Q4 2021 Peloton Interactive Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to peloton fourth quarter.
Quarter of fiscal year 2021 earnings call at this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your Touchstone telephone. Please be advised that today's conference may be recorded should you require any.
He further assistance. Please press star Zero I would now like to hand, the conference over to your host head of Investor Relations Peter Stabler.
Good afternoon, and welcome to peloton fiscal fourth quarter conference call.
Joining today's call are John Foley, our co founder and CEO, 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.
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.
Both of which can be found on our Investor Relations website.
During this call we will discuss both GAAP and non-GAAP financial measures are.
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 and thanks for.
Joining us today.
Our fourth quarter brought a remarkable year to a close we finished the year with $4.02 billion of revenue up 120% year on year and up 340% versus versus fiscal 2019.
We added over 1.2 million connected fitness.
<unk> subscribers in fiscal 2021, and digital subscriptions ended the year up 176% versus a year ago.
We introduced new products and software features greatly expanded and enhanced our content library and launched in Australia, which was no small feat given COVID-19.
Stomach complexities.
We invested aggressively in supply chain and logistics, allowing us to bring product wait times back to pre pandemic levels.
Even with the significant investments we made in manufacturing capacity and expedited shipping this level of growth drove far more EBITDA profitability.
<unk> pit than we had anticipated or intended to achieve at this point in our growth cycle.
We recognize of course that there was a great debate about the growth prospects of our industry post Covid. Therefore, I think it's worthwhile to spend a minute, reflecting on the year and our path forward before we review the quarter and.
For fiscal 2022.
Over the past two years, you've heard us speak regularly about the connected fitness opportunity we see for peloton.
The combination of our world class fitness hardware and software and streaming media is fundamentally disrupting an industry that has seen a little in terms of true innovation.
<unk> in the past 40 years.
How are highly engaging motivating and entertaining world class fitness content is consumed in the comfort of your home, creating an unparalleled workout experience at an exceptional value.
How the magic of network software and streaming media enables a near constant innovation cycle.
Cycle, where your experience on peloton platform is incrementally better every time you use it.
What happens when we put member engagement at the center of our business strategy and adopt and members first mindset across every part of our operation.
The benefits that come with high subscriber retention and the advantage.
A industry, leading net promoter scores.
And the power of the peloton community that motivates and encourages millions of people in their pursuit of physical and mental wellness.
We believe that we are still in the first inning of connected fitness industry growth and we have the opportunity to extend our leadership as the pioneer of this category.
Our strategy remains constant.
We will continue to invest aggressively behind new hardware products software experiences and content offerings for both cardio and strength training the two pillars of physical fitness.
We will continue to prioritize subscription growth over near term profitability as it still.
Very early days in the consumer migration to connected fitness in the home.
We will continue to expand our geographic footprint, while leveraging additional distribution channels like commercial and corporate wellness.
And we will continue to drive supply chain efficiencies via a focused hardware portfolio.
From.
Our beginnings, we've also consistently sought to make our products and content more accessible lowering a key barrier to purchase.
In 2017, we began offering a zero percent financing option.
In 2019, we introduced our new risk 30 day home trial.
Last year with the introduction of bike.
Plus we lowered the price of our original bike.
Earlier this year, we reduced the price of our digital App for frontline health care workers active military first responders and full time students.
And just a few weeks ago, we introduced peloton corporate wellness further increasing the accessibility.
All of our products through subsidy relationships with corporate partners and health care providers.
Today, we announced our latest step on the journey to broaden the accessibility of our products.
We are lowering the price of our original bike by $400 to $1495.
Applying.
Applying our 39 month zero percent APR financing option. This equates to a hardware cost of just $39 per month.
Adding our all access membership comes to just $78 per month and monthly spend that skills across an entire household creating an incredible value versus almost any.
Other fitness offering.
For a two person household inclusive of all of the all access membership that's under $40 per person per month during the finance period and less than $20 per person per month thereafter.
Today, we are also introducing revised financing options for our bike plus and.
Products, extending our 39 month option 243 months option equating to a monthly payment of approximately $59 per month during the finance period.
As before we will continue to offer 12 month, and 24 month options as well.
Democratizing access to our platform.
It has always been our goal for our team.
With our supply constraints largely solved now we're seizing this opportunity today to continue to deliver against one of our key strategic priorities.
Now turning to some highlights for the quarter.
Our community has now passed $5.9 million members globally.
Globally up 93% year on year on over 320% from the year ending fiscal 2019.
Total platform workouts in the quarter reached $154.5 million up 86% year on year, and reflecting roughly eight times the number of workouts completed in Q4.
For fiscal 2019.
In Q4, we averaged $19 nine monthly workouts per connected fitness subscription versus $24 seven in the year ago period.
As expected engagement levels were lower sequentially and on a year over year basis has typical seasonal trends associate.
Associated with improved weather and consumer mobility have reemerged.
Last year's engagement benefited significantly from Lockdown orders.
Work from home mandates and gym closures.
On a two year basis monthly workouts per connected fitness subscription increased 66% from 12.0.
Zero in Q4 of fiscal 2019, validating our significant software and content investments.
As a result of our efforts to keep our members engaged connected fitness retention rates remain very strong with average connected fitness monthly churn of 0.73% in Q4 and zero.
0.61% for fiscal year 2021.
