Q3 2021 Peloton Interactive Inc Earnings Call

Greetings and welcome to the peloton interactive third quarter of 2021 earnings call. During presentation, all participants will be in a listen only mode. Afterwards, we'll conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone if it at any time.

Turn the conference need to reach an operator, Please press star Zero. This conference being recorded Thursday, the sixth 2021, and now I'd like to turn the conference over to Peter Steeler head of Investor Relations. Please go ahead.

Thanks, Scott Good afternoon, and welcome to peloton physical third quarter conference call.

Joining today's call or John Foley are co founder and C E O price.

William lunch and C F O Jill Woodworth.

Our comments and responses to your questions reflect management's views as of today only.

It will include statements related to our business that are forward looking statements under federal Securities law.

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

As a reminder, our question and answer session during today's call us for our covering analysts on line.

For a discussion of the material risks and other important factors that could impact our actual results. Please refer to our SEC filings in today's shareholder letter both of which can be found on our investor Relations website.

During this call we will discuss both gap and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

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

Thank you Peter Good afternoon, everyone. Thank you for joining us today.

I want to start by giving you an update on recent events regarding our treadmill products.

As a company we believe strongly in the future that home connected fitness and we know we know we have a responsibility to be an industry leader and products safety.

We are are members first organization and that means for all of us It peloton the safety of our member community comes first.

I wanted to be clear, though peloton made a mistake in our initial response to consumer products safety Commission's request that we recall or tread plus product.

We should have been more open to a productive dialogue with them from the outset.

As of members first organization promptly stopping the sales of our products, while we cooperated more closely with the C. B C with something we should've considered sooner for.

For that I apologize.

Given our goal of being the largest and safest home fitness brand in the World yesterday, we took an important step initiating voluntary recalls and stop used directives for our tread plus and tread products and collaboration with a C. P. S C consumer products Safety Commission.

That was the right decision at this time.

We are working to build and introduced even more safety measures and to help set new industry safety standards for all treadmills, we want to provide a safe world-class fitness experience for our members people, who want the convenience and value of being able to work out from home.

Specifically are voluntary recall involves immediately stopping sales of both products in all markets, where they were available.

We will also postpone the launch of tread in the U S, which was previously scheduled for May 27th.

With regard to the tread plus our work with the C. P. S. C involves building an extra layer of safety features for that product.

This will include a digital pass code that will further protect against unauthorized use of.

Feature that we expect to deploy via an over the air software update in the coming days.

We will be working hard in the coming weeks and months to develop additional physical hardware to fifth to further enhance the safety of tread class.

We will of course sure detail details as we develop a plan at a time line for these additional safety features but bear in mind that hardware features take time to develop test and manufacturer in in this case the Cps he will need to improve our proposed enhancements.

With regard to the tread, which is our new lower price treadmill products that features a low profile traditional belt design. We're also temporarily stopping sales as a reminder, this product with only available in Canada and the U K and as we have stated previously we have been pleased with the reception and reviews.

In addition, a small number of tread units were made available to select U S members over the past few months in a controlled rollout to gain additional insights and feedback on the product ahead of launch.

While the new trend has been well received there have been some minor quality issues related to how the tablet console is attached to the tread the console or touch screen attaches to the tread with screws and a handful of cases, we've had reports of the screws loosening, causing the console to detached from the units.

We notified the C. P S C and the safety regulators in the U K and Canada last week about this issue and we will be working with them to review our proposed solution.

We expect to offer the tread for sale as soon as the Cps. He's full review of the product is completed while this process typically takes six to eight weeks it could take longer so we can't offer and on sale or revised launch date at this time and.

In the meantime, we will continue to produce the tread.

We will sorry, we will continue to produce tread content in anticipation of our tread launch as well as to support are nearly 900000 digital subscribers the.

Passcode, we are developing for the tread plus will also be released on the tread by the end of the fourth quarter of fiscal 2021.

As the largest home connected fitness brand in the world, we want to be leaders and safety.

Our goal is to have the best safety features for treadmill products on the market. The most engaging content from our roster of world class and fitness instructors and the most innovative software that unites our community.

While there will be a short term financial impact due to the steps we're taking.

We are putting and will continue to put our members first and a moment Joe will review had these actions are expected to impact our financial outlook for Q4.

Now turning to some other recent announcements.

On April 1st we officially closed or purchase a pre core the pre core team adds greatly to our already talented supply chain manufacturing and R&D teams.

In addition, we expect the pre core will help us significantly grow our commercial opportunity and hospitality.

Colleges and universities corporate campuses and multi unit residential buildings to our pre core teammates a hearty welcome. We're thrilled to have you join us.

The integration process with pre core is advancing according to plan and we look forward to offering you updates in the future as we refine our go to market strategy.

