worked until now.

People are now moving on to POLATOM because of all incredible instructors because of our strong in support of community.

Because of our best in class hardware, our net worked and Gamified software a world class music or unparallel delivery experiences and so much more.

Again these are not Qubic dynamics. These are fundamental sustainable dynamics that meet people, where they are with content and programs that exceed their fitness and wellness goals and make it fun and engaging to work out at home.

For the first time full stop.

Finally, a huge thank you to our team you all incredible what a wild six months of Crazy hard work. It has been for all of US. Thank you for everyone for thank you for everything you do to help our members with the physical and mental health. It has been more important this year than ever.

And with that thank you all for tuning in talk to you next week for first annual Investor Day Indoor our next quarterly earnings call a in November Tonight, everyone. Thank you.

Ladies and gentlemen, as everyone else.

Thank you for participating you may now disconnect.

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