Q2 2021 Peloton Interactive Inc Earnings Call
Ladies and gentlemen, and today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to peloton Interactive second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session task of question. During the session you will need to press star one on your telephone.
And please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker Mr.
Mr. Peter Stabler head of Investor Relations. Please go ahead Sir.
Good afternoon, and welcome to peloton and fiscal second quarter Conference call.
Joining today's call are John Foley, our co founder and CEO and President William Lynch and CFO Jill Woodworth.
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 Act.
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 SEC filings and today's shareholder letter both of which can be found on our investor Relations website <unk>.
During this call we will discuss both GAAP and non-GAAP financial measures of <unk>.
Reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.
With that I'll turn the call over to John.
Thanks, Peter Good afternoon, everyone. Thank you for joining us today to discuss our second quarter results.
Global demand for our products was strong throughout the quarter and we added a record number of new connected fitness subscriptions.
We also launched our new peloton tread and the U K.
Produced over 2100, new classes for our on demand content platform.
And added more software features to continue building the best member experience and global connected fitness.
And our members are clearly responding as we again posted substantial year on year engagement growth and the quarter.
Over the last several quarters, we have been very focused on significantly growing our manufacturing capabilities.
15 months ago, we bought tonic one of our Taiwanese based third party manufacturing partners, which has allowed us to significantly scale, our bike and bike plus production.
And over a year ago, we broke ground on a new tonic plant and Shinji and we're pleased to report that this facility is now up and running.
With the desire to have greater control over our own supply chain destiny.
We were proud to announce our biggest acquisition to date pre core and we're excited to welcome the pre court team into the peloton family.
Pre cores of leading global manufacturer of commercial fitness equipment.
Our acquisition of pre court will allow us to produce peloton products here and the U S and fast track of our ability to build a large domestic manufacturing footprint over time.
Importantly, pre core has deep manufacturing and R&D expertise, which will help us bring new hardware products to market more quickly and better position us to serve our north American member base over time.
Pre course product portfolio and sales team will also accelerate our commercial business, where we see a significant opportunity to grow pre course franchise, while introducing the peloton platform to an even greater number of fitness enthusiasts and channels such as hospitality multi unit residential buildings.
But campuses and colleges and universities.
As we mentioned and our transaction announcement.
We expect to be producing peloton equipment and the U S. By the end of this calendar year of pre cores, North Carolina facility and expect to close the acquisition early this calendar year.
Pending a successful close we'll offer more thoughts on pre Covid next quarter.
Though we're beginning to see the benefits of our extensive supply chain investments are delivery wait times remain elevated as with last quarter continued strong demand for our products West coast West Coast Port delays and Covid related delivery challenges have prevented us from returning to our normal order.
To delivery wait times, and unfortunately forced us to reschedule many of those deliveries.
To address this issue, we will continue to invest heavily and systems teams and manufacturing capabilities to ensure we don't disappoint our customers going forward.
Importantly, we are going to do everything we can to get back on the right side with our new members.
And in order to do that we are investing over $100 million and expedited shipping to reduce the wait times for our products.
This expense will include air shipments expedited ocean freight and incremental costs to get containers to other ports that are less congested.
Member support has also been and will continue to be of critical investment area for us to help address the support needs of a rapidly growing member base, we've more than doubled the size of our member support team over the past year.
We will continue making significant investments to get our products to the U S with more certainty and with greater speed.
We have also significantly lowered marketing spend even during our typical peak selling periods.
We are determined to do what it takes to reduce our delivery times and get certainty for customers on the delivery dates we offer.
And a moment Joe will offer more color on how these investments impact our guidance for the balance of the year.
We are very excited about the new tread, which went on sale and the U K on December 26, we're pleased with the U K market reception, particularly as it represents the first time, we've offered a tread product to our international members.
UK tread sales have exceeded our expectations and our early reviews have been overwhelmingly positive.
The success of this launch and the fantastic reception of this new product has forced us to reconsider our schedule for our new tread rollout and North America.
Our launch plan originally called for a limited market launch and the U S. On February 9th in conjunction with the launch in Canada.
And the U S. We had plans to start delivering nationally and April.
To adjust to current market dynamics and to better equip our UK and Canadian teams to fulfill expected demand with high levels of customer service, we've decided to allocate additional resources to those markets and adjust our U S rollout schedule.
For many of those eagerly awaiting our U S launch this is no doubt disappointing.
But these additional weeks will enable us to build a deeper inventory footprint, helping us deliver a better member experience once deliveries commence.
Our plans for a February 9th Canadian launch are unchanged.
We will begin selling a limited number of new peloton treads and the U S. Starting on February 9th to consumers, who have expressed early interest and the tread.
And this limited sale will be restricted to a few select zip codes.
We will then move to a full U S rollout, excluding Alaska and Hawaii on May 27th.
Now some operational highlights from the quarter.
We added 333000, net connected fitness subscriptions and the quarter, bringing our end of quarter connected fitness membership base to 1.67 million up 134% year on year.
As of December 31st we had over 4.4 million global members inclusive of our nearly 625000 digital subscribers.