And to be sure. We continue to expect to produce peloton products, both bikes and treads here in the U S. By the end of this calendar year.

We're also excited to share some great new features announced at our virtual Homecoming celebration last weekend as many of you know homecoming is our annual member community event with this year's event, bringing together over 200000 peloton members for a three day weekend, featuring special live classes and community discussions.

Newly announced features include a major expansion of peloton programs, which are guided fitness programs designed to help members stay on track to achieve specific fitness goals with weekly progress reports.

We also launched strive score, which is a purse personal noncompetitive metric based metric based on your heart rate using a compatible heart rate monitor strive score strive score gives you credit for all the work you do with peloton, even when you're off the bike or off the tread engaged in for based X.

Your sizes.

With many members taking scenic rides and runs we're also very excited to announce a major upgrade to a scenic experiences.

And finally, we will be introducing a pause button for our on demand classes. One of the most member requested features for years.

We know sometimes life life's other duties intrude on your workouts and while maintaining the egret integrity of the leader Board members will soon be able to pause the workout and seamlessly pick up where they left off.

Remember reception of these announcements of these announcements has been great and we're hard at work building more features to motivate and delight remember community in fact from a hardware software and content standpoint, we've never been more excited about our future roadmap.

Fiscal year 2020 is going to be a year of major innovation for us.

Now I'll hand, it over to Jill to review, our financial results and updated outlook.

John I will start with the review of our third quarter results.

In Q3, we generated total revenue of $1.62 billion.

Representing 141% year over year Krauss exceeding expectations across all geography.

Primary drivers leading to our revenue outperformance vs guidance were significantly higher deliveries unexpected, particularly for bike meaningfully better than expected churn lower than anticipated financing rate and strong accessory sales.

Last quarter in order to reduce wait times for our products, we announce substantial incremental investment an expedited shipping of our products from Taiwan.

Today, we're pleased to report that we have made significant progress wait times for our original bike are back to pre pandemic levels of 123 week wait times for our bite plus are also coming down and to get to the same places like by the end of the queue for.

We added a record 414000 net connected fitness subscription didn't acquire bringing our end of quarter connected fitness membership base.

2.08 million up 135% year on year are better than anticipated net ads were driven by our expedited shipping investments, which accelerated bike and bite plus delivery net ads were also helped by our low average net monthly connected fitness churn.

0.31% the best we've seen in six years or.

A record low churn is due in large part to the efforts that we all make it peloton day in day out to drive engagement in Q3, we averaged 26 monthly workouts per connected fitness subscription vs 17.7 in the year ago period and <unk>.

Kris of 47% year over year.

A remarkable workout growth is being driven by our differentiated world class instructors and content. It continued introduction of new modality fitness, an ongoing software enhancements such as session stacks classes and most recently the rollout of our class scheduling feature.

As a reminder, prior to the COVID-19 pandemic Q3, historically represented our highest engagement quarter of our fiscal year. So we expect typical seasonal patterns to re emerge as we come out of COVID-19 and enter warmer summer months.

As with recent quarter, we saw particularly strong growth when it comes to our strength classes, which again posted the highest year on your engagement growth of any of our floor base modality.

As of March 31st switching gears to digital we had 891000 digital subscribers at the end of Q3 were thrilled with the growth of peloton digital we can think of no better way to introduce fitness minded consumers to the amazing quality breadth and depth of.

Our content offering.

During the past year, we've dedicated more resources to building a powerful digital <unk> too connected fitness upgrade path and we are currently driving the highest monthly upgrade right. We have ever achieved trend suggest our new digital cohorts will likely upgrade to connected fitness member.

At a significantly higher rate and the 10% figure we've discussed in the past.

As a testament to this progress we're now seen over 20% of our digital subscribers ultimately upgrade to connected fitness and that number continues to increase.

As our digital membership base growth, we expect our improving upgrade rates to become an increasingly large driver of our connected fitness sales.

Moving to gross margin gross margin for the quarter was 35.2% in line with guidance connected fitness products gross margin was 28.4% the biggest driver of our margin compression over the last over last year was the outside one time shipping investments we.

Discussed last quarter to reduce our order to delivery timeframe.

In addition, we had margin compression due to September 2020 price reduction of our original bike and a modest impact from Nick's shift a sales to our treadmill products.

Subscription gross margin was 64, 6% and subscription contribution margin was 68, 4% ahead of expectation as we continue to leverage fixed costs associated with content production.

Please note that in Q3, we saw a one time benefit of approximately 350 basis points associated with reserve adjustments and the reclassification of certain costs to operating expenses.

Total operating expense as a percentage of revenue was 36, 3% compared to 58% in Q3 last year are strong sales growth drove significant operating expense leverage in the corner and we also benefited from a shift of some marketing investments into queue for sales and marketing.