Moving on to tread.
As we announced on Tuesday of this week, we are thrilled to commence U S sales and resume U K and Canada sales on August 30th finally, bringing this incredible product to market in the U S ahead of the key holiday.
<unk> selling season.
Similar to how we re imagined what a stationary bike workout can be our new tread experienced brings game changing full body workouts into the home.
Early consumer reception supports our enthusiasm within net promoter score for our all new tread of 85, and our initial U K and Canada.
The launch markets and incredible result for a brand new product.
And to be sure the software and content is only getting better.
As we have said, we believe the opportunity for our new tread is two to three times the size of the bike category.
Sales of our slab belt, tread plus product, which has only been avail.
On the U S remain paused as we continue to work on a retrofit able hardware modification to further enhance tread pluses safety profile.
As the category leader, we see a clear opportunity and frankly responsibility to innovate on safety and we are encouraged by the progress being made across our teams.
Now.
Now I'll hand, it over to Joe to review, our Q4 financial results and outlook for fiscal 2022.
Thanks, John.
Alright.
<unk> of our fourth quarter results.
In Q4, we generated total revenue of $937 million, representing 54% year.
On year ground.
The primary drivers leading to our revenue outperformance versus guidance were higher than expected bike deliveries.
And better than expected connected fitness churn.
It's partially offset by higher than anticipated tread and Todd pletcher churn rate.
We made significant progress.
Progress on product wait times like bike and bike price order to delivery windows at pre pandemic levels or the tag.
For example, right.
We added 250000 net connected fitness subscription during the quarter, bringing our end of quarter connected fitness membership base to your point.
Three.
Three 3 million up 114% year on year.
This was ahead of expectations, reflecting strong bike.
Bike price demand as well as better than expected. Gross addition helped by secondary market sales.
Despite seasonality and increased consumer mobility.
Average net monthly connected fitness churn was also better than anticipated at 0.73%.
As of June 30, we had over 874000 digital subscribers, representing 176% year over year ground.
It was a modest sequential.
Decline from the previous quarter, which mostly reflects the seasonality of our digital business, which is more pronounced than for connected fitness.
In addition, our growth in digital quarter to quarter is influenced by our marketing spend with acquisition efficiency and L. T V in mind.
As we discussed last quarter, we see digital as a healthy emerging business as well as an effective path for many to upgrade to connected fitness.
Further peloton digital accessibility and compatibility with multiple operating systems is very attractive to potential corporate wellness partner.
As a result, we expect continued growth in our digital subscriber base in fiscal 'twenty, two, albeit with some quarter to quarter growth rate variability.
Moving to gross margin.
Gross margin for the quarter was 27, 1%, which came below our expectation.
This was entirely due to work connected fitness product segment, which had a gross margin of 11, 6% below our 21% guidance.
As I mentioned, a moment ago initial tread and tread plus return rates were higher than our forecast as of the third quarter call. We are now recognizing.
A higher than anticipated expense associated with actual return and have updated the return reserve rate accordingly.
Please keep in mind that we always expected some uncertainty and modeling returns and we do not believe the delta versus our expectations is meaningful.
The impasse.
<unk> of recall related returns is added back to our adjusted EBITDA, but it's fully reflected on the revenue and gross profit line.
The tread recalls also have some carryover impact on our logistics and warehousing costs, which came in higher than anticipated rounding out the balance of the shortfall.
Fallen connected fitness margin versus expectations.
As we are now largely passed these recall related activities, we expect a rapid return to more normalized and predictable execution across our logistics platform.
Subscription gross margin was 63, 3%.
Past subscription contribution margin was 69, 3% modestly ahead of expectations as we continue to leverage fixed costs associated with content production.
As a reminder, our quarter to quarter. We can we will continue to see some variability, but we have strong visibility to our goal of.
And corruption contribution margin target above 70%.
Turning to operating expenses.
Total operating expense as a percent of revenue was 59, 3% compared to 32, 7% in Q4 last year.
Operating expense dealer.
This was driven by our planned shift in marketing spend from Q3 to Q4 lower revenue due to recall impacts in the quarter and the impact of adding pretty core to our financials.
Sales and marketing expense was 24, 5% of total revenue versus the prior year period.
Average Jean <unk>, 9%.
As planned we ramped marketing in Q4, given our improved order to delivery windows, and we lapped a year ago period in which we paused the majority of our advertising spend.
G&A expense was 24, 8% of total revenue versus 14th.
Certainly 2% in the prior year as you know our business grew significantly during fiscal 'twenty. One we made substantial investments across member support financial systems and other functions. So that the organization can scale effectively with the growth of the business.
With our member experience.
<unk> plus our Northstar these investments will help us continue to improve our end to end member touch points.
Also we added pre core to our organization, which was a driver of some of the sequential increase in G&A inclusive of legal and integration costs related to the acquisition of <unk> in Q4.
R&D expense was 10% of total revenue versus four 7% in the year ago period.
Similar to recent quarters, we continued to invest in developing best in class hardware and software teams, both organically and through Aqua hires.
Fiscal 'twenty, one Q4 adjusted.
Adjusted EBITDA was better than expected at a loss of 45 million, representing an adjusted EBITDA margin of negative four 8%.
Net loss for Q4 was $313.2 million or a loss of $1 five per basic and diluted share.