Digital continues to be of high growth sales channel for connected fitness products and we have been pleased with both the exceptional growth and digital subs over the past several quarters as well as our improved upsell conversion rate to our connected fitness products.
Our member engagement continued to soar and Q2 with connected fitness subscription workouts growing over 300% to $98 1 million. That's an average of over 1 million workouts per day and the quarter.
I'm also happy to report that in January we saw our first day of over 2 million workouts.
In Q2, we averaged 21.1 monthly workouts per connected fitness subscription versus 12.6, and the year ago period and increase of 67%.
We continue to see particularly strong growth across our collection of for base classes as members of increasingly embrace our full body fitness content.
A great example is our bike bootcamp series that combines bike based cardio and off bike strength training.
And this quarter bike bootcamp classes were taken nearly 2 million times by our members.
As we've mentioned previously enhancing our strength offering as a key strategic focus for us.
The addition of pilates classes to our strength vertical was welcomed warmly by our member base with over 1 million classes taken since launch.
We will continue to build on the success of our strength content pillar over the coming quarters.
Beyond adding new fitness modalities and class varieties, we're always on the lookout for groundbreaking partnership opportunities as.
As you May have seen we've teamed up with the global Megastar beyond say to produce a series of themed classes and we're proud to be joining her and supporting students of 10, historically black colleges and universities with free two year peloton digital memberships.
Our most recent collaboration is with Shonda rhimes, the hottest executive producer on the planet today.
We worked with Shonda to produce the year of yes, and eight week class collection spanning multiple fitness disciplines focused on overcoming fears maximizing potential and discovering the inner athlete and all of us.
Our world class content and music teams have a robust content pipeline over the next several quarters to further delight our member base.
Lastly to our entire peloton team. Thank you.
Your unwavering commitment to our members is a source of inspiration for me every day.
And we want to thank our members, especially our newest ones and those of waiting their deliveries for their patience as we work hard to get their products to you as quickly as possible.
Now over to you Joe.
Thanks, John I will start looking for review of our second quarter result.
And Q2, we generated total revenue of one.
$1.065 billion, representing 128% year over year growth exceeding expectations across all geographies.
Primary drivers leading to revenue outperformance versus guidance for strong continued demand for bike quite flat and.
And try and play.
Lower than anticipated financing rate.
Strong apparel sales and better than expected shine.
During Q2, and then for the remainder of the fiscal year, we are working closely with our global payment providers to improve our member experience and.
And the U S. We have already begun to rollout delayed payment capture two of portion of our customers, which means we are adjusting our transaction process to collect payment closer to the time of delivery rather than at the time of sale.
And this change does not impact revenue of Brazil, or our forecast as we recognize revenue at the time of deliberate that overtime, we will have a dramatically lower level of customer deposits, which are recognized on the balance sheet.
We expect to finish our global rollout of delayed payment capture and Q4 of this fiscal year.
Moving onto gross margin.
Gross margin for the quarter was 39, 9% connected fitness product gross margin was 35.3 per cent and expected year over year decline of 385 basis points.
The leading driver of this decline.
Timber nine price reduction of our original bike and expedited shipping expenses incurred in Q2 as noted during last quarter's earnings call.
Subscription gross margin was 63 per cent and subscription contribution margin was 65.3% slightly ahead of expectations with greater than expected leverage of fixed costs and some variable cost efficiencies as well.
Average net monthly connected fitness churn was modestly better than expected at <unk>, seven and 6%.
As John noted, we continue to be pleased with the high level of member engagement on our platform by new content fitness verticals and software features building on our promise of bringing more and more value to our membership.
Total operating expense as a percentage revenue was $34 four per cent compared to 55, 5% in Q2 of last year.
Performance drove significant leveraging of operating expenses and a quarter.
Sales and marketing expense represented 16, 7% of total revenue versus prior year period, 34, 4% and we operated with limited marketing spend as we continue to work through our supply and demand imbalance.
Importantly over the past couple of months, we built significant additional capacity at tonic and through our third party manufacturing partners. We are extremely pleased that our current manufacturing capacity exceeds demand a trend that will accelerate as we move through the back half of the fiscal year.
General and administrative expense was 13, 2% of total revenue versus 16, 6% in the prior year, even with significant continued investments and our teams and systems, allowing us to scale our business operations.
Research and development expense was four 5% of total revenue versus four 4% in the year ago period, we expect R&D as a percentage of revenue to remain in this range as a percentage of sales and we continue to build best in class hardware and software teams.
And with better than expected sales gross margin and operating expense leverage our fiscal 'twenty. One Q2, adjusted EBITDA was $116 $9 million, representing an adjusted EBITDA margin of 11%.
Net income for Q2 was $63 $6 million for 18 cents per diluted share.
Lastly, we ended the quarter with $2 1 billion of liquidity and have additional liquidity in the form of and untapped $250 million credit facility.
Now onto our outlook.
And Q3, we expect revenue of approximately $1 1 billion, representing a 110% year over year of growth.
As with recent quarters, and we carried a substantial number of backlog deliveries into the quarter.