Spence represented 16.5% of total revenue vs. The prior year period of 29.5% we've resumed marketing in the second half of the quarter and we continue to ramp in queue for given are improved OTB position.

G&A expense was 14.3% of total revenue vs 24.2% in the prior year, we leveraged expenses, even while continuing to make significant investments in our team and system.

R&D expense was five 5% of total revenue vs. Four 3% in the year ago period, we will continue to prioritize investments and R&D as we build the best in class hardware and software team, both organically and through Aqua hiring.

With better than expected sales and operating expense leverage our fiscal year 21, Q3, adjusted EBITDA with $63.2 million, representing and adjusted EBITDA margin of 5%.

As I will discuss in a moment most of the outperformance relative to our $10 million adjusted EBITDA guidance for Q3 was due to the pull forward of deliveries that we had expected to make in queue for.

Net lots for Q3 was negative $8.6 million or a loss of three cents per basic and diluted chair.

Lastly, we ended the quarter with $2.7 billion of liquidity and have additional liquidity in the form of an uncapped 285 million dollar credit facility. As a reminder, our balance sheet benefited this quarter from approximately $900 million in net proceeds from our convertible offering.

Completed in February.

Now L onto our outlook.

With the recent developments John mentioned with the trend line. It is more difficult than usual to predict our financial results, but based on what we know today, we are updating our queue for outlook.

Our revised revenue guidance for Q4 is $915 million.

We estimate the revenue impact of the tread and tread plus recall will be approximately $165 million. The breakout of this impact to revenue is as follows one we currently estimate at ceasing tread and tread plus deliveries will negatively impact.

Revenue in the quarter by approximately $105 million.

Two we are offering both tread and tread plus remember the ability to return the product for a full refund.

We currently estimate an increase to our return reserved for this in Q4 of about $50 million.

And lastly, three we will continue to produce tread content as John mentioned and in conjunction with the stop used directive, we will be waiving monthly all access subscription for both tread plus and tread members for three months we.

We estimate that this will impact subscription revenue by approximately $10 million in queue for.

Here are a few additional drivers of revenue guidance for Q4, we mentioned previously that we've reduced our delivery backlog more than expected in Q3 and as a result, we pulled forward approximately $125 million of revenue that we had expected to fall into Q4 and secondly.

We closed pre core on April 1st and so pre core will be consolidated in our queue for financials.

Q for revenue estimate includes $60 million of pre core revenues.

In the context of these events and also the continued reopening in the U S. We thought it would be helpful to offer some overall commentary on our bike sales outlook.

As anticipated global bike and fight plus sales have been tapering from COVID-19 highs and we're expecting a gradual return to historical seasonal sales trend. However, our unit sales remain significantly higher than pre COVID-19 level, we expect global bike.

And bite plus units sales in queue for fiscal 21 to be over three times higher than they were in queue for a physical 19 two years prior.

Continued robust growth of bike sales is the result of the benefit of our better best bike portfolio strategy, including or bite place at bike price reduction last fall or international business is growing at a faster rate than the U S are scaled and men.

<unk> scaled and growing member base driving continued strong word of mouth and of course, the resumption of media spend.

We believe all of this success up very well for continued strong bike portfolio growth and fiscal 22.

We have ramped media investments in recent weeks coinciding with are greatly improved order to delivery outlook. After a long period of little to no marketing activity. We are very eager to build on our connected fitness leadership position and this is particularly important as our demographic profile of our men.

Hershey base continues to brought in.

With our revised queue for revenue outlook. We now expect full your physical 21 total revenue of $4 billion inclusive that the contribution of $60 million from pre core.

For fiscal year, 21 expected ending connected fitness subscription is 2.275 million consistent with our prior guidance taking into account our estimate of returned for treads and tread pluses.

For Q4, we expect average net monthly connected fitness churn under 0.85%. This is an increase from Q3 due to typical seasonality observed in the warmer months of the year. Please note that our churn estimate excludes the impact of expect.

Would churn from those member to return their tread or tread plus as well as the impact of the subscription waivers.

Moving on to profitability metrics in queue for.

We expect queue for gross margin of approximately 35% comprised of a connected fitness product gross margin of approximately 21% and a subscription contribution margin of approximately 68%.

We expect connected fitness gross margin in queue for it to be impacted by the following unusual items.

As part of the recall, we will incur logistics costs to pick up returned treads and tread Plusses. We have also offered our existing tread plus owners the option to have us move the tread plus to another room within their home.

These costs combined with the increase in return reserve are expected to reduce connected fitness product gross margin this quarter by approximately 900 basis points.

A portion of these costs will also impact operating expenses.

The second item is expedited shipping.

<unk> it in the quarter expedited shipping investments are driving year on year deleverage of our connected fitness product gross margin as well the port congestion issues. We have discussed on recent calls remain a cute and we are recently, we've recently allocated an additional $15 million and X.

