Q1 2022 Peloton Interactive Inc Earnings Call
Serially from those contained in or implied by these forward looking statements to 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 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.
Reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.
And with that I'll turn the call over to John.
Thank you Peter.
Good afternoon, everyone. Thanks for joining us today.
Before we recapped a quarter and discuss our forecast I Wanna spend a moment, providing some context for updated outlook.
As you all well know stay at home and work from home orders, coupled with commercial Jim closures drove massive awareness gains for connected fitness accelerating an adoption curve that was already well underway.
Given the unprecedented circumstances presented by the global pandemic, we said last quarter that modeling the exit from Covid and the massive growth. We saw in fiscal 2021 would be a challenging task and that has certainly proven to be true.
With reduced backlogs, our visibility into our future performance has become more limited.
From forecasting consumer demand to accurately predicting logistics costs are teams have never seen a more complex operating environment in which to guide are expected results. This year.
As noted in our shareholder letter, we are reducing our guidance for fiscal year of 22.
We have returned to presenting ranges given the uncertainty.
The Swift timing of these changes since giving our initial guidance in August is not lost on us.
As we prepared our previous guidance, we had to make assumptions about consumer behavior coming out of Covid the impact of our original bike price reduction in the cost structure within our connected fitness segment.
All against the backdrop of a global supply chain crisis.
Well, we have had to manage carefully around many issues such as component shortages elevated free costs and increased transportation costs I'm proud of our team who has moved mountains to ensure that we have ample inventory across our portfolio ahead of the holiday season.
We track our estimated market share closely and while sales are currently not meeting our previous forecast.
Third party data suggest that we continue to build on our leading share of the connected connected fitness market.
We firmly believe at home fitness customers will want one subscription for a comprehensive home fitness platform and we are determined to be that one subscription.
Moving onto thoughts on the quarter.
On August 30th we officially launched our new lower priced tread in the U S and resume sales in the U K and Canada.
On September 28, we launched sales in Germany, and we look forward to bringing tread to Australia, and the not too distant future.
We have high expectations for our tread.
Our tread platform provides members with both running in full body workout taught by a great roster of instructors.
We have re imagine the tread experience in the same way, we fundamentally improved the stationary bike experience with the launch of our original peloton bike.
While we believe the wider price gap between bike and bike plus has resulted in some trade down impact we're comfortable with that outcome.
As we've said growing household penetration remains our primary objective.
On the engagement front, we recently passed a significant milestone.
Over 1 billion classes taken by our members.
We're honored to be playing such a positive role in our members lives and look forward to many billions more.
We finished the quarter with 2.49 million connected fitness subscriptions up 87% versus the year ago period.
End of quarter digital subscriptions were 887000 up 74% versus a year ago.
And our global peloton member community now stands at over $6 2 million.
Engagement per connected fitness subscription totaled $16 six workouts per month declining modestly from Q4 and more significantly when compared to last year's COVID-19 impacted quarter.
On a two year basis engagement was up 42% over the first quarter of 2020.
As we have said summer months have traditionally seen lower engagement levels, and we expect our first quarter to represent the trough quarter for engagement for the fiscal year as it has in every non COVID-19 year in our history.
In Q1, we generated total revenue of $805 million, representing 6% year over year growth and an 88% two year CAGR in terms of revenue drivers, we had lower than expected financing penetration better than expected connected fitness churn partially offset.
By the $11 million adjustment to our return reserve for our tread recalls.
We added 161000 net connected fitness subscriptions in the quarter, bringing our end of quarter connected fitness membership base to 2.4 $92 million up 87% year on year.
Average net monthly connected fitness churn was <unk> eight 2% as a reminder, we disclosed last quarter that we will no longer be offering forward churn guidance, but we'll continue to report this metric we continue to expect low.
Industry, leading churn and high engagement, especially as we head into colder weather.
At the end of Q1, we had over 887000 subscribers, representing 74% year over year growth slightly ahead of our internal expectation.