In Q3, we forecast end of period connected fitness subscription of 198 million, representing a 123 per cent year over year of growth.
For Q3, we expect average net monthly connected fitness churn to stay under <unk> 75 per cent.
As John mentioned Port congestion issues continue to negatively impact our product delivery windows as.
As you may have seen the executive director of the Port of Los Angeles recently reported that Port unloading times are currently for times longer than they were a year ago.
It's clear to us that additional significant investments have required and the near term to help us navigate these congestion issues and.
Net products to our members more quickly and with certainty and the majority of our air shipping expenses will be and Q3 for bike and bike plus and that we can dramatically improve product wait times and minimize reschedule and for our newest members.
And also incorporates elevated pricing for ocean freight from Asia, which is currently three times higher than normal rates and reflected in our forecast.
We expect these expenses to have a material, but short term impact on our connected fitness gross profit margin in Q3, while the impact of Q4 will be more muted.
We believe these outside shipping costs will largely abate by June and as we build up significant inventory stateside and the coming months.
We expect Q3 gross margin of approximately.
35% comprised of of connected fitness gross product margin of approximately 29% and of subscription contribution margin of approximately 64% of Lee.
Leading driver of year on year deleverage of our connected fitness product margin is the higher shipping expenses I just mentioned the <unk>.
Reduction of our original bite and a mix shift to tread importantly, we continue to focus on connected fitness subscription lifetime value and net customer acquisition costs.
Despite the significant investments and the quarter on expedited and air shipping our adjusted connected fitness gross margin continues to more than offset our customer acquisition costs.
For our subscription segment, we expect continued fixed cost leverage to be partially offset by increased cost of higher member engagement and continued strong growth of digital subscription, which carries a lower gross margin profile.
Over the long term, we continue to expect that our subscription contribution margin will exceed 70%.
Turning to operating expenses sales and marketing for Q3, and Q4 will increase as a percentage of revenue when compared to the first half of fiscal 'twenty, one as we ramp marketing spend including support behind the launch of our new tread.
In terms of phasing, we expect Q3 and Q4 to have roughly similar spending levels as a percentage of revenue for the.
For full year fiscal 'twenty, one, we expect sales and marketing expense, though to be materially lower as a percentage of revenue when compared to fiscal 'twenty and 'twenty.
With regard to G&A, we've accelerated some of our system and people investments and importantly, and R&D, we've been able to accelerate that hiring with engineering Aqua hires while we're pulling forward. Some investments. This spending is focused on people and technologies that will accelerate our development of new products and features.
Yeah.
Rolling all of this up.
We expect adjusted EBITDA of $10 million in Q3.
Moving on to full year expectations for fiscal 'twenty. One we are raising our estimate of full year total revenue to 4.07 and $5 billion for better representing 123% year over year growth or higher.
And the second half of fiscal 'twenty, one we expect quarterly sequential revenue growth as we bring down our delivery backlog build adequate inventory as a result of our shipping and manufacturing investments and resume marketing spend.
The increase in revenue guide for the balance of the year is primarily driven by the continued robust global demand for bike like play and strong U S demand for <unk>, plus we expect our new trend to be a more meaningful contributor to performance in fiscal 'twenty two.
For fiscal year 'twenty, one we now forecast 2.2 dollars 75 million ending connected fitness subscriptions or more and.
And average net monthly connected fitness churn to.
Stay under 0.8 per cent.
Due to the increase and shipping costs for the balance of the year fiscal 'twenty. One gross margin is now expected to be approximately 39% down some of our previous full year guidance of 41% and.
Including investments for air shipments expedited Ocean shipping and shipping and price increases we expect a connected fitness product gross margin of roughly 34% other.
Other drivers include our recent bike price reduction and continued mix shift to credit products.
We now expect subscription contribution margin in fiscal 'twenty, one of approximately 65% up 100 basis points from last quarter's guidance and we expect to continue to see additional leverage and fixed cost of content production and some variable cost efficiencies.
This will be partially offset by continued expected elevated engagement levels higher digital subscriber growth and continued investments and global fitness and wellness programming.
As a result of our incremental expedited shipping and accelerated G&A and R&D spend we leave our adjusted EBITDA guidance unchanged at $300 million for better.
These short term investments and shipping our products are obviously impacting our near term profitability, but we must invest in our member experience. It's our first priority and these investments today will allow us to resume marketing spend so we can maintain our leadership position and global connected fitness.
I will now turn it over to the operator to take your questions.
Okay.
Thank you and there are.
Reminder, to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question will come from Doug Anmuth with J P. Morgan.
Please go ahead.
Thanks for taking the questions one for Joe and one for John and Joe You mentioned that manufacturing capacity exceeds demand I just want to clarify is that strictly because you've ramped capacity or are you seeing any change to demand due to extended order to delivery times.
And then John just on the free core opportunity, hoping you can talk a little bit more about how youre thinking about the commercial space and the opportunity. There and then also if there's any way to quantify or provide any more color just around the.
And the manufacturing capacity and the benefits just in terms of proximity there as well thanks.
Thanks, Doug we're going to flow switcheroo, I'm going to take the first one and I think William can talk about <unk>.
