Q1 2022 Beachbody Company Inc Earnings Call
If we're successful lifestyle change for so many customers since we started beach body. This social Influencer network of coaches.
Not only various special group of leaders, there and unique competitive advantage for us that I believe we're only scratching the surface of today.
This quarter. We also continued to scale, our live premium tier beach body on demand interactive or body as we call it.
We've refined our programming for body by leveraging learnings from the initial launch last year and those refinements are helping to drive viewership for instance, we've incorporated live versions of our most popular program titles, which gives us a real competitive advantage in the fitness content space by offering these special live presentations a programs like.
21 day, VIX morning, Meltdown 100, and the muscle Burns back program and.
And we've seen an incredible response to other special events from live program premiers on this tier to mash up workouts that feature several of our most popular trainers performing together there are a lot of fun.
We're also initiating new three week body challenges on the first Monday of every month with a set program of content along with live support from our trainers and coaches. This is a format that is very attractive to getting new subscribers started on the body tier and existing customers re engaged in improving their fitness and new.
Attrition.
Now, let's talk about connected fitness home indoor cycling is a competitive space, but the beach body on demand experience is really in its own category our customers see the value in combining our commercial grade bike with our immersive engaging fitness content and proven nutrition.
<unk> meal plans and recipes and it's all delivered directly on the bike screen. We continue to ensure that the bike and digital subscription is priced competitively, but ultimately it's the superior beach body content and holistic experience that defines our value proposition.
While digital subscriptions remain the tip of the spear for our new customer acquisition, which is how each party has always defined the category connected fitness is an important lever for driving lifetime value for a cohort we refer to as our super users.
We're pleased with the demand for the bike in the first quarter and we continue to build brand momentum across our entire user base with approximately $2 5 million subscriptions move.
Moving on to marketing our efforts to focus solely on the marketing channels that are immediately accretive to cash flow are continuing to drive our CAC to LTV ratio back towards our historic levels, we're already seeing benefits from our recent actions to streamline and focus the marketing organization the marketing team has.
Been extremely disciplined at managing spend on the most efficient and profitable media opportunities for customer acquisition.
We also continue to evolve our lifecycle management capabilities to deepen engagement with our existing subscriber base.
Addition to the positive response to new product launches. We're also progressing on our strategy to drive Upsells as we reduce friction in the purchase funnel for instance.
Later this month, we'll roll out the ability to purchase supplements and accessories from within the App for the very first time. This will allow customers to transact in the same place. They go to complete their workouts at the very moment, when it's top of mind for them.
With a strong pipeline of product innovation and enhanced merchandising capabilities, we're confident in our ability to return momentum to the nutrition business.
Our results in the first quarter are encouraging and demonstrate the consistency and agility of our content driven business, we are bound to equipment or even technology to help customers get results. We create world class content, we've done it for over two decades, and we test it to make sure it delivers results that out.
Perform the customers' expectations, then roll it out and let the coach and customer who get results being the most effective promotional channel in the industry that creates a unique advantage one that's especially important when the environment is dynamic as we've seen over the last year.
Okay. Let me summarize we remain laser focused on executing on our strategy to generate profits and cash flow in any demand environment.
Combined with our focus on disciplined marketing and efficient customer acquisition, we expect to not only drive revenue.
But also further enhance profitability with a focus on creating long term value for our customers employees and shareholders so with that sue.
I'll turn it over to you.
Thanks, Colin and good afternoon, everyone. Let me begin by adding to account as well.
We remain confident in the long term opportunity to teach money and we continue to see significant that is to deliver profitable growth as we unlock the power of their assets capitalize on our unique position in the marketplace and build upon out to plastic needs.
Leadership.
Now turning to our Q1 results.
Total revenue was $198 $9 million and although these results would not within Q2.
We're ahead of that guidance, reflecting the strong momentum driven by innovative solutions.
We started with that in your fitness program Joe one in December .
Led by the impressive rollout fully got protocol unmatched 15th.
Digital revenue was $81 7 million, which was a 14% decline from prior year.
And two thirds of the decline was due to reclassification of business service fees from preferred customer Alice digital and infant nutrition revenue.
So adjusting for this geographic shift digital revenue would have only declined by 5%.
Digital subscription decreased year over year against a challenging 41% comp increase from the first quarter of 2021.
Compared to the first quarter of 2019, our digital subscriptions increased 48%.
Reflecting solid adoption digital fitness compared to our pre pandemic baseline.
Engagement with DAU MAU was down versus prior year, but increased 200 basis points compared to 2019.
Quarterly retention levels remained solid throughout with Nazi and Q1 of 2019, demonstrating how consistency in retaining subscribers through continued content innovation.