We ended the quarter with $1.6 billion of cash and liquid assets and have additional liquidity in the form of an untapped $285 million credit facility. As a reminder, our balance sheet benefited in fiscal 'twenty, one from approximately $900 million of net proceeds from our.
Our convertible note offering completed in February.
Now onto our outlook.
As you know fiscal 2021 was a very unusual year in boat in which both supply and demand shocks impacted our performance.
We are now lapping those comparisons which makes predicting our year over year.
Performance more challenging than normal.
The Q1 and fiscal 'twenty 'twenty two outlook, we are sharing today reflect our best current estimate and includes the following assumptions one a return to normal seasonal patterns, where Q2 and Q3 combined comprise roughly 60.
Scent of sales with Q1, being our lowest sales and delivery volume quarter.
In the years prior to Covid, we expect fiscal 'twenty, two sales trends to be impacted by seasonal weather as well as holiday and new year's resolutions purchases. We saw these trends going into fiscal 'twenty two.
Purdue.
Demand for bike in bike plus with higher unit sales expected than in fiscal 2021, three strong acceptance of our lower priced tread with our expectation that approximately 50% of treads globally will go to existing connected fitness households.
Therefore, those sales will not result in an incremental connected fitness subscription.
<unk> compelling net customer acquisition costs with rapid payback.
<unk> continued high engagement and healthy retention across all cohorts, including those added during the pandemic implying.
And the expected low churn of our connected fitness subscription.
Six.
Operating expense growth ahead of revenue growth as we restore sales and marketing following pandemic related cuts and recognize the annualized impact of recent G&A investments, we've made to scale our organization.
Applying growth.
And last number seven sequentially improved connected fitness gross margin and positive adjusted EBITDA in the second half of this year.
As we leverage our fixed investment in our supply chain and logistics platform and generate operating expense efficiencies.
<unk> for moving on to revenue in Q1, we expect revenue of approximately $800 million, representing 6% year over year growth and an 87% two year CAGR.
Note that our Q1 revenue assumption contemplates a very small contribution from the upcoming launch of trading.
The U S and resumption of sales in the U K and Canada due to our anticipated order to delivery expectations of three to four weeks and the fact that we recognize revenue upon delivery not fail.
For fiscal 'twenty 'twenty, two we expect total revenue of $5.4 billion.
Tread and were 34% year over year growth and a 72% to your taker.
Given our significant manufacturing capacity and logistics investments during the past year, we are entering fiscal 2022 with a normalized backlog for our bike portfolio and guidance reflect reflects.
Or expectation of continued strong demand.
Please note we are assuming 15% of full year revenue will occur during Q1, which is below 19% in the COVID-19 affected fiscal 'twenty, one, but modestly above the 13% contribution we.
Saw in fiscal 2018 in 2019.
Moving to connected fitness subs.
We expect to end Q1, with 2.4 dollars 7 million connected fitness subscription or 85% growth versus last year to Q1, implying 140000.
Our ads for Q1, we expect monthly average net churn for our connected fitness subscription of 0.85%.
Please note that after this quarter, we Wouldnt, we will no longer guide monthly average net churn of our connected fitness subscription on a quarterly or.
Net well basis.
As we have discussed in the past this is a difficult metric to forecast with precision and we therefore do not see the value in continuing to provide guidance. However, churn remains a very important metric to us and we will continue to report our actual results each.
Or any order.
Everything we do at peloton is designed to keep our members engaged and our churn rate low and overtime, we expect our churn and retention rates to remain relatively consistent.
For fiscal 2022, we forecast ending connected fitness subscription of.
<unk> <unk>, six 3 million, implying 56% growth year over year, and 1.3 million net adds.
Similar to revenue our guidance assumes normalized seasonality with Q1 net adds representing 11% of the full year total down from 20.
Three on last year, but similar to the 12% we saw in fiscal 2018 in 2019.
Moving onto margins, we expect total company gross margin of 33% in Q35% in fiscal 2022.
<unk>, which is based on a connected fitness product gross margin of 15% in Q24% for fiscal 2022.
The year over year gross margin compression reflects the following factors.
One the impact of our price reduction on the original bike that we announced this afternoon.
Too soon.
To the sales mix impact from launching tread, which currently carries a lower margin than our bike portfolio and three significantly elevated cost of certain commodities, including steel in semiconductors, as well as freight rates multiple times higher than normal.
After and as we've mentioned previously we manage our connected fitness product segment to optimize for gross profit dollars rather than gross margin percentage.
While introducing a more accessible price points for bike and a higher sales mix of tread will lower our gross margin percentage in the near term these are strategic.
Pick actions that expand our addressable market and will be highly accretive to gross profit dollars over time.
We continued to expect connected fitness gross profit to largely offset our fully loaded cap overtime and our fiscal year 'twenty two guidance assumes a modestly positive net.
Teach which follows a significantly negative net cash in fiscal year 2021.
While our current guidance reflects our best estimates of today for commodity costs and freight rates. It's possible. We may see additional pressure on our connected fitness margin if costs are materially worse than we.
We expect or if component shortages necessitate expedited shipping costs.
We continue to see tightness and component supply, but we have and are taking steps to prepare for a strong holiday season and balance of fiscal year 2022 demand.
Lead times for certain components continue.
To be abnormally long and were therefore utilizing longer term commitments with our supplier base.