We are not seeing a softening of demand that is absolutely not what's happening here.
<unk>.
Seeing incredibly strong organic demand even in the face of light marketing as you know.
The successes that we're seeing and getting order to delivery down and getting our backlog down our 100% basis shown incredible of.
Upgrades and and.
Our manufacturing capacity.
Up over six times, six X increase and just the last 12 months and our capacity of no. We're now making more bikes on a monthly basis than we did and all of fiscal 2018. So it's a herculean effort based on our in house manufacturing teams and our third party partners.
And so yes, I hope that answers your question, but it's absolutely not a softening of demand.
That's not what we're seeing we're seeing robust demand yeah, and I would just highlight obviously that's reflected in the revised revenue guidance that we've given for Q3 and Q4, obviously in Q3 were working through a substantial backlog of orders.
But we're still seeing very strong organic demand across all geographies across all products.
And then Doug on pre core we we love the commercial opportunity and in fact since the announcement.
If you look at inbound from some of those channels that John mentioned.
Universities schools and clubs.
Hotels hospitality, it's been enormous the curiosity about what this could mean in terms of delivering a combined pre core peloton experience and the commercial channel. So that thesis, which was one of the three primary reasons. We did the acquisition of the first being.
The manufacturing capacity and scale and the team frankly, we just fell in love with that team.
We're more excited than when we were going through that transaction. So it's yet to close.
And we will provide an update as it does but on that aspect, yes, and then in terms of expanded manufacturing capacity Thats that was that was kind of premise one and.
As we've said, we expect U S manufacturing.
With three core in the and the back half of not until the back half of the calendar year and that's unchanged that is still the plan and that's what where we're tracking towards.
As we close.
Great. Thank you. Thank you all.
Thank you. Our next question will come from Edward here of MA with Keybanc capital markets. Please go ahead.
Hey, guys. Thanks for taking the questions I guess first you've had a really impressive expansion of new modalities types of programming.
And you see someone engaging and just and something beyond and bike doing and floor doing other verticals.
And what happens to their churn and what happens that of overall kind of workout per connected fitness device and then I guess.
Joe a question on marketing you guys have been able to keep the line on marketing for an extended period of time I know, it's a funny time of Covid, but how does it make you think longer term of about the role of marketing spend as a percentage of overall sales. Thank you.
Yeah.
This is this is william on the modality, what we see and it is interesting to watch how the expansion in different verticals of John mentioned.
Plot as most recently.
And as deepened engagement and and Al mentioned strength, which we've identified as one of the core pillars along with cardio.
Strength, we know is a huge category and fitness the growth and strength in terms of engagements buybacks here on your 500% growth and strength and so.
All of these investments, we're making and making that all access membership more valuable in terms of.
Getting household members engaged is working.
We don't know EBIT correlation of causation, but what is absolutely true is that the more modalities that a members engage with and their profiles are engaged with.
And the stickier, they are and thats within and incredible.
And retention rate among among the overall membership, but the more we can get them into those other.
Those of other modality stretching strength for.
Pilates et cetera.
And the more valuable they are to us.
And and then on the marketing question, we've never given a long term target in terms of sales and marketing as a percentage of revenue and of course over the last almost year and now I can't believe it's been a year.
And clearly <unk> been able to rely on.
And on organic growth of our business and a lot of that has been attributed to the fact that we have a very high NPS score and we have very happy members, who recommend our.
Our products to two others.
But marketing is critical for us going forward and in our humble opinion, we've got and <unk>.
Credible new products that we want to spread the word about we're really excited about the new trad and.
So as we expand our product portfolio as we expand into new geographies, where we're starting from very low brand awareness.
Marketing is a incredibly critical component to continuing us to continue to drive growth over the next few years. So.
We don't have a target in mind, but you, but as we said earlier you will see us.
In the next couple of quarters be a little bit more offensive.
Thank you.
Thank you. Our next question will come from Justin Post with Bank of America. Please go ahead.
Great, maybe one for John or William and and then.
And so for the first one just thinking about the opening next year. Some of the E. Commerce companies had a slowdown in September and October and then Reacceleration due to Lockdowns did.
Did you see anything in the fall and how are you thinking about that and then and then secondly can you give us more detail on the U K launch I know theres a lot of anticipation for the new trend and what you've seen and any clues on how big that market could be versus the bike market. Thank you.
And.
Yeah, I'll take the first one.
And when the vaccine was announced and the fall you saw a reaction to the stock, but we did not see any reaction to our sales of demand we still have not seen any.
Any softening since that vaccine was announced and since the vaccine has been rolling out so.
Other than the Investor is getting nervous.
And the consumers are still.
Feeling like they want to work out at home the experienced of Williams point, where is the best and the world and it is getting better as we launched more software features more content types.
More access on more of different platforms and.
What youre seeing as and when starting to realize that working out at home is a better place its a better value and so we're very bullish on.
Our sales opportunities.
On the other side of the opening to your point and like Joe Just said, we're excited to get on the offensive and start marketing because the stores incredible the profit.