Dated shipping expense to our queue for plan in part due due to the Suez Canal blockage.

Based on our current forecast, we do not anticipate meaningful expedited shipping expenses and fiscal 22.

Lastly, I'll note that connected fitness margins continue to be impacted by the September 2020 price reduction of our original bike.

Moving on to subscription margin, we expect a subscription contribution margin of 68%. We continue to expect leverage against our fixed costs associated with content production, but the one time tailwind in Q3 that I previously discussed are not anticipated to return in Q4 Oh.

Over the long term, we continue to expect our subscription contribution margin to exceed 70%.

Turning to operating expenses.

Are planned sales and marketing spend in the back half of the fiscal year is now weighted to queue for this is due to a shift and timing of media and production spend.

For for fiscal year 21, we continue to expect sales and marketing expense to be materially lower as a percentage of revenue when compared to fiscal year 2020.

With regard to G&A, we've axelrad, we've accelerated some of our system and people investments primarily in supply chain and members support function.

Given the lower revenue expectations, and a quarter and the increased spend we expect G&A to be greater than 20% of revenue, but continue to expect significant leverage and G&A in fiscal 22.

We also continue to invest heavily in R&D and have accelerated certain product development costs, including through engineering Aqua higher.

With these investments and people and technologies. They will deleverage are R&D expense space, but they will accelerate the development of new products and features the increase spend combined with the lower revenue. This quarter will result in R&D, reaching nearly 10% of revenue.

For adjusted EBITDA on queue for we now expect negative 60 million, including pre core adjusted EBITDA of negative 5 million.

Arrested EBITDA will be negatively impacted by the loss of sales of tread and tread class for the remainder of Q4 and the loss of revenue from subscription waivers.

We estimate these items combined will negatively impact Q4, adjusted EBITDA by approximately $16 million.

All other costs associated with the recall will be <unk> will be excluded from adjusted EBITDA such as the increase to the return reserve tread inventory write down the logistics costs associated with refunds and move and the subscription labor costs of service.

This all represents a revised guide for adjusted EBITDA of approximately $240 million for fiscal year 21, we have done our best to provide our current estimate of the impact to queue for but obviously these impacts are subject to change I will now turn it back to John for some closing comments.

In closing I'd like to reiterate that the safety of our member community is our first priority and and through working with a C. P. S C and others. Our aim is to have the safest products on the market, while delivering the best experiences and value and fitness, we will be working diligently against you.

Goals, and we remain optimistic about our business strategy and team short mid and long term the underlying growth of our scale bike business is bringing thousands of new connected fitness members onto our platform daily building a community million strong that is arguably our greatest asset.

We will continue to innovate for a member community and we're particularly excited about our fiscal year twenty-two roadmap.

When we plan to introduce new hardware software futures languages and content and all the goal and all the goal of providing the most comprehensive connected fitness and digital membership experiences in the world.

And driving ever increasing engagement among our members.

Of note there were 171 billion total platform workouts during Q3, a 258% year on your increase.

This engagement leads to industry, leading retention levels and most importantly are happier and healthier community now numbering over 5.4 million global members.

I will now turn it over to the operator to take your questions. Thank you.

Thank you if you'd like to register a question. Please personal one will follow up with a four on your telephone Jewish urethrotome prompt to acknowledge a request.

Your question has been answered and you would like to withdraw your registration police force. The one followed by the three.

Once again, that's one four to rest or for question one moment. Please for the first question.

Our first question is from Doug unless with J P. Morgan. Please go ahead you range that open.

Great. Thanks for taking the questions Uhm to Uhm first John just there'll be you could talk about what impact <unk> recalls may have.

But you can bypass sales and demand <unk>, we have obviously the force few numbers, but.

You're welcome to fiscal 22, a bit as well and then just if you could talk more about the process to get tread to mortgage in terms of repairing existing kind of built up tread inventory, making the changes in manufacturing and then also getting approvals as well thanks.

Hi, Hi, Doug, It's Jill I'm Gonna take the first question on bike.

I think as we said on on the prepared remarks that are guidance for queue for certainly in beds are our thoughts on the impact of the recall on tread.

And so we do we have baked in some modest impact to to bike and bite plus sales, but we think that will be temporary and we don't think there will be any long lasting impact and I think as I outlined we're still predicting units sales in queue for to be three X what they were more than three.

<unk>, what they were two years ago. So.

Obviously last year was it was a big comp it was the first few months of COVID-19.

But that type of growth over a two year stack, we were pretty excited about and we believe that that can continue into physical 22.

And Doug.

Let me break out the second question with respect to tread to make sure that everyone on the call understand that there's two very distinct products and it's the tread plus and the tread.

The tread plus is the the more expensive tried that we've been selling here in the states for a couple of years.

And that is the tread that we are.