It has proven to be very challenging while we saw an easing of return activity through late summer. We believe the exploration of our subscription waivers motivated a higher than anticipated number of treading plus owners to initiate return con.
Consequently in the quarter, we increased our reserve to account for this activity.
As a reminder, the impact of recall related returns is added back to our adjusted EBITDA, but it's fully reflected on the revenue and gross profit line.
With this increase in our reserve we are attempting to capture the entirety of expected returns from now until the end of the recall related return window, which last for another 12 months, but there is the possibility that future adjustments will be needed.
Excluding the impact.
Of the unexpected increase to our return reserve our connected fitness margin in Q1 would have been 14%.
And overall gross margin would have been 33, 6%.
On the logistics front, we saw some additional inefficiencies associated with middle and last mile delivery costs and pre core related freight and expenses.
These negative impacts were partially offset by lower than anticipated bike financing rates and bike related reserve adjustments.
Fires and the R. M D team from pre core.
As with GMA, we expect roughly flat quarterly spend could've remainder of the fiscal year.
R Q1, adjusted EBITDA loss was better than expected at $233.7 million.
Net loss for Q1 was 376 million or a loss of $1.25 per basic and diluted sure.
We ended the quarter with $924 million of cash and marketable securities and have additional liquidity in the form of an untapped 285 million dollar credit facility.
Now onto our outlook.
Reintroducing ranges for our guidance as John alluded to earlier, the overall consumer and logistics environments have been challenging to predict coming out of Covid and we are providing guidance just a few weeks ahead of our busy a sales season.
For fiscal twenty-two we are now forecasting ending connected fitness subscription of 3.35 to 3.45 million, implying approximately 1.1 million net ads and representing 46% year over year growth.
And 77% to your <unk> for ending subs at the midpoint. This equates to roughly a 6% reduction in our forecasted end of your connected fitness subscriptions at the midpoint.
R revived full year revenue forecast is 4.4 billion to $4.8 billion, representing 14% year over year growth and a 59% to your cake or at the mid point of the range.
For Q2, we.
We expect ending connected fitness subscription of 2.8 to 2.85 million, implying 333000, net ads and representing 69% year over year growth and nearly 100% to your cake or for ending sounds at the midpoint.
For Q2, we expect revenue of 1.1 billion to $1.2 billion, representing 8% year over year growth and a 57% to your cake or at the mid point.
Yeah.
Since launching media for tread, we have seen a progressive increase in <unk> sales and remain bullish on the category and our ability to grow from our currently low product awareness.
Our primary task today is educating the consumer about our all new tread and how it differs from other treadmills on the market. However, much like our bike portfolio. Our revised traffic estimates will also impact our trade forecast for the balance of the year.
Lastly, we have reduced expectations for our commercial channel or legacy pre core business, given both supply and demand dynamics.
While the commercial gym industry has made significant gains as the country reopens overall visits remain below pre COVID-19 levels, leading operators across some commercial segments to delay capital investments in new equipment. However, more importantly, sourcing certain component parts has become materially more challenging since we gave our.
Guidance in August this is led to supply constraints and some pre core products, leaving us unable to fulfill some of our commercial demand.
Moving on to margin.
Q2, and 16% for fiscal year 2022.
As we've said before we are more focused on connected fitness gross profit dollars than margin percentage with the goal of using those gross profit dollars to offset our sales and marketing expense.
This is an extraordinary year, where this goal is difficult to achieve but we are committed to making material improvements to our cost structure that will help us get back towards being net cash neutral in fiscal 2023.
For our subscription business, we expect a contribution margin of 69% in Q2 and 70% for the full year with the improvement to last year, reflecting continued fixed cost leverage and some benefit from identified cost savings.
Okay.
Rolling up our segments. We now expect total company gross margin of 24% in Q2 and 32% for fiscal 2022.
Turning to Opex in response to our revised sales and margin outlook for fiscal 2022, we have identified material savings across our operating expenses.