For the products and experiences are incredible and theyre getting better by the by the month. So we remain very very bullish on our opportunity and we haven't seen any softening of demand.
And then on the tread launched and the U K as John noted, where we couldnt be more excited and facts, it's exceeding our expectations, we decided to launch and the U K one because they had not had the tread.
That form.
But two it also gave us our second largest market the ability to learn a lot, which we think was of really prudent.
Prudent decision and Kevin Cornelius and that amazing.
National team.
We're able to launch that product at the end of last year and if you look at almost every metric customer reviews being most meaningful for us we'd start with the product experience.
And the customer experience and work backwards on everything, but then sales word of mouth lead conversion and all of it and so that gave us a chance to take a step back and say, let's make sure as we launched Canada next week, we're in a really good position on supply, but we've always maintained the tread was going to be of fiscal year 'twenty two story in terms of volume and.
And we're solving for short and mid long term with that platform. We think it's one of the biggest growth engines for the company and the foreseeable future and.
And.
And as you look at the U K, there's nothing we're seeing in fact, just the opposite of.
And more bullish than we've ever been on on the on the new peloton tread.
Great. Thank you.
Thank you. Our next question will come from Jason <unk> with Oppenheimer. Please go ahead.
Yes.
I think for a lot of us.
Gross and came in a bit lower for the reasons you talked about but digital subscribers came in meaningfully higher.
What can you just tell us about.
And the conversion rate for any color you can share about digital subscribers moving over to connected fitness and then given that you are taking up.
Guidance for the year, even though you are pushing out cred.
And if you can share a little color because clearly you know the.
And the the bike side is clearly going to call me and even more than you expected because there was an offset of some tread asami.
Assumption that youre, not taking out of the full year guidance. Thanks.
Thank you Jason Yes, we continue to be very bullish about our investments and the digital platform.
I'll remind you that.
Investments in digital arent, just good for that business on its own but it is good for our connected fitness members.
Who would have bikes retreads and also get that digital platform as part of the $39 membership for their old household so.
And that's one of the things Thats, helping drive engagement as they might be traveling and might want to go for Ron or do yoga and their hotel room or whatever or go down to the gym and take of bootcamp class on somebody else's treadmill.
So we're excited about the investments because they're kind of a two for as it were but purely the digital business.
Did have an incredible quarter thanks to.
Karina and matter of that team.
And with not just with the content of what the software.
And the year on year growth is I think six X, which was fantastic and Mike Gill alluded to the conversion from digital members digital subscribers to connected fitness subscribers is something we do track something we do care about it as one of our thesis that if we and introduce our great instructors and our great music and a great <unk>.
Immunity and our great content and software to members and a very low friction and $12 a month away.
And they see what were bringing and why the experiences on peloton are different they are eventually going to want a peloton bike for peloton tread. We are absolutely seeing that it continues to be one of our best lead Gen channels, and it's getting better as we get smarter with it. So it's a great question.
We're very excited about it.
And to answer your question. Despite the fact that our new tread is a couple of months delayed.
What is then the driver of the increase in revenue outlook for the balance of the year.
We've always maintained that that our new tread was going to be a very and material contributor to fiscal 'twenty. One so the strength and our revenue guidance is continued to be driven by bike bite plus <unk>, plus all geographies, which are growing.
Much faster than the U S. So where the overall health of the business is incredibly robust, but I will say, we've always maintained that it was going to be a very small contributor to 'twenty. One so that it's not moving the needle.
Thank you.
Thank you. Our next question will come from Scott Devitt with Stifel. Please go ahead.
And I think some connected fitness sub additions suggest that deliveries will be moderating slightly and the March and June quarters, and there is new capacity ramping as you suggested so I was wondering if you of a sense yet of when to expect delivery lead times.
Back to historical levels, I think I heard and Joe's comments that may be back half of calendar 2021, and then secondly, you have plenty going on right now, but it still would be great day to better understand how you're thinking about the full hardware offering over the long term and specifically and how you think about strength for you.
Devices like resistant space strength and rowing is there a fundamental belief that the company is to weather strength will ultimately require hardware or not thank you.
Yes, Im glad you asked Scott we are we plan to get back to normal order to delivery on our bike product line way before the end of this calendar year I would say by.
And mid to late spring, we should be in the below for weak order to delivery time frame. So we are.
We are putting points on the board and eating into the backlog and we're going to be.
Back in good shape before you know it so it's not going to take us the rest of this calendar year by any stretch.
On the hardware for.
For strength.
Good question I think.
There is a question mark.
On and my own hat on that.
<unk>.
I see us potentially innovating on both.
Just a content only offering if you are familiar with 20 years ago, there was a big business called the <unk>.
<unk> and <unk>.
Beach body and people were getting fantastic strength workouts on the back of.
Of just content alone and there.
And their hotel rooms that is not to say that we are not.
Considering and innovating on our strength of hardware platform, we don't have anything to announce right now but.
Uh huh.
We are.
Pursuing both options and I personally and I'm excited about winning no matter what the answer to that question is.
Thanks.
Thank you. Our next question will come from John Blackledge with Cowen. Please go ahead.