Expanding our supply chain partnerships in order to limit any disruptions.
Connected fitness margin in Q1 will also be significantly impacted by last mile delivery costs given the seasonality.
Business.
Hello towns last mile Logistics is an important aspect of our member experience. The fixed investments we have made in warehouses vehicles and people in our delivery network are carried throughout the year. Therefore, we will experience higher fixed cost absorption jewelry and are smaller.
[noise] volume first quarter, but expect significant leverage of these expenses in the remaining quarters of fiscal 2022.
We expect a subscription contribution margin of 68% in Q1 and for the full year with the improvement to last year, reflecting continued fixed cost.
Mueller Budge.
Turning to operating expenses as I alluded to earlier, we are planning fiscal 2022, as an investment year in marketing our products and optimizing operations after making significant investments to scale our organization.
During fiscal 2000.
'twenty, one we dramatically curtailed media spend due to supply constraints and we're largely off air during important holiday and new year's resolution selling period, which created a synthetically low spend level that we will lap in the coming year.
As we restore media investments in fiscal 2022 weeks.
We expect material year over year deleverage in sales and marketing during Q1 and for the full year.
During fiscal 'twenty, one we also scaled our organization to support the higher than anticipated growth in our member base since the onset of the pandemic.
Much of the needed investments are.
Now largely in place, but the annual impact of a higher G&A base will drive year over year deleverage in fiscal 2022.
As we expect more modest sequential G&A growth going forward, we expect to achieve healthy leverage on this expense base starting next fiscal year.
Finally, R&D will continue to increase as a result of both organic and acquisition related spend on hardware and software development.
Based on these factors, we expect adjusted EBITDA loss to be $285 million in Q1, and a loss of three.
$325 million in fiscal 'twenty, two or a negative 6% adjusted EBITDA margin.
Keep in mind that in the absence of Covid, we would not have anticipated or intended to be profitable during fiscal 'twenty one.
Although our profitability will step back in fiscal 2020.
For the reasons I've outlined we are very confident about the economic profile of our business model and expect to be adjusted EBITDA profitable again in fiscal 2023.
Lastly, we'd like to provide some thoughts on forward capital expenditures as you know we officially broke ground.
Round on peloton output Park, a couple of weeks ago, we're glad to be underway with this project and we're looking forward to build it and peloton products here in the U S.
As we outlined previously we expect to invest approximately $400 million over the next two years on this plant with much of that spend expected to occur.
Occur in fiscal year 2022.
In addition, we continue to make material investments in our supply chain I T systems, and our retail footprint, both domestically and internationally.
These investments, which will position us for continued growth will bring total capital spending to approach.
Proximately $600 million in fiscal 2022 looking out to fiscal 2023, we expect capital spend to taper.
Lastly, we continue to see a decline in customer deposits with the rollout of deferred payment capture.
While this migration does not impact revenue recognition.
We'll continue to apply modest working capital pressure until fully deployed we've.
We've completed the full rollout of <unk>.
Deferred payment capture in the U S and expect a full global rollout in the coming quarters.
Operator, please open the line for questions.
<unk>.
At this time to ask a question. Please press Star then one on your Touchtone telephone again Thats Star one on your touched on telephone to ask a question to withdraw your question press the pound key.
I ask that you ask one question and one follow up please standby, while we compile the Q&A roster.
Our first question.
From the line of Doug Anmuth of Jpmorgan. Your line is open.
Great. Thanks for taking the questions one for Jon and one for Jill John We know there's seasonality, but just given the light <unk> guide if the price is the bike prices got authenticity.
How do you think about demand for bike plus currently.
Then Jill I hope you can walk through a little bit more detail around the tread gross margin structure.
Haps relative to bike or even tread plus a couple of years ago. When it first came out thank you.
Thank.
Uh huh.
So as Joe said in her opening remarks, we feel like the demand for bike plus and bike is robust.
And we feel good about the the entire year's forecast the price drop with the one was absolutely.
Sense of as we think about the competitive landscape.
Have you done about democratizing access to two great fitness, which is as you know it always been in our playbook. This is actually the first year since we founded the company that we had the opportunity to do this.
And we're super excited that the investments we've made in our supply chain.
Certainly over the last few.
We think it's but definitely in the last 12 months.
Are bearing the fruit that we have the capacity to make what will become will look like a close to $2 million fitness units.
Of hardware this year, which is just incredible considering when we founded the company we approached the biggest.
Contract manufacturer, we could find and they said that they were confident that they could make up to 10000.
A year.
It was only eight years ago, so the scale of which we have.
Of scene and put in place and invested in across our entire supply chain with bikes and now obviously it includes.
<unk> trends in the lower price tread as well allowed us to consider.
Lowering the price would be one and we think it's the right thing for our business, obviously solving for net new sub adds which was kind of our true north is getting more people into the tent.
And then thinking about the LTV of those users.
Not just Doug interestingly, not just as a subscriber for the $39 for you for a new bike sub which has always been kind of our true north in the Golden Goose of our business model, but think about selling those same people the same households, future trends and future products apparel and all the other stuff that.
That becomes a much broader LTV picture.
Overtime.
Hi, Doug.
Sorry.
Oh, sorry did William did you want to chime in.
No I was just going to say on the price Jill. Thanks. This is William just on the pricing.