So some of these actions may take a quarter or two to show improvement.
He used to optimize or U S manufacturing expansion and costs, but continue to believe that this is the right long term move, especially in light of the supply chain challenges, we are facing today with frightened delivery costs needed supply chain flexibility and the benefits that will come from stateside expertise in manufacturing as we look to manage.
<unk> we.
We now expect approximately $400 million of Capex spend through the balance of physical 2022.
While the next several months present, a forecasting challenge in our business, we have many leavers to control our costs and will implement the appropriate strategies to support our continued growth in our member base revenue and path to profitability.
I will now hand, it back to John.
Thanks, Joe.
Cause you all know we've been managing through an unprecedented in 19 months since Covid began.
Going from extreme demands too extreme supply shocks.
And coming out of Covid consumer behavior and supply chain inputs have been very challenging to predict in the short term is clearly evidenced by her new outlook, but.
But please know that the entire peloton management team is focused on making the best decisions for the long term health of our business. Despite the challenges we are currently facing.
We know the positive impact we were having on our members lives and.
And while our growth is not what we had expected just a few short months ago, we are extending our lead in home fitness cardio and becoming a leader in strength, we make the best most immersive and interactive home fitness products available and we have more on the way in the coming weeks and months.
We will come out of the other side of this uncertain operating environment, a much stronger and more nimble company.
We will be vigilant in managing our cost structure for both growth and profitability.
In conclusion I want to let you know that managing this business is incredibly personal to me and the entire team here a peloton.
As one of the founders and the biggest individual shareholder I can't tell you how much we care about peloton and we want every piece of it to be beautiful, including the financial model and performance.
I'm incredibly proud of the vision that we have laid out and I'm energized by the clear path to get there.
And over the next couple of years.
In terms of your first question certainly I would say as we think about the three or four contributors to the reduction of guide I would say bike portfolio is the largest.
And that is obviously a decrease in the demand profile, but secondarily as you know with the mix shift.
It is also.
More heavily weighted towards the original bike right or the lower price spikes in bike plus and.
And so that does have revenue implications and EBITDA implications and effectively connected fitness gross margin implications relative to what we thought.
And just giving you a little bit more detail there as you know we're agnostic on an entry point, but certainly.
Before we did the drop in original bike, we were seeing about a 50 50 mix.
That expanded a lot after we dropped the price it's come down a little bit but call it more.
More like three quarters original original bike so.
Also contributing but again just remember we're agnostic to entry point and that has no impact on sub growth.
And then you know tread, we're still in very early days, but obviously the traffic trends that were seeing on.
On bike are the same for Tret and so.
We have also taken down tread and then the last piece would be pre core or commercial business where.
We've moderated some of our expectations for the year given some of the headwinds we saw in Q1. So those are the that's the order.
Got it thank you Joe.
Thank you. Our next question comes from Edward.
There are some.
We talked about last quarter is theres, an asset and a liability with the awareness of what a tread is where you see you think it's something to run on and then certainly it is ours is the best tried to run on but to your point. It's also a portal to a full body workout as we call it.
Circuit workouts are so popular.
Think about Orange theory, and bootcamp classes.
And then even cross fit.
Huge category huge opportunities to tread on the hardware side is huge and then the content from a circuit training perspective is a fantastic huge opportunity huge market and huge consumer.
Demand and so we do have some education two to work through in the coming quarters in coming years. It's the same education, we went through with the bike.
Where people would say eight years ago, why do I need a $2000 stationary bike and it's like well, it's not a stationary bike at the portal to a fantastic indoor cycling class with the community and the quantified self and instructors and the programming and the music and everything that the peloton bike brought similarly, the tread is so innovative that.
There is some education and we're going through that I will point out we've only been call. It 30 days on TV trying to start telling that story and the trend of sales of tread has been fantastic. So we're bullish on this year, we're bullish on the coming years, and it's going to be a huge.
Yes.