Great. Thanks, So two questions on the launch of the lower price trend and the U K.
And any early learnings on demand relative to your expectations like does it.
Change production output plans and also just any color on member satisfaction and then just a question on brand and once the pandemic.
See the shift of behavior and working out at home sites of incredible demand youre seeing for of the hardware and digital subscriptions, just any way to frame the impact on the brand. Thank you.
On the I'll take the U K launch.
And tread.
We're taking estimates up full stop based on what we've seen and and the U K and.
And we felt like we had.
Baked in our plan that that that had a strong forecast there and based on what we've seen early we've taken it up.
And that's that's really informed the decision on moving out the U S launch general availability of 60 days as John noted, we're going to be rolling out.
Some orders here and the U S, but the general availability and moving it out 60 days because we think that we think this is a rocket ship in terms of the product platform and there is a lot of demand for it we've talked about the tret market and the past is the bike.
And the demand for running and boot camp style workouts John's talked about.
The efficacy of those workouts bootcamp as a content modality is one of our fastest growing.
And on trend plus so.
Everything we're seeing as we noted with UK on trade and then we'll learn next week from Canada, but all early signs there in terms of leads and Canada suggests the same thing strong demand.
For that product.
And to your question on the order to delivery impacting our brands.
And we track it.
John and John.
Not really not ordered not guidance I've just just the.
And the shift in behavior and just the shift to working from home, we're seeing and impact.
And the hardware and subscriptions, but just the impact on the brand like everyone talks about pull forward of demand for for the hardware, but how about the impact on the brand and and also any color on the shipping delays and that impacts but.
It'd be helpful.
Yeah.
Yeah.
And I'm struggling to understand your question.
It's around the.
A pull forward or.
Yeah, and here's lately.
Go ahead sorry.
We do research on consumer perceptions around.
Home fitness and going back to the gym et cetera, I don't know if this is what youre getting out of it.
As is.
And as we study of the consumer and we of quarterly tracking and we do.
The spoke research and what's clear is the shift into the home is not a COVID-19 led phenomenon and it has accelerated it but we see if anything.
As we emerge.
Whatever the new normal is that the norms haven't changed there is a secular shift into fitness in the home and as John has said before it's a better experience and a better place at a better value and.
And consumers are all seeing that and so everything we've seen and the data I think Joe has talked in the past about.
Some of the bespoke research we've done on <unk>.
Going back to the gyms and consumer perception on that vis vis of home workouts suggest that.
Certainly COVID-19 has been tailwind for our demand, but in terms of demand for peloton products and connected fitness and the home.
We see continued momentum and foreseeable future.
Thank you.
Thank you. Our next question will come from Ron Josey with JMP Securities. Please go ahead.
Great. Thanks for taking the question I wanted to talk a little bit more about tread and William I think you've just sort of talked about this but with the delay of 60 days go into May here and the U S. Can you just talk about the plans and maybe you might have to ensure a quick smoothed. The rollout. So I think next week, we talked about pre sale and certain zip codes and the states and then just.
Tactically speaking when things normalize maybe less than four weeks as we talked about order to delivery times would be the same across all devices and I just want to make sure that that's true as we think just tactically as tread rules out and and how we might think about that and then just a quick follow up Joe you mentioned, bringing more bikes and treads of the states and ahead of demand and maybe just talk.
About the the rollout of the network there and the build out of the warehouses how that might work. Thank you.
Yes.
For the.
The new tread to William's point.
With such a fantastic success and the U K book, both on the sales and now on the.
Now that we're delivering the product the reception from the experience and we know this from having my wife and I have out of one of the strength and our APA.
Cartman and New York City for over a year the experience the software the content. The classes are sue fantastic and we are now making thousands of them going to tens of thousands of them very quickly and so we're making them we're delivering them we've been running on them. We've been doing boot camps for a long time, so there's not a lot of ambiguity around.
How fantastic this product is and how.
We're manufacturing, it and and delivering it and using our existing delivery folks so.
Theres not a lot of wobble to your point as far as the.
The launch and the states. The the biggest thing that informed the push from out of six or eight weeks and the state towards with two things.
<unk>.
Stronger than anticipated demand and the U K.
And we didn't want to frustrate those members as they're ordering these treads and we want to make sure that they have plenty of inventory and then we we extrapolated that seems strong demand and the U S and we didn't want to get off on the wrong foot with order to delivery with that new product line and the states. So I think we made of prudent decision, but the plan and the execution again.
That plan are rock solid and were feeling great not only about the rollout, but about the product itself and and the experience that our members are already having on that platform.
And then on OTT across all devices, we don't we want to solve for a reasonable OTT for sure we don't try to calibrate.
Across product lines to make sure it's exactly on the pin and especially with the new product, where it's really more challenging to forecast demand and then it is on a more mature product line like bike.
And the bike bike product line and so for better for worse, we think it's for better peloton has to make a lot of things across a lot of product lines. These days frankly.
Frankly and fitness.
There is no there is no analog and no one's making that in.
In terms of scale of hardware the kinds of volumes, we are and so we're building of supply chain that has not been seen before.