Our connected fitness revenue with $19 5 million with 16600 banks diluted compared to a net of 1900 <unk> delivered in the third quarter of 2021 on a pre merger basis.
Importantly engagement in the first quarter with higher amongst digital subscribers to end bike versus.
Subscribers to debt and bike.
Taken together this demonstrates that our value proposition is resonating without subscriber base, which further enhances LTV.
And nutrition and other revenue was $97 $7 million down 25% compared to the first quarter of 2021.
His starchy fitness innovation and digital acquisition have been key drivers for our nutrition business, along with new product launches that sort of multiple meetings.
Given the early positive reads recent launches and a robust pipeline of additional new releases since fluid throughout the year, we're confident that our nutrition portfolio will return to growth and at the time now.
Now turning to gross margin.
Our gross profit was $93 million or 47% of revenue in the first quarter. This is 70% last year.
Over 80% is the year over year reduction was related to the negative margins in connected fitness.
The remaining 20% was due to higher content production costs and additional COVID-19 related supply chain surcharges.
Now over time, we expect to improve the margin on connected fitness sounds as well as enhance total LTV.
And we will do so as we catch them more retentive high margin subscription revenue and increase the cross sale of nutritional products with target reductions made directly on the bikes touch screen, which are due to launch in Q2 of this year.
Our connected fitness gross profit was negative $25 2 million and was impacted by three key drivers.
Firstly, we incurred $14 9 million and our V charge.
This is a noncash charge applied to a quarter end bike inventory in its NPL balance in accordance with GAAP and is added back to net income in our calculation of adjusted EBITDA.
Secondly, our margin was impacted by lower <unk> and the operating environment remains highly competitive.
And the third driver with highest shipping and freight costs, which deleveraged our connected fitness gross profit.
Our digital gross margin was 79, 9% and declined by 840 basis points versus 2021, primarily due to higher content production costs.
And these costs predominantly related to the launch of bought interactive and the mixed content Library, which we acquired last year as part of the merger costs.
Constant now being amortize within digital cost of revenue.
In nutrition and other gross margin was 54, 2%, which was a 230 basis point decline from 2021.
The change in margin was evenly split between additional supply chain surcharges and a change in our product mix.
Now turning to operating expenses.
Total operating expenses decreased approximately 22 million with 12% year over year to 167 $4 million.
This change can be seen in four line items in the P&L.
In selling and marketing you'll notice now have been extremely targeted acquisition expense focused only on the highest return lowest risk and opportunities.
And that reduction in selling and marketing expenses were partially offset by an increase in technology and development costs to support new program launches that drive customer acquisition engagement and retention as well as higher G&A due to public company related accounting legal and insurance costs.
The addition of the restructuring line totaling $7 2 million from our strategic realignment to one brand.
Finally, our first quarter adjusted EBITDA loss was $19 1 million and our net loss was $73 5 million or negative <unk> 24.
Basic and diluted share.
Now turning to the balance sheet.
We ended the quarter with an unrestricted cash balance of $63 4 million and no debt and the change in cash since the end of Q4 reflects the timing of working capital outflow is and is not indicative of an ongoing quarterly cash burn rate.
Specifically the first quarter also represented the peak of inventory purchases and technology investments for 2022 capital projects, which we expect to significantly decline over the remainder of the yeah.
And given our increased efforts to control cost and preserve cash we remain confident that we can continue to manage the business from cash flow from operations.
Now I'd like to move to outlook as we look forward our emphasis will remain on profit maximization and cash flow generation for.
For the second quarter of 2022, we're guiding total GAAP revenue of between $175 million to $185 million, which reflects a return to more historical seasonality trends the impact of lower digital subscriptions versus prior year as we exited Q1 and the timing of new product launches.
Additionally, in terms of EBITDA guidance, we expect an adjusted EBITDA loss of between $7 million to $12 million in Q2, as we benefit from cost savings from the one brand strategy and other organizational efficiency initiatives that we've deployed in the first quarter.
For the full year, we expect to realize the combined adjusted EBIT improvement and Capex reduction of approximately 120 million versus last year.
This is a $10 million more than we previously guided and we continue to identify opportunities across the organization to drive efficiencies and reduce costs.
Regarding our full year 2022 outlook, while we're not issuing specific guidance I'd like to provide some directional color.
We expect total revenue to be slightly weighted to the back half of 2022.
Third quarter revenue to be higher than our fourth quarter revenue in line with historical seasonality and the cadence about fitness and nutrition launches, which drive that revenue flywheel.
Also while we expect to deliver a significantly lower full year adjusted EBIT loss versus 2021, we're not forecasting linear improvement quarter to quarter.