Doug just underscoring the point about it being offensive.
And strategic as Gil said we.
As you might imagine done extensive extensive testing on elasticity for pricing on bike.
Both in terms of in market testing as well as qualitative and quantitative in.
That testing gave us a lot of <unk>.
Conviction that this price point will drive the kind of growth that's in the guidance, but also makes this price drop very strategic as we look at unit economics going forward and so.
It's super consistent as John noted with our strategy around accessibility, we introduced financing in October of 2017 that was the first.
First moves with 30 day home trial Jill.
<unk> talked about our app moves and accessibility around frontline workers and what we've done with the military and student rates. So we.
We feel like this is just a continuation of that strategy.
And allows us to continue our lead in connected fitness as we add more and more households.
Holds to the membership.
Yeah.
Okay.
Might just add and then obviously answer your question around tread gross margin is.
For fiscal 'twenty, two we are expecting a slightly positive net customer acquisition costs, which we think is an incredible trade.
<unk> for the LTV of the subs that we get which John mentioned and so.
The economics for us.
Credibly compelling, especially doing so in a position, where we had order to delivery and a really good spot and manufacturing in a great spot as it relates to tread gross margin.
Just a couple of pieces in the backdrop, obviously, we noted that we are facing commodity cost.
Freight rate increases at the moment across all of our products.
So as a starting point and as you know too.
As a starting point, we've only just started.
<unk> producing trends over the last several months. So we have a very long runway to get economies of scale. There. So think about our margin profile in the low teens.
But also I would put in the back of your mind think about what we did with bike over the last five years on.
On an index level, let's.
Five years ago, it cost us a dollar to make a bike it cost us 40 today, even with the commodity and freight rate increases. So I think given our very lean portfolio and our ability to build very few skus.
With great capacity will give us a.
Say Mendes Marjan power over the next few years, and then I might just add especially with tread as we think about moving production to the U S avoid.
Avoiding those shipping costs and freight cost is.
<unk> is also going to be very margin accretive going forward. So.
This is just the beginning its a <unk>.
A trip a demo double whammy effect with tread this year right, you're going to have less efficient marketing as we build product awareness and we're going to have lower gross margin.
And both of those will become more efficient over time.
Thank you. Our next question comes from Justin Post of Bank of America.
Little bit of your line is open.
Great. Thank you.
You hit on the tread can you help us understand I appreciate the 50% sub contribution per unit, but how you think about units this year.
And how you thought about the launches.
In Canada, and UK, what you learned there.
America, maybe the differentiation between the U S launch in Canada U K launches. Thank you.
Justin This is John Thank you for asking.
We love the tread category, we've said, we're going to win the tread category and so I'm glad you're glad you asked me about it I'm going to back up a little bit further to your question about what we learned.
In Canada, and the U K and tell you what we learned with the tread plus which has been in the market for even longer we've been learning a ton about the experiences and the programming with the software and the content evolving significantly over the past two years since the fed plus has been in the market.
We kind of.
You could think about it as a proof of concept with that platform. So that when the lower priced tread hits the market here in the U S next week and back on sale.
In the UK and Canada, as well and then very quickly in Germany.
We kind of have a two year head start on ourselves.
Protecting that experience.
But specifically to your question about the reception in Canada, and the U K I have to point out the 85 net promoter score that we saw in those markets right away, which is just incredible for our new products considering that the software and the constant theyre going to continue to get better.
In the early days of selling bikes.
I would talk to individual members who were on the fence I said listen by the bike Trust me every quarter the software and the content is going to get better and going back. If you talk just emoji peloton owners, who have their bike for six or seven years.
Absolutely what they've experienced and so that same promise holds.
True with the with the tread and we're Super excited about that category not just for running of course and I think you know this is justin but for everyone on the call. It is also a strength platform of sorts and when you think about the bootcamp content on the circuit workout. So you get on and off the tread with the.
With the.
Strive scores in the <unk>.
The tethering when you're off the tread and Youre Harvey monitor is still helping you stay connected in the experience.
So it's an incredible platform, we're super excited about it we're super proud of it and.
We're very pleased that it's going to be back on sale next week.
And then just to chime in on the 50% we wanted.
To give you all it just a guidepost just so that you can better understand the contribution to connected fitness.
Subscription with tread and wanted to make sure that wasn't overstated.
In any way.
I think as you think through the trends that we saw of course.
Of course, when you have very low brand awareness and a product you're existing member base are going to be the ones first raising their hands to buy the product and thats. What we saw in the U K. That's also to John's point, what we saw with tread plus in the very early days, so that 50% think about it like a blended average but of course as we get the word.
It out and.
And we ramp up our incredible marketing efforts around our all new lower priced tread I think what youre going to see is very high our existing members buying the tread, but that percentage coming down as we get the word out and we launch our marketing campaigns around that and attract.
Incremental subscribers to the platform.
Thank you. Our next question comes from Ed <unk> of Keybanc capital. Your line is open.
Hey, guys. Thanks, so much for taking the question just first on the gross margin differential on V. One I know you gave some color there but just.
Just to try to really understand again have the price reductions over time been funded by your manufacturing efficiencies kind of how much is still left and kind of what's the timing in terms of getting the gross profit generated by one device to offset CAC and then as a follow up lots of exciting second corporate wellness, how should we think about.
Profile there thanks guys.