And fitness and so when youre approaching of new product, where demand has more variability.
And more beta to it.
And then on other product lines.
What you are trying to do is put yourself and the best position as you start to read the early sales results and that's what we're trying to do with triad and to say, we're going to manage it perfectly with with bike the bike product line, that's not what we're trying to do and we're just trying to get.
Our selves, and a and a reasonable position.
And we feel good about where we are and bike and.
And we're going to manage it as best we can as we launched strength.
Yeah, and I'll I'll start the second question, but I have a feeling Williams may want to weigh in here.
We're clearly using the $100 million to expedite.
And the shipping of products, so that we can get products into our warehouses stateside.
There's obviously been numerous reports about the issues that are going on right Theres container shortage there is.
Extended time of of <unk>.
Container ships sitting out on the ocean.
There is a backlog to get those containers unloaded and so this investment is just essentially to circumvent all of them.
Of those issues, so that we can prioritize getting.
Our major warehouses stocked up for us for our third party three PL partners. So that we can take down that order to delivery as quickly as we possibly can and at the same time, we're still going to be using standard ocean freight overtime, which is our typical of model.
But we're certainly and our forecast now taking all of these new factors into consideration when we're planning out when that inventory is going to hit but this $100 million is going to give us a massive jumpstart.
Thank you we can't wait for the try to either thanks guys.
Thank you. Our next question will come from Youssef Squali with choice of Securities. Please go ahead.
Great. Thank you very much so Jill just some of that last point just to be clear. So there's hundreds of millions of dollars is going to be deployed over the next couple of quarters to bridge the gap until you're fully functional on the on the ship and side does that get you back to that two to three weeks of that is ideal or starting next year.
For fiscal next year in a couple of quarters, you may need to subsidize shipping with additional funds. So just that's the first question and then second on.
On pre core I was wondering if you can maybe flesh that out a little bit in terms of the strategic rationale of of that acquisition, but probably.
Things like you know what other products are they manufacture and right now that could help.
You accelerated the rollout of new customers to two I'm, sorry of new products to new customers and how much of your manufacturing statewide will that ultimately account for over time. Thank you.
So I'll take the first one as we all know the port issues and Covid are incredibly fluid situations and so it's hard to give you absolute.
But I can tell you, whether it's now or and six months of year. Two years, we're obviously going to always do whats best for our members.
And so I can never say never that we won't use expedited shipping, but what I can say is that we do expect that this $100 million, which we recognize is a very large investment.
We believe will get us back to normal shipping protocol by the end of this fiscal year.
So the one element of of the increase and cost.
And that we're obviously using with air shipping and expedited Ocean is also the fact that the shipping costs have actually increased.
A fair amount as well I think the last we looked it was about three X. What we would normally pay good news is is that shipping costs in a regular freight model are only 2% to 3% of our total cogs, so that could persist for months and months and months and Thats easy for us to absorb some of margin perspective, but.
We believe this is 100% going to get us in a very good position, where we can better manage O T D.
And you said and I'll take the pre core question.
And as William said earlier, we love for their commercial business.
They have incredible products product lines, and they've got a great brand and they've got great service.
We like that for all sorts of reasons, we like their facilities their existing facilities as.
We've talked about as well the third thing and the biggest thing that William alluded to that excited us most is their team and their team knows how to make quality fitness equipment better than anyone in the world.
And with peloton, who now we're eight or nine years into our own quality fitness equipment represents the two greatest quality fitness equipment manufacturers globally and.
And it's their in house expertise of knowing how to make treadmills and bikes and all kinds of fitness equipment didn't scale high quality and that knowhow and that R&D not only the R&D on the products that the R&D on the manufacturing is going to allow us to be very sure footed and the coming quarters as we invest and use.
Manufacturing and getting ready to make millions going to tens of millions of treadmills and bikes in the U S. So thats to Joe's point, we don't have to move them all around.
And the world, we can have and location manufacturing plants, which is great for U S jobs, it's great for cost as you think about the transportation, it's great for flexibility and where we don't have to come through the ports if theres congestion.
And as we become the global dominant fitness.
And the experience business, we want to Asian manufacturing, we want U S manufacturing and it creates optionality for us to service different markets from different.
Points of entry. So we're very excited about the <unk> and what that team represents to our our supply chain globally moving forward.
Thanks, John Fitzgerald.
Thank you. Our next question will come from Heath, Terry with Goldman Sachs. Please go ahead.
Great. Thanks.
Just wanted to dig a little bit deeper into how youre thinking about about marketing, especially as.
As you catch it up as planned to sort of where to consumer demand.
Obviously been a massive benefit to the bottom line and having the backlog of need.
The demand that you have for from consumers, how do you think about waiting back back into that and.
You know the the pace and I guess impact to profitability whenever that whenever that does have to happen.
Yes.
Hi, Heath, it's worth noting that I think Joe alluded to that's the expedited shipping investment brings down O T D. So and that gets inventory and the warehouses, which is going to allow us to get aggressive with marketing really for the first time.
Since since the spring of last year, So in Q3, and Q4 and the guidance that Jill provided and are.