A huge new product line for us. So we're super excited William I don't know, whether you wanted to add anything on top of that.
No I'll just I'll just.
Add to Ed's question.
As evidence of the awareness John mentioned.
Measure awareness of our various products and the brand and track empty measures.
And our unaided awareness among the target is only at 11%.
You have to go back to close to 2000 late 2015 to find that kind of awareness on bike. So we actually view that as a massive opportunity our formula for.
For growth that we've been able to hone on bike and then as we roll out internationally as it starts with product experience, we deliver the best product experience and connected fitness and tread with an 89%.
What we've seen on bike and so when we start from there as the core we start to build awareness, we build the installed base to Jon's point on momentum, we get people talking about it and we have an expression that our members sell more bikes and we did we were seeing that word of mouth with with with tread just start and we feel like as we climb with these investments in.
Tried to solve for really is a net cost neutrality, meaning that the gross profit dollars uhm in the units that we sell offset.
The fully loaded remember, it's all fully loaded its showrooms it's emergencies.
Uhm acquisition marketing media fully loaded CAC.
Certainly this year given the pressure were seen on <unk> and that is combined with the fact that we've returned to media spend in the near term net cap is positive and so you can sort of think about a ballpark number for the year in the three to 400 dollar range.
Thank you. Our next question comes from Youssef Squali of Truth Securities. Your line is open.
Great. Thank you maybe one question for John and one for William If I may So Johnny engagement remains a key obviously to the peloton story. This is the second quarter of declining engagement I think in your prepared remarks, you spoke about Q1 being the trough maybe speak to what you're doing proactively took on them.
Fixed that outside of the basically the reopening is it a content issue is it just something else altogether that maybe we didn't talk about and then William can you discuss the the pre core integration I think you guys mentioned that it's the performance is trailing a bit behind your unexpected, but I care more about.
The how's the integration going and particularly as you look at there kind of a richer product offering how much of it do you think is.
And then Youssef on pre core just reminding everyone. Why we made that acquisition first and foremost it was about building the.
Substantially the best connected fitness equipment manufacturer in the world, we feel like one of our objectives internally and we said this is to build a structural advantage not only in scale and our ability to build connected fitness equipment I'll remind everyone. This has been a very fragmented market.
One line, making tens of thousands of things was remarkable we're making millions of things and that's been challenging.
To build that capability over time, and especially with our growth, but we've done that and and then also build a structural cost advantage in quality advantage, while we build that scale advantage, we feel like.
To win connected fitness as John noted you have to be best of breed in that pre course talent, Rob Barker Greg May.
That team is remarkable we thought it was the best team.
When combined with ours and everything we've seen in terms of the integration some of the work we've done out of the North Carolina.
The facility on domestic manufacturing staging for pop it has been going remarkably well and everything we believe and hope and our diligence.
It's been true there in terms of channel.
As Jill noted there is softness softness there the operators on.
Existing digital subscriptions or how we should think about demand within your control versus demand without of your control and along those lines. It seemed like what you were saying there with the variable cost structure is is we should be almost rethinking about maybe margins longer term just wanted to make sure I heard that messaging clear and and what the takeaways where.
In terms of a more variable a mix of cost and the model. Thanks, so much.
Yeah.
Change the order of your question very quickly just yet address that what what I meant and.
You know when you think about Jerry.
Right, we had several quarters.
Sequential growth.
You know what I'm, specifically thinking through is.
Obviously built warehouse footprint, we've obviously invested in a lot of field operations, which has been great for our business has been great for a member.
But I do think going forward as we think about our Grove right. We're now going to have them Ah more seasonal business again, right and and so I do think as we think about future growth layered on top of those fixed card right. We I think we have to get more creative in thinking through how to stir.
<unk> three P. L. Right. So you know, it's it's not like we're gonna just keep.
Building that our warehouse footprint, we're just gonna have to think about and I think it's all in addition to that there is also some opportunity within our members support model. So I. Just think is we have a seasonal business right I think one of the ways in which we can gain advantage is looking for ways to have fixed costs leverage and also improve variable cost structure. So.