Great. So on the first one obviously, what we've seen over the last several years as I said earlier is that we've been able to get incredible cost of our bike product over the last five to six.
The murders.
To the tune of about 70% to 80% right versus what we were paying for a bike five or six years ago.
And as you look at our.
Our original bike its our most mature supply chain and.
But for US we think at a $14.95 entry point.
Next year. It is absolutely worth the ability for us to grow our addressable market and sacrifice gross profit margin percentage.
Because we do think the gross profit dollars matter here more and over time, even though we are going slightly net positive in cash this.
Year, we that will reverse very quickly our market with marketing efficiencies and with the conversion uplift that we expect so we think it's an absolutely right trade off for that very valuable high margin long lifetime sub.
Yeah.
Corporate feeling you wanted William Yeah did you want to take that I mean, we we won't be offering just a breakout in terms of of the economics of that business. It is very very early days I would say that we are still building a lot of the infrastructure.
Sure both from a sales and E comm flow perspective, so we.
We have a I think fairly conservative estimates in this year, although we think it's a massive multibillion dollar market, which I think William can can address further.
Sure.
It's tens of billions of dollars.
Annually now if you look at employers and what they invest in and wellness for their employees as Jill noted, it's it's early John talked about us.
Downswing it within the last few months.
I will say that the initial sales rate through the partners, we announced the Accenture.
Songs.
So the world has exceeded our expectation.
But we.
We feel great about that team Cassidy, Ralph and the team we put in place we feel great about the business model just the way we think about that just to answer. Your question is very similar to the way, we think about our consumer business and getting to that net cash.
Equation. This is a super efficient channel for us to acquire customers. So that relationship between gross profit on the hardware and and how we acquire this customer is very similar to how we make decisions and our consumer business and so.
It's an acorn.
But were emboldened by the early results and not not a whole lot difference as we think about margin between those channels.
Yeah.
Thank you. Our next question comes from Ron Josey of JMP Securities. Please go ahead.
Great. Thanks for taking the question just a quick.
One and a follow up John you talked to new products being positioned for just additional product launches later this year. If there's any details you can share on the product.
Insides type of type of workout et cetera would be really helpful and any insights on the manufacturing capacity ahead of that and then on a follow up on the on the lower priced bike can you just talk about the impact.
<unk> of this of what that means for CPO pricing. Thank you.
Hey, Ron.
New products. Unfortunately, we cant talk too much about them.
Which is frustrating to me because I am Super excited about a lot of these new platforms that I get to experience and see in the R&D pipeline.
We've said that our strength is a key priority for this year.
There are some rumors that some other products.
We might be working on.
But I will say to Joe's earlier point about manufacturing scale.
We're pretty focused we don't have 50, new platforms in the R&D pipeline.
Pipeline, we have a few that we're very excited about that we think are going to be staples in our portfolio.
And several of them have been we've been working on for several years. So.
This should be a big year for.
For our.
Our members and the new product pipeline and we look forward to sharing information.
Information as it is.
It's available.
I think you also had a question on CPO.
I can take that nothing really to update there as we've talked about in the past. We just havent had given are credibly low return rate.
Our bike and bike last we've just not had the inventory.
<unk> until it's a little bit of a moot point for now, but obviously, if we ever our net inventory position, where we can launch.
<unk> it would certainly be priced below the new pricing for original bike.
Thank you. Our next question comes from Youssef Squali of true.
Your line.
Line is open. Thank you very much so two questions. John can you maybe speak to the just quarter to.
Trends in demand Youre seeing obviously the guidance implies.
She will decline, but maybe you can parse out the effect of the reopening relative to others like pullback in AD spend et cetera, and then Jill I think you said something to the effect that you expect.
Higher unit sales of bikes in 'twenty two than you did in 'twenty. One if you just do a back of the envelope math it looks like.
That would imply not a whole lot of sales for the new tread. So just wondering if you can maybe.
Provide a little more color on that thank you yeah, yeah I might.
Ill take the second question first and then we can double back on the first one so I think what you are probably noticing is that in this year, we're forecasting $1.3 million net adds and last year, we added 124 net.
Net adds is that correct yep yep exactly great well, it's a really great call out.
But what I might note is that in fiscal 'twenty, one our net adds were.
Listed a lot by the backlog that we went into if you remember when Covid hit in March we went directly redline Ah.
Manufacturing and went in with a pretty massive backlog going into fiscal.
'twenty one given the long no T D. So.
I would so first I would say we have much better alignment in sales and delivery time frames in fiscal 2022.
And then so from my perspective, yes, we do.
Forecast growth in our bike portfolio this year on.
On a year over year sales basis, but you have to take into consideration how big the backlog was.
That we went in and I think you'll see that that would then imply even with the 50% of tread buyers being existing members.
That would imply a healthy first year of robust sales and tread.
And Youssef, we can't comment too much on the quarter to date trends as you can imagine, but I will say and Joe alluded. This in our opening remarks is that we historically have been a very seasonal business, where not only are people out running.
Riding their bikes in the summertime and getting outside.
And this summer I think is excel.
Exceptionally true in that sense coming out of last summer where people are in lockdown, but.
We obviously don't market aggressively and then I think Joe opening comments talked about this in the digital business, we couldnt be more excited about the digital business.
I've been one of the biggest champions for since day one.
And that business.