However, overall, we expect our adjusted EBITDA loss in the back half of the year to be materially lower than the first half of the year.
Now before turning it back to Tom I'd like to take a moment to say what a privilege to serve as president and CFO for the past seven and a half year and work alongside so many talented dedicated and passionate individuals. The beat study I couldnt be prouder of what we've accomplished together.
As I hand over the reins to Mike sedan.
Mark has a really strong background, especially in technology transformation and I have every confidence in the team's capabilities and growth ahead to beach Buddy.
With that I'll turn it back to Tom.
Thanks, Sue I am extremely grateful for your partnership and leadership throughout your time with the company you've made many contributions over the past seven and a half years and have played such a key role in some of our most important milestones I'd also like to welcome Mark <unk>, who officially starts tomorrow as beach bodies New CFO .
So beyond his expertise in various finance functions Mark also brings with them deep experience in the high growth technology space and we're confident he'll be a great addition to our leadership team.
<unk> is joining us at an exciting time, while the environment remains dynamic we are executing with focus to create profitable productive subscribers in a lean and efficient operating model for more than 20 years of discipline of our company has been our commitment to evaluate our business through the lens of the current reality with a willingness.
To adjust as conditions evolve first quarter results are a testament to that.
Our new products are resonating with customers and we have a solid pipeline of new releases throughout the year and when you combine that with our proprietary coach network and unique flywheel with nutrition and connected fitness all United under the Beach body brand. It creates a powerful virtuous circle that builds momentum over time and position.
Us to create value for our shareholders, while delivering on our mission to help millions of people leave healthy and fulfilling lives.
And with that operator, I'd like to open it up for questions. Please.
Yeah.
Yeah.
Thank you we will now begin the question and answer session. If you'd like to ask a question you can do so by pressing star one on your Touchtone keypad.
Is there any reason you'd like to remove that question. Please press star followed by two.
Again to ask a question press star one.
We will pause briefly to allow questions to generate in Q.
The first question is from the line of Joanna <unk> with Bank of America. You May proceed.
Hello, and thank you for taking my question I have two questions if I may.
First one is on the next spike.
Segment of the business I'm, just curious I understand there are three reasons, that's causing the quarter over quarter decline on the margin, but you have a long term margin expectation on the mix side.
And what was the margin like prior to the mixed acquisition. If you could provide some color on that.
Then my second question is on the cash flow needs in the second half of this year do you foresee the need to raise capital.
<unk>.
What are the plans for the capital rate would it be through the debt or preferred equity.
Thank you.
Yes.
Okay, Hi, Hey, Joanna thanks, very much for those questions.
Happy to take that a bike and then cash flow and then call feel free to jump in and.
In terms of the bike, we know that the bike business ultimately drives value.
LTE win with more of a kind of customizing combo cohorts with whom recently, we're starting to see those trends. So we feel like we're well positioned in the long term to deliver positive gross margin over time, but it needs to be resolved by two factors one is price and one that's cost and right now the <unk>.
<unk> has been challenging because the industry works through excess supply.
<unk> impression, but fortunately, we don't need to participate in an ASC rates for the bottle because that business model is differentiated by the digital nutritional upward offering what we get which definitely gives us an advantage.
Technical costs.
Apply chain normalizes, our shipping and freight costs will start to June .
And that will help our margin, but for us in Q1, one of the factors that impacted our negative connected fitness margin was $15 million and have the non cash charge.
So on a pro forma basis, if you back that out Joanna gross margin would've been around 10 million not the negative $25 million.
As I mentioned, where we're seeing encouraging sign on the buyer cohorts retaining longer.
So for the rest of the year, though our focus will be on increasing about margin to closer to breakeven and that gap to breakeven would useful if you take a holistic view from the digital and nutritional upsells. Unfortunately will be accept expect to see margin.
Crews from now on basically in Q2 through the end of the year as the nutrition up so they're live on mobile tablet, which is scheduled for late Q2, which will improve the economics considerably.
I'll just add to that too if I could.
So if I could just add to that.
It's an important note. This is just the difference in our business model is we don't have to sell the bikes really to turn our sales flywheel.
We always expected it to be.
A balance of acquisition tool, but also really backend business, where people who have visibility to the experience our content. They start to see the bite content through their subscription and they self select to become one of these super users that want to purchase the bike but.
For two decades as the business has been driven by content releases, creating demand for subscriptions and then nutritional subscriptions and now that can lead to the LTV contribution of our bike purchase so.
In the first quarter, we did move bike inventory at <unk>.
That was.
Responding to the environment now, we've called that down and we're really focusing on delivering content at the appropriate value to drive.
Profitable sales transactions into this flywheel that then those subscribers can buy the bike.
When they see that content and want to participate.