I I think it's just more to think about coming out of Covid right. How do we right size our business model for the demand that we see in our business and the seasonality and making a tap the most robust profitability.
And.
This is William on the demand side in terms of lovers sort of need to think about it byproduct and I'll just start with tread. We I think we all made the point about how excited and bullish we are tried and it's really about.
<unk>, it's so unique to start with a product at 89 M. P S and it's to the credit of our our product team led by Tom Cortese and Jen Quatre, We've got the best product and content team on the planet and it's it's so it's a marketer's dream to be able to get the word out and that's what we have to do 11 per cent awareness 30 days in.
It's just about scaling awareness getting more people are buying that product that I'm doing the work force on word of mouth, we know that formula very well and we bet Joe mentioned, the new campaign that started day really pushing the tread educating people to Johns <unk> about it's not just running it's this incredible full bar.
Experience, we've got the best instructors in the world. So that's gonna be a foundational growth engine for us going forward that houses very excited on bike.
And we not been comping be massive bike growth and COVID-19.
And isolation the bike units. This year would look incredibly exciting would be Jill talked about the next stop adds largely coming from the sale of bike. This year. That's a lot of volume and so we have to keep penetrating the huge opportunity and Sam We've said it's early days.
Both in salmon Tam, we dropped the price on bike just recently and it's getting the word out. It's also our messaging and creative we do a lot of consumer insights work on how do we get people over the fence and coming into peloton on the bike and we feel great about that it's it's new channels were opening up.
We reference corporate wellness and others huge partnership with the United Healthcare, that's just getting off the ground. So we like our headroom on bike, we'd like international markets, We added Australia, Australia. So just.
Three X and within the first month in terms of an international launch three X number of units that we've sold and U K K N U K, Canada, or Germany, any other new international marketing. So we've got amazing growth prospects in front of us and it's just about being focus being disciplined getting over this COVID-19 comp.
And also getting more efficient with our marketing, but we know how to do all that.
Thank you and next question comes from Iraq wrestled rescue of extreme BNP Paribas. Your line is open.
Oh good afternoon. Thank you for taking my questions. Two part question. Your during last year's Investor Day, you provided a lot of great stats about the income brackets of the consumer the demographics embedded in your full your guidance for this year like who is your target consumer uhm, considering the price cut on the bike and then secondly more of a.
A modeling question, but I think you mentioned there is new digital marketing landscape now with Apple a sales and marketing was 35% of sales how how do we think about those metrics for the second quarter and the full year.
Thank you.
Great and in terms of I might just take you're you're the second question first yet again, because I think it's.
An easier.
Question that to tackle or are you just asking what percentage do you believe.
The leverage we're going to see in the sales and marketing line versus leverage certainly versus Q1, we expect our sales and marketing to come down fairly dramatically throughout the year as you can imagine I'm in sales and marketing right. Obviously in Q1, we began ramping at all.
Our bike at media to talk about the price drop.
And of course that was our seasonal level of revenues sell sales and marketing as a percentage of revenue was obviously at a seasonal high for us as we move through the year Q2 will be I'm also a big key sales season for us and so you can expect through the year.
Probably and in the low to mid twenties, an overall sales and marketing as a percentage. So it does come down almost sequentially through the years. So that that is and then did you have a question I think embedded on digital marketing.
Oh that was the part of the question because of the new landscape like how much is marketing was a percentage of your sales going forward for this year.
But yeah. The semi first part quite yeah, Gainesville marketing, yeah, if you're talking about more of the media spend aspect of it obviously are full sales and marketing mine does have obviously, it's all of our fully loaded showroom costs and merchant fees and of course, everybody on the team. So.
Are you asking specifically what breakout is is variable media spend.
Yeah that would be great and also just overall guidance on sales and marketing total as a percentage of sales for the year, which I can can just keep.