Working with the <unk> to get a couple of different fixes and I talked about the software fix that's going to allow us to have a code that will help prevent misuse.

People, who call it kids, who shouldn't be on the tread won't know your P. I N won't be able to start the tread. So that's the first at the start that should get fixed should go out in the next couple of days to all tread pluses, but we won't get that product back in the market and we won't take the suggested stop us off until we get what we're calling a hard.

Square fix something more robust that would that would go to call at the back of the tread.

Physically keep.

Objects from from getting under the tread I don't want to talk too much about it there's a lot of different R&D as we look at it and then we have once we get a plan and proposed solutions, we have to work through the Cvs fee to make sure that they're okay with it so that could take months and it's gonna take some time, the tread, which is the low profile.

Lower price products that we've been selling in the U K and Canada with great reception and and great net promoter score great great reviews.

Is something that we think could be on a hopefully a more accelerated timeline with potentially just improving the screws indoor locking washers or we have a couple of different solutions to make sure that the screws don't come out of the console and that that is a product quality has improved we're already.

In People's homes in the UK in Canada.

Securing their their screen so that they don't so that they're more.

Stronger attachment and here in the states we're excited.

Hopefully I alluded to in my pre pre remarks, but if you think about the cpsu potentially turning around a solution that we would present to them within call at six to eight weeks. We're optimistic that we're hopeful that an early Q1 of next year will be able to bring the tread to market the lower price dread to market here in this.

States with their approval. So I just wanted to make sure everyone understands there's two separate products two separate issues I think the tread will be coming back to market much sooner than the tread plus.

And so just to clarify when you say early one cute because you're obviously wanted to different fiscal you meet your high school.

<unk> is that what you're saying that's right that's right. It would it would be early Q1 would be hopefully July.

Thank you.

Yeah.

Our next question is from one of <unk> Josie with JMP Securities. Please go ahead your lungs now open.

Great. Thanks for taking the question just may be following up on Doug's question real quick and very helpful. Gentleman additional commentary any any changes to your manufacturing process that you are thinking of when you add maybe that additional hardware to the back of the tread that just might take a little time as you think about it as we think about just the the newer manufacturing.

Processes that peloton done this past year and then that that's question number one and then maybe the second question Julia talked about improving free trial conversion on digital but then also digital being a a bigger part of the overall sort of newer subscribers to connected fitness going forward can you talk a little bit more just about that strategy and what that might mean.

For for overall marketing going forward. Thank you.

Yeah, Ron for the tread plus to the extent that there is a hardware fixes were calling and broadly.

There will be a manufacturing change we will have to probably twilla apart and and then work with our contract manufacturer to.

To get that into the manufacturing flow. So that you could take months again, the tread, which is the lower price lower profile belt treadmill that was doing well in the UK in Canada, and we hope to quickly soon bringing to market in the us pending the <unk>.

Approval of our of our screw system, we believe that that won't won't be meaningfully a change the manufacturing it'd be just to change to potentially just to screw itself.

But we're we're working through some solutions so we're.

Yes to tread plus there will probably be a change in the manufacturing but.

We're optimistic that the tread, which will probably be the the higher volume.

Alex for next year, we won't have to change your manufacturing process.

Great and on the second question on digital it's obviously something we're really excited about as you know the way we've thought about digital is as a sales final two connected fitness and two ways to obviously drive that is to drive the total number of digital subscribers is high.

As we can and we're really proud that we're nearing near nearly 900000 digital subscribers, which is pretty staggering growth to have achieved over the last call at 18 months.

So first of all we have a much bigger lead call digital and then the second thing, which was something that we've only really done in earnest over the past year, which is really how do we get them on a more robust upgrade path to connected fitness. So we're we're so excited by both of those.

Things growing in tandem with with one another but I think it is a testament, we said in the past we run that business at breakeven to an extent right, we're not trying to lose.

A lot of money going after digital subscribers, but we are marketing that product and it is something we evaluate from time to time, how do we allocate potentially more marketing dollars to digital knowing that will ultimately end up as a connected fitness sales. So that is something in real time that we're constantly looking at how do we allocate marketing.

Between connected fitness and digital and certainly with this.

Success.

Of digital that might be something that.

We do more of in the future, but but it's pretty fluid and again, we do try to operate it on a relatively breakeven basis.

But I think a lot of it true is also a testament to the fact that our content and platform just gets better and better so the digital value.

Is this going through the roof.

Great. Thank you John and thank you Joe.

Our next question is from your remote with Keybanc capital markets prescribed your line is open.

Hey, good afternoon. Thank you for taking my questions to for me I guess first on pricing with bike now that you've gotten OTB times kind of in line thoughts on kind of price thing I know you did run a mother's day promo that was non calm. So it should be expect to see more of those and then second John kind of a broader question right you've had lots of highs and lows. This year you kept people healthy drink COVID-19, but you all.