Our plan, we've got a substantial increase in marketing and we want of market, we want to fuel the growth of we've had amazing organic growth, we want to further fuel that growth.
And increase we look at leading indicators like purchase intent on bike plus and bike Interestingly, we launched <unk> plus and dropped the price of bike and we really couldn't exploit those opportunities for them from a marketing standpoint. So we we've got what we believe is an unbelievable product and experience and the way of bike plus and really haven't gotten to tell.
And that story with our amazing marketing team and so we want to do that we also want to talk about the value that the that the bike. The original bike offers of $49 a month with the amazing.
Using financing offer so we're.
We're going to get back to it to.
Going aggressively and the marketing that plans reflected it and our guidance as we get into the backlog and bring down O T D that marketing works even more efficiently.
And so that has the team really really excited and we believe positions us well not only as we and this fiscal year, but going into <unk> and.
And of 'twenty, two as we build demand and also I should've mentioned for for Tret as well.
Talking about new products, and digital and and so yes. There is a substantial increase in marketing as Jill said and the opening statement.
Investment built in and as a percentage of sales built into Q3 and Q4 and the way. We think about that is if we can acquire of customer well within our cash thresholds for marketing.
And we know it fuels growth for us, we're going to we're going to take advantage of that opportunity.
Great. Thank you Robert.
Thank you. Our next question will come from Bernie Mcternan with Rosenblatt Securities. Please go ahead, great. Thanks for taking the question. When you think about customer lifetime value, how does the shipping higher shipping costs kind of impact of that equation and I believe you said you would go and expect these new short term shipping initiatives to flip the.
<unk> on the net customer acquisition costs.
And then as a follow up what went into the decision to pay more for shipping now for six months ago. For example is it because of more supply coming online with Shinji. Thanks.
Great.
Thank you for bringing up I think one of the favorite ways I have of looking at our business model and that is clearly lifetime value of our subscriber base and the thing that we've always loved to highlight.
And especially as we've gone very negative CAC in the last several quarters.
And we earn of gross profit on our connected fitness products and and.
And we're in a position even with these investments such that those gross profit dollars.
And I'll set more than offset all of our customer acquisition costs on a fully loaded basis, which means thereafter, we have a very high margin long lifetime value given our low churn.
Of our subscriber base.
And now you of our subscribers so from our standpoint.
Certainly this does not change.
And does not change that equation at all of it just goes back to the rationale as to why we don't care about gross profit margin percent, we care about the gross profit dollars and obviously with the growth and our revenue base.
And even with the ramp in marketing spend expected in the next two quarters, our net customer acquisition costs are negative in Q3, and Q4 and certainly for the full balance of the fiscal year.
And then on the second part of your question on why the expedited shipping now for six months ago. This is meaningful and we appreciate the question and that six months ago, we looked at it and it Wouldnt have helped because if you looked at what we're manufacturing on a daily basis for what we were selling.
That was sort of deficit that equation, meaning we were building the backlog with COVID-19 and in effect pulled our business plan and a year and so we were just reacting to that and it takes a while to ramp.
Source components and everything that goes into the production of our of our fitness equipment now as John noted.
We've ramped production and manufacturing out of two facilities.
Such that pulling in and shortening and effect of lead time on logistics, one allows us meaningfully to drive down O T D and backlog, but two we've got more inventory coming on the ocean behind that and so.
And that's what makes those industrial it's worthwhile and we've done it before you were just kicking the can down the road and it would've been solving short term OTT, but there's no light at the end of the tunnel now as John noted Theres light at the end of the tunnel.
We thank our teams who of.
And I think John used the term herculean effort, we think the teams and the capability of <unk>.
For ramp that production, but it puts us in a really a much more favorable position and it doesn't show up immediately and O T D. But it puts us in a much more favorable position than we were six months ago, and and that ramp and manufacturer and we think is going to be a competitive advantage for us.
And the future to support growth.
Thank you ladies and gentlemen, thank you for participating and this evening's question and answer session I would now like to turn the call back over to Mr. John Foley for any closing remarks.
Thank you much so in closing I want to reiterate that we are a company as you know that is obsessed with our members experience.
Today, we are putting our money, where our mouth is this $100 million commitments to our members.
To get on the right side of the line with other Reits that are aligned with them.
Something we're very excited to do it makes sense for our brand and for our new members.
We're not using hope is a method so to speak these extraordinary circumstances, obviously require extraordinary actions and that is exactly what we're taking I'd like to again apologize to all of our new members, who haven't had a great experience and the last few months with their deliveries.
No that we care about you and we're taking action.
And to our team of almost 8000 people globally. Thank you for all of that you do I know, it's been a tough and stressful 12 months since we've been deep in the Covid World.
But we're getting there on all fronts as you know we are as far as I know the fastest growing scale consumer technology company and the world you should be proud.
And your hard work creativity and innovation continues to be and inspiration to me personally and to anyone who gets to see you and action, let's keep pushing and I'm confident that we will surprise the world and the coming years.
Until then.
Until next time, thank you everyone for tuning in.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
And.
And.
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