Yeah, and and I will say I you know on this point as you know T. V has always been an incredible medium for us to convey the peloton value proposition and so I would generally say, we're more heavily weighted there so I.
I don't think the changes that we talked about in the digital landscape or going to impact us much I do think from a variable media spend we are a little bit more waited and there's a lot of other channels like you know O T T. But certainly T. V is is a big category for us So we're not.
Concerned with the media landscape, but certainly it does have some impact and then I think William you're gonna take the demo question.
Sure I can we don't want to go too much into kind of our secret sauce, but we have <unk>.
Customer segments that we used to buy media against you're asking specifically about demographics I think the general push there that I can talk about is we want to continue to print penetrate younger and less household income and we've been successful doing that part of the part.
Part of the thesis strategically on the price drop was we wanted to bring this amazing experience to more and more people and obviously, we want to do that against the mission John talked about in his closing remarks. It's also good for business. It allows us to really penetrate the tammen Sam given.
Besides of that segment and it's the fastest growing segment it meaning the the under 35 and 50000 in under it's been our fastest growing segment for I think it's been the last year, we can I'm almost sure. That's the case and so as we think about.
The opportunity, we talked a lot about connected fitness and our leadership there, but we really see it much more expansively. If you look at the prize of fitness, which is a massive global market. It's really about there are 181 a million people globally gym memberships globally and you you look at the <unk>.
6.2 million members of John referenced in and do you think about our experienced in the convenience of home and the value that we offer an engagement and it's it's it's why we're so confident this <unk>, we do our job continue to do our jobs. It comes to US. So that's we we think about a broad segment.
We have members that are 80, plus and we have 20 year old members and so it's it's really a wide it's really a wide demographic.
Thank you very much.
Thank you. Our next question comes from John Blackledge of Cohen. Your line is open.
Hi, This is James on for John in light of the traffic trends you mentioned, how are you thinking about the role of retail showrooms to drive conversion of the treadmill and bike prior to the pandemic I think you said somewhere around half a treadmill conversions redo. The first hand experience I customers trying out tried those are shown is that still the right way to think about conversions for the lower cost treadmill.
And then a second question on the product portfolio in light of the supply chain issues and inflationary pressures.
Does that potentially impact product release cadence as we get through fiscal Twenty-twenty too. Thanks.
Yes, Giovanna I'll jump in on the first one I'm glad you asked because as you know we have over 100 fantastic store retail stores worldwide and we are whenever we launched a new products those stores become an even more important strategic asset and we will see that.
When we want your daily sales throughout the week and how much better the tread does on Saturday and Sunday at those stores are full and so for a more mature product you might feel comfortable buying it on online like a bike cause you've written before where there was a hotel or your friend or whatever and so you have a familiarity with that.
Product, obviously with the tread the new Fad being two months, new in some markets and even newer in other markets going to those stores and I'm getting on in having an experienced and more and more I'm going to the back and and actually doing the work out and some of these stores is a huge asset and why.
<unk> a lot of people are are shutting down stores, we love our retail stores for just this reason we think it's a really critical strategic asset.
When we bring new products to market and we talked about the treads, new and we're gonna have other new products in the coming quarters that we're excited about it and they also benefit from the retail programmes.
[noise]. Thank you at this time sorry.
Sorry go ahead, I'll I'll take another product.
Question, sorry about that we did say this year is going to be a big year for a product launches we stand by that we're excited if you caught in my in my prepared remarks, I alluded to the coming weeks and months of some new announcements.
One that I'm very excited about and and then potentially another one next.
Next year, hopefully an H two and we're we're pushing or we've got a lot of fantastic R&D and the offer for years at this point and we are super excited to bring it to our members and to expand our opportunity. That's that's all I can say right now, but we are a technology and innovation company and we're going to show.
What that means in the coming quarters.
[noise]. Thank you at this time I'd like to turn the call over to John told me for closing remarks, Sir.
I guess, that's it thanks, everybody, we'll talk to you next time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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