We think that Thats, an incredible lead Gen lead Gen business as well as a standalone business on its own.
It's just not smart for us to marketed aggressively in the summer piece of the other times of the year. So when you think about a basket of advertising dollars against your businesses.
Summer is generally.
Italy, one of the least efficient so we're trying to run a little bit more disciplined.
Business certainly on a digital and you could extrapolate that more broadly, but I will say even in the face of light marketing sales have been robust across across our bike business and.
Hi.
Hi.
I am not.
First to tell you but.
How incredibly strong the leads have been for our tread business.
So we are excited about.
How many leads are in the hopper for people wanting trends and we're excited about the demand that we've consistently seen.
This quarter and.
Frankly since Covid hit as you know.
Thank you. Our next question comes from Jason <unk> of Oppenheimer. Your line is open.
So is there anything the data that suggest the comp longer pending tread launch meeting just it's been talked.
It's about obviously for a long time and all the issues that that could have weighed on bike sales, meaning you have some consumers who would only buy one device.
We're kind of waiting and so that kept people potentially on the fence to design what they wanted and the second question on the supply chain, we can see the inventory numbers up pretty dramatically.
Quarter to quarter on the balance sheet.
Outside of the cost headwinds that you talked about for supply chain are you worried at all about actually getting product to the consumer.
Over the next basically through the holiday season.
Well I can take the second question first.
William in terms of the guidance that Jill provided we feel like we've built and the investments that John and Jill talked about we built the infrastructure to support our holiday plans.
Jill noted we feel like fiscal.
Full year 'twenty, two is going to be a return to more seasonality. So.
A large part of our businesses in Q2, Q3, and certainly that is true of deliveries and so everything in the supply chain from inventory that you're noting the accumulation of on the balance sheet too.
Warehousing and how we've expanded our warehouse footprint.
Two our delivery infrastructures people bands or last mile facilities all of that.
We're staging for what will be our biggest holiday ever we're very excited.
Both in terms of the bike growth that Jill noted and then the launch of tread, which we expect to be.
<unk>.
Very large over time and so.
There's a lot of companies aren't in that position of reading in automotive and some of the shortages on chips in sami's. So we're very proud of our team. We thank our partners Ti others, who have helped us get in that position. So.
Inventory is up we are building inventory as you know the lead times with Ocean.
And freight in general.
Extended and so we've been diligent about learning from the past and feel like we're in a really good position to execute this plan this year.
And just to answer the first question around tread potentially having an impact on bike.
Freight I.
I mean, it's hard to know for sure, but I think based on our data.
When you look at the leads that we have for tread theres a lot of existing members Theres a lot of new people. We think it's a pretty massive category, but there is still very low awareness for us in.
Sale category so.
I personally don't think influence has influenced bike sales over the last few months.
Thank you. Our next question comes from Jonathan Komp of Baird. Your line is open.
Yes, great. Thank.
The tread don't could I follow up on your comments about the first half in the second half adjusted EBITDA outlook and any more color on the factors that you're expecting to drive the inflection to positive adjusted EBITDA in the second half.
Yes.
So I would say.
First off.
The connected the connected fitness margin is it's really one of the main drivers of adjusted EBITDA profitability and that variability throughout the year. So if you look at Q1.
The connected fitness margin is fairly depressed largely due.
Hey, who are delivery cost inefficiencies.
Even that we're having lower volumes in the quarter and of course, what that will do is reverse in Q3, sorry, Q2, Q3 and Q4.
Where we will leverage a lot of those fixed cost investments in our field operations with warehouses and people.
And bands so.
That's going to get us a lot of leverage as we move through and of course on Opex, we will get substantial leverage here too as we move through the year and have higher revenue quarters, and as I said, 60% of our revenue is going to be generated in Q2, and Q3 and really Q.
And I will say, it's just a little bit of anomaly right. We've built up our cost structure to support and scale our business.
We've grown member support we've grown manufacturing Nymex over the last 16 months and so it will take US a couple of quarters to really see that leverage back into the system.
But we expected in the back half of the year.
Okay. That's really helpful. And then one other follow up I think John you mentioned at one point.
Unit capacity close to $2 million fitness units of hardware.
Thank you for this year, how should we think about the horizon.
This sense, you're building out the capacity and just any other context to how you see the hardware business scaling over the next few years relative to that 2 million unit comment. Thank you.
Yes.
So that's something we spent a lot of time on Oh extrapolate. It also in the context of a business that's growing.
Into it.
Adding subs at <unk>.
6% this year and we will continue to be higher a hyper growth company for years and years to come all extrapolate into the idea as well with real estate in the context of our headquarters and our field ops.
Member experiences you have to.
Try and walked away.
<unk>.
Seeing where youre going five to 10 years out, but not getting over your skis with fixed.
Cost and overhead.
And that's kind of the balance that we've had to strike over the last six or eight years as we've grown the company.
And to answer your question, we're excited about our investments in Ohio and state side manufacturer.
Factoring.
We're excited about our continued relationship with with Rex on which is a big manufacturing partner of ours, and tonic, which we brought in house a couple of years ago.
And continued the contract manufacturing relationships in house.
We have.
Obviously partners on the on.
On the tablet side, as well, which has great scale, and we will probably always use contract manufacturers for that.
But yes, you do have to think about how do you make.