Also had delivered the latest <unk>, how would you assess brand house and kind of how do you get back to the perception that <unk> once had thank you.

Yeah, the first one.

<unk>.

I will say.

The awareness of our $49 bike is still pretty low we weren't able to lean into marketing that so it feels like the understanding that for $49 a month you get the.

The peloton the award winning original peloton bike.

Now in a week's time feels like we have a lot of runway with that so we're not looking at a at a price drop anytime soon.

And the second question around brand health, It's obviously something we care deeply.

Deeply about and yes, I think it's ebbed and flowed over the last two years.

Going back to add gate, we've had moments in months, where we start our star Sean bright in situations like right now that we feel like we have some work to do to get back on the right side of the line with trust and and safety and and.

Let people know what we stand for it I think yesterday was a big day, and Mending Trust and telling.

The market in our consumers and our members that we're going to prioritize safety and we plan to have an industry leading brand one of the special brands one of the most trusted brands over the next couple of decades and it started yesterday with our Ah recall to say, we're gonna take some short term financial pain to be able to <unk>.

Invest in a building something that's built to last for for decades, where our brand is.

Christine and so I think that's what you saw yesterday and something where obviously committed to.

Thank you.

Our next question is from Justin Post from Bank of America. Please go ahead you line is open.

Great. Thank you so I think you're suggesting about 200 net ads in queue for could you clarify what the tread impact is in with the bike M package and then as you think about next year I interesting.

To grow so can you talk about as you look back how much supply was a limitation or the long order to delivery times vs. The stay at home you know being a positive driver how do you think about those two factors as we get into 22. Thank you.

Great So I I.

Want to try to be the most helpful to answer your question on on sub bad year correct. It is roughly 200000 ads and as you know.

We stopped delivering tried and tried pluses so obviously.

Had some impact.

On our guide for connected fitness the other thing to take into account is that that two <unk> 275 million guide or the 200 roughly 200000 net ads also takes into account the returns that we expect right. So for tried and tried plus and we.

Talked about the fact that we have a 50 million dollar increase in our return reserve.

For both tried and tried plus return. So that is also net of tread. So you can pretty much think at least on a net add perspective that the majority of those net ads are due to bike bike and bite plus globally.

Does that makes sense, yeah that makes sense and then on 22.

For 22, Yeah. You mentioned you think bike can grow I just want to make sure is that yeah vs. This year and how do you think about the drivers.

Yeah, So I I think what.

I I think in the context of everything right. We obviously have tried news we have the the economy reopening with.

Finally, getting out from under the pandemic right and then you go back to history with peloton and you look at the seasonality of our sales right. We typically see more more heavy sales call at 60% to 65% of sales and Q2 and Q3 R Q2, and Q3, which is you know.

Timber through March vs.

Vs. The warmer summer months. So there's there's a few things going on there which is why I thought it was helpful to give the context that even with all of that backdrop, we're still looking at a bike comp.

Two year stack Euro right going from 19 to 21 in queue for we're still talking about more than three X and units sales right. We typically talking deliveries because that's what translates into revenue, but we feel very good about the health of the bike and bite plus business day.

What I talked about was the portfolio. The fact that we have a better best strategy. The fact that we have a long runway to market that lower price Spike. The fact that international is actually positively comping last year, which is crazy given the type of volume that we saw in the first few months that code.

It hit us all so.

International is is is.

Fire firing on all cylinders and we've ramped media investment so there's just and the word of mouth with the scaled member base that we now have with over 5 million people. So I think it was just to give a little bit of optimism around the fact that we feel really good that we're going to have a very.

A strong.

Growth and our bike and by class business going forward and I feel excited in August to give you some updated more specific numbers.

On where we will land for physical twenty-two, but we're excited and I about everything that we have especially now that we can be back on air telling telling our story.

And J, that's really really helpful.

It's William like just to build on on Joe's point also notably it was in your question O T vs will be in a lot better shape on bike and bike plaster Jones point about our portfolio.

As we look at last year vs getting into physically or twenty-two meaningful that order to delivery an overall supply will be in a lot better shape assistant another point.

Great. Thanks for him.

And we have a question from use of Squali with true a securities. Please go ahead you line is open.

Great. Thank you very much have two quick questions first jovi too.

A million dollars and returns and refunds that you've mentioned if I'm doing my math right that assumes about maybe 10 or 15% of the installed base for both treading trip plus is that is that the right way of thinking about it and is there a risk of seen maybe more refunds extent.

[laughter] into early next year and then John.

John.

<unk> I guess on pre core just how quickly can you launch new connected devices leveraging prerecord just beyond the tread beyond the the bike and then the bike plus thanks.

Great. So of course as you can imagine estimating the number of tread and tread pluses.

That we will get back as it is a very difficult thing to do.

This is our best estimate using all the data that we have available to us at this time and I think your math is reasonably correct.

It represents roughly 10% of Ted and tried and tried pluses out there.

So hopefully we'll be able to give a much more robust update at the end of Q4 in August.

When we report and you're correct.

The customers for tried and tried placid, then offered the ability to return their product all the way through November 2022. So.

This will this will be something that will be adjusting for overtime, but we imagine that there, we'll we'll see as sort of a bigger spike initially and that should subside uhm over the next several months.

And then you surface, it's William Lynch I'll take the pre core question. So we had to close the transaction and we're pleased as John noted to close to on time.

And the state of gold of that acquisition was to build the best R&D and supply chain team and all and all of a fitness we feel like that's as we look to the future about is an important strategic mode and also giving our growth is to just as a practical matter be able to to meet the demand that we.

We're gonna have looking forward across are.

From clouds portfolio, So John mentioned in his opening script.

We're on track, we've stated that we'd be manufacturing M. A U S. Notably from the first time in the back half of the calendar year first half of our physical and we'd mentioned that we would be focusing on the bike line. The good news. There is we are on track for that we're actually early.

Rob Parker, who is R. C O peloton commercial president of pre core.

Rob blood to pre core business and there's a big part of the acquisition. He has you've done great work and so we're tracking ahead, ma'am and notably well you've given that our our view on the tread product line as John said, the lower lower cost tread, we we decided to also rampart me.

Andy fracturing out of that same North Carolina facility in the fall on tread. So that's a new development and there's a testament to our conviction in that product line and then also underscores just how strategic that acquisition was for us.

Okay take care of.

Whenever question from John Black wage with Cohen. Please go ahead you line is open.

Great Uhm. Thanks, the two questions Uhm, how would the unit sales from the lower lower price treads in the U K and Canada <unk> vs. Your internal expectations and then John you mentioned pretty positive customers customer reviews on the lower price striped just any color on what they liked about it.

And then just on the sales and marketing a ramp it to four Q is that broad based across G OS and I'm, assuming key focus will be on I can bypass one is there anything else there. Thank you.

Great. So the first question is obviously prior to the news over the last couple of days tread was performing very well against expectations. We had very strong launches in both the U K and Canada and.

Had been anticipating a very strong lunch in the U S as well based on the member feedback from our control rolled out here as well. So reviews has been great reception has been great and I I think the.

The second question I think I might pass it to John and possibly way into China. Yeah. So good question. John we are very proud of the tread product line.

Recall, notwithstanding that's kind of why we did the recall because we're so excited about it we wanted to.

Take a pause and make sure the C. PSC felt great about it and then we added some additional safety features.

And and took care of the quality or the the.

Screw situation on the on the console, but when we bring them back to market, we expect them to be the best products by far the market in the safest products from the market's we're very excited about them, but to answer your question.

When you think about our original bike from.

<unk> that had a obviously industry, leading and one of the highest net promoter scores in the world in any category.

Two.

Learn last month's that are tread products had 85 net promoter score was just had a staggering and it really spoke to how great the products and experiences it and to your question what people like about it the boot camp classes are particularly popular where you're on and off the tread. So you don't have the monotony of staying on it.

Tread for 45 minutes, you you'll get on it.

Gorgeous device you have a fantastic constructor, a great community and and then you get off and you get you get a full body workout.

On a on a tread products.

Your home and so when you think about getting the best cardio and the best strength in one workout. It's just so efficient and so funding so motivating and it's one of the things that's driving the net promoter score I will add my.

I alluded to this earlier in my open Murray opening remarks.

Strive score. This drive score is a really cool feature that once you step off the tread of course, you get the metrics of the speed and the resistance from the incline and all that and.

And all of the metrics and quantitative self that you would expect from peloton, but when you stepped off the tread prior to strive score you weren't connected to the leader board or or being track to make sure that you're working hard enough and doing the the weight training with all of the other people in the class and now with stripes score, it's even more immersive. So we're.

Very excited it was fantastic products and it's getting better we also announced target metrics, which now it'll tell you what inclined you should be at a course instructor tells you, but now the software and the interface. Also tells you how fast you should be going what you pay it should be within your card should be so it's an incredible software content hardware.

That form and when we bring it back to the market.

It's gonna be 10 out of tune from an experienced perspective, and and one of the safest treadmills.

<unk> treadmills or coffee safest treadmills and the world. So we're very excited.

And then just found marketing spin briefly obviously when when we were in long O T D's, and we announced we were spending $110 million to expedite largely bikes. It made no sense to come to market. When we were in that supply constrained environment. The way we look at Joe noted in queue for we'll be wrapping up marketing spend.

Because O T d's are coming down, but but also across all day as as you mentioned, because we see opportunity the way we're disappointed performance marketers the way we.