Millions of treadmills.
Year, three or four years from now and our team is planning that and getting ready for it again try.
Trying not to get over our skews with the.
The opex or the Capex.
Too far in advance, but you've got to make some bets and.
As always were going to bet on success not bet on failure, because it kind of becomes self fulfilling.
So other than that I don't have much color for you other than we have incredible people who are planning.
And and.
And continue to land the plane like they did last year and we plan to do this year.
And maybe just to add to that but just the $400 million investment.
Pop the peloton output park.
That is a decade long.
We view that as a decade long plus investment to support.
Support that capacity growth that John's referencing and so.
Our goal and we feel like we're there, but our goal is to continue.
To provide the capacity leader cost quality and safety leader in fitness and there are very few companies in this framework.
Fragmented market and very few factories that are producing the kinds of volumes, we produce so these moves including pop.
Are all laid out.
To John's point, we look at things 10 years out to support.
Robust growth that we're expecting in the future.
Thank you. Our last question comes from the line of Camille cash for Waller of Credit Suisse. Your line is open.
Hi, everybody thanks for taking the call.
Yeah, a couple of years ago at your Analyst day, you talked about the Tam and the Sam.
Given the pricing at the time.
Being around $15 million.
Potential members with the with the new lower price.
For the new $500 price point do you have an idea on how those numbers, but those numbers may look like now.
Yes.
I think youre talking about last September.
2020.
It's about a year ago, where we talked about our household Sam and again thats existing product.
And product verticals at existing prices, we said, a an addressable households of $15 million and that represented $20 million and connected fitness unit sales obviously given.
The overlap that some households with multiple products.
And that had increased 43% from the last time, we had done that analysis of course, we have not we run that analysis.
Yes.
But as you can imagine with the observed data that William discussed in terms of the last.
<unk> and the research that we had done we believe that $14.95 significantly significantly expands.
Our addressable market and so we're really excited about it and when it was one of the key reasons why we did this was to continue to make our products more accessible.
And of course expand that addressable market and then there are other things that will factor into increasing Tam like the extended financing terms that we announced on bike plus and tread.
And then of course, just the building of awareness, which frankly has been the biggest needle mover for us over the course of the last several.
Several years as we've looked at the addressable market.
When you and tread just as a reminder, and digital still have very very low awareness relative to our bike portfolio. So I think there are tremendous gains that we're going to see over the next year now that we finally are bringing that product to the U S.
Got it thank you and quickly on innovation.
With the kind of timing delays with what's going on with tread and trade plus does that change the cascading of some of the other products you may have planned rollout or whatever the calendar may have looked like.
You'd prefer to have them spaced out or.
Any original plans.
<unk> for for new products still running on whatever the timeline might have been before the recalls.
Yes.
Hi, Brian.
Well I was just going to say.
We think tread and being able to execute.
This tread launch in the U S. This.
Arguably as John has noted our research and if you look at industry research tread is just a much bigger category than even bike and if you look at the amount of runners bootcamp amount of boutiques that offer this type of workout circuit bootcamp vis vis spin.
Every metric.
Trick tread.
Has the real possibility of being our biggest product and so we're definitely focused on this opportunity. We think it's incredible product as John noted.
Having said that if you look at our R&D spend that Jill noted.
We've never been there.
Prolific in terms of investment and exciting new products.
And so.
We do think about the marketing and sales calendar, we do think about how to make sure we execute and drive the awareness that we need to in each product and we're not mixing messages in the marketplace and tread.
Ed.
With low awareness right now, we see as a massive opportunity having said that.
As John noted.
Good.
We're not done and we're investing heavily we.
The strength category has definitely been something we've.
We've been thinking about and investing in for a long time and so.
As John noted nothing to announce here, but.
Definitely something we're looking towards in the near future.
Sure.
Okay.
Thank you at this time I would like to turn the call back over to CEO, John Foley for closing remarks.
Thank you before we wrap up I want to share a bit of nonfinancial, but interesting and important news. Nonetheless in recent surveys conducted by comparably peloton.
<unk> earned the number one position and a ranked list of 100 top global brands and again the number one position for best place to work in New York Besting, a who's who of established brands in household names.
For me this is particularly gratifying recognition as these rankings point to both our member experience and the internal.
Internal culture, we've been building at peloton since day one.
By definition powerful brands are recognized for their extraordinary product and service experiences by always putting members first and obsessing over their experience. We're building the most powerful brand in fitness and potentially one of the most powerful brands in any category. It explains why were sofa.
So focused on net promoter scores by the way.
And when we couple our dedication to member experiences with a commitment to expanding accessibility, we see an opportunity to extend our leadership position for years and years to come.
Telecom being named the best place to work in New York is personally rewarding as a leader in a cofounder.
But it's also a big strategic advantage as you can imagine.
Recruiting and retaining the best talent is the foundation of every great technology business and separates the truly great companies from the good ones.
Lastly, and most importantly, I want to thank the entire peloton team around the world for their hard work in.
A tough year of rapidly scaling while managing through a global pandemic.
Also want to thank our members for allowing us to play a significant role in their health and wellness journeys as you know we don't take this opportunity to opportunity nor responsibility lightly weaker we care deeply about every one of you.
And with that we're going to sign off for the night. Thank you all for joining we'll speak to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Yes.
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<unk>.
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Okay.
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