Look at that calculation is there's a cat target customer acquisition cost based on the L. T V substantial T V that we've got on our connected fitness products. Both in terms largely contributed by hardware margin and then art industry, leading membership mmm membership revenue.

At the margins with the retention rates. So we stick to that we see opportunity to fuel growth. The grossest Joel mentioned on the core bike line.

And those economics reported the ability to market aggressively so that's one of the <unk>.

Many attractive things about our business and and now that we're we're in a better supply position. That's that's why you're seeing that marketing ramp on bike across all day is.

Thank you.

Alright next question is from Laura Fresh left you with fixing BNP previous. Please go ahead you lines open.

Oh good afternoon. Thanks for taking my question I think it was called out the international is doing very well I'm curious to know about the milestones from setting for the Australian Lodge, and what does Australia mean proud of potential country Rollouts, especially since you recently added to Spanish speaking instructor.

Well.

<unk>, Australia, we look at market opportunities internationally on a couple of different ways, we actually have a matrix one it starts with an attractive Cam of October identifies 3.3 million households, if you look at the behavior of theirs.

Huge university fitness fanatics.

<unk> fitness as an example is growing 60% ear boutique fitness is growing 60% year on year Interestingly cause we looked at and did research on our purchasing an awareness in Australia peloton actually without any marketing and country has has had both high awareness.

Send purchase and pet relatively and Australia as we know love Global brands that was another thing that came out of the research. So all of those reasons made a super attracted will launch.

Both with bye Bye class and.

And digital we're actually doing something interesting in this this talks to the benefit of learning from each global launch we're going to release the App first.

And and get see the market with the App isn't that amazing digital contacted the Joe referenced we'll have three retail Sherman's at launch those are important earlier on retail is a great.

Platform for demonstrating are amazing user experiences and we've already got a three P. L. In terms of logistics and delivery identified in the major <unk>.

Major metros a lot of the population is concentrated as I suspect you know and Australia and from Melbourne, Sydney, Brisbane, We've got three accounts ready to go so Kevin Cornell's in our international team are doing a great job, we have a country manager Karen lofton in that in that country. So we feel very prepared we're excited.

And and I will enter often with the thank you for noticing Marianna Fernandez and our a and R peloton Spanish yoga yoga at Espanyol as it were we are super excited about.

All the languages that we plan to offer.

Spanish was a big one marianna as the first the instructor as you noted.

We don't have any new countries to announce on that.

And in that line right now, but you can imagine we have global ambitions and Spanish language is something that we're very excited about obviously, we have Mexico, Mexico adjacency, Spain is a big market and there's a lot of Spanish speaking Americans.

Which is a third opportunity as we think about the Spanish the immediate Spanish opportunity again.

Not announcing anytime line is there but.

We do Spanish.

The excited and Marianna is a great first edition and that Victor.

Very helpful. Thank you very much.

And our last question for the day is from Jason Holstein with often hungry. Please go ahead you line is open.

Oh, Thanks, maybe wanted to just ask what this all means now with the tragedy brought or if the industry growing flow going forward. When your your credit plus wasn't enormously different than other.

Slat treadmills on the market, but those tended to be in commercial location. So are those companies now gonna be restricted from selling those too.

Home users and just brought her how are you how are you thinking about kind of what this means for the treadmill sales industry given that it is the largest.

Yeah. It has the highest marketshare of all home fitness products. Thanks.

Yeah, that's a great question and thank you for asking it because you're right. It is the.

The number one selling piece of fitness equipment in homes globally from our units perspective, and we believe treadmills remain safe and effective exercise machines for the home.

When operated as as instructed and we know it is historically like you said the most popular fitness option in the home that we have we know that millions and millions of Americans use treadmill safely in homes today. So we remain incredibly bullish.

About the opportunity in order to run at home you need a treadmill in order to Cyclotome, you need an indoor stationary bike and we believe that they're gonna be pillars for getting in shape at home.

Again, especially when you think about.

Treadmills of yesteryear being more for running at our treadmill is more of a multidisciplinary circuit training.

[noise] platform had portal for experiences, but clearly to your question, we need to work with the C. B O C to make sure that we not only emerge as a global leader and connected fitness, but also leader and safety in the industry and we believe that it is our opportunity and a responsibility for that matter.

To really be the industry leader and safety, we're obviously already the industry leader in innovation and we're excited to work with a C b C and and.

And keep you guys appraised of a future announcements in future products settlements that are going to make our our tribes even favor.

Thanks, everybody.

Hello.

Hello.

<unk>, there's no further questions at this time.

Okay. Thanks.

Thanks, everyone for joining us today. Thank you have a great afternoon.

That concludes the Gulf War today, well. Thank you for your participation unless I. Please disconnect Illinois.

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