Right and I think I'll ask about the bike margin before the acquisition.
Still below breakeven I think it was negative 10 negative 15%.
But as I said the goal will be for us to close that gap between where we are now.
And the rest of the year Q2 by tablet upsell to nutrition, all help to do that together with the digital.
What we have.
Consumers upstream not.
Just talking answering a question related to cash flow and brown, we profiled that so.
You can see now earnings release, we've got no debt ended Q1 with $63 $4 million of cash.
On the business comfortably with cash flow from operations than we know this because since December .
Actually focus on deploying several initiatives to return to profitability and manage our cash very judiciously and in Q1 those initiatives enabled us to do that.
Managed working capital from a cash flow included there are basically three key drivers one but the one brand strategy in the platform consolidation that came with that as a reduction in personnel.
The significant saving the Q2 guidance towards the second was the re prioritization on media investments to loans in year, all along activities on record was when we actually Alex partner savings the critical Capex to EMEA payback and so now we're in a very good place. So that you know in Q1.
No cash burn actually was relatively high.
Because it sort of included various investments in technology media and inventory and those commitments were higher from what we expect for the rest of the year. So.
While we have adequate liquidity to manage the business given the macroeconomic environment.
Value, adding all the liquidity alternatives.
To give us additional flexibility, but at the same time, we're constantly looking at additional levers to enhance profitability and efficient and efficiency. So I think we're approaching it appropriately on all angles.
Okay. Thank you.
Thank you Michelle the.
The next question is from the line of John Heimbach <unk> with Guggenheim Partners. You May proceed.
Hey, so I wanted to start.
$20 million sequential reduction in revenue right. So your <unk> plan versus <unk>.
The bulk of that coming from nutrition.
In terms of segment.
And then if it is coming predominantly from nutrition as that base.
Basically <unk> as opposed to subscribers.
Can you break that out or thoughts on that.
Yes.
I think the Q2 guidance that we gave John really reflects the return to more historical seasonality and a focus.
Immediately.
Immediately high return sales and marketing expense was net Q2 sales mix will maintain the general high to low rank of nutrition being the highest in digital and connected fitness.
But the current competitive dynamics in connected fitness market and the <unk> doesn't change.
Changing that race to the bottom that I mentioned so.
Because our business model is on the line on that is connected.
So we basically plan to fulfill the demand from awareness created last year as well.
In Q1, but expect Q2 sales to be more weighted towards nutritional and digital.
Versus connected fitness per se in Q1, which will also improve margins.
Okay.
Secondly, right.
Our long term.
So you think about.
The connected fitness business is there an opportunity to somehow partner with hardware providers. So you basically get out of the bike business right.
Your strength is content, maybe somebody else's as the hardware.
With someone to do that.
That can be done on bikes or you've been very you can deliver your content bikes treadmills anything.
Can you do that and then secondly, you before.
Before Covid right EBITA.
EBITDA margin was 8% to 10% can you get back there.
If you're in the connected fitness business and does that matter.
So.
I think the.
Answered on the last part is correct the first part.
The connected fitness business.
Short of some of the supply chain issues, which.
We reacted too by getting ahead of that in terms of inventory now we've got that inventory. So we're not in a position where we're forced to.
Support an entire infrastructure.
To produce that bike, we've got the bikes, we deliver the bikes in the customers, having a great experience with it.
However.
That experience with that screen and a heart rate.
Based training is sort of integrated into that content that we're creating so while it's quite possible that we will partner with other equipment providers to scream our content on their devices.
We do think that the proprietary experience on this bike that we've sourced through the mixed fitness purchased is really the best experience big screen the commercial grade bike so.
Now I will get the benefit of really just purchasing additional inventory as demand.
Follows. So we don't have to be ahead of it as much and I think it's I think connected fitness will always be a part of the business, but the tail wag the dog as much as it did really on the back half on the back half of 2021 of the first quarter 2022, now will get the benefit of really returning to this.
Cadence of content launches.
Leveraging that content to drive nutrition starts and those subscribers that come and then who is.
Meyer or appreciate the genre of stationary or indoor cycling will recognize the quality of that content that comes along with their subscriptions. So.
I, absolutely do expect to return to the kind of margins that we've seen historically.
And better.
As we scale the business and I don't think that connected fitness will continue to be a drag on the overall business performance.
Yeah.
Okay. Thank you.
Thank you Mr. Han and <unk>. The next question is from the line of Jonathan Komp with Baird. You May proceed.
Yes, hi, good afternoon, and thank you.
Carl I wanted to ask first just on the digital subscribers. The $2 5 million can you can you shed any more light on how many of those are bought interactive premium subscribers and then how many.
The Super users that you mentioned that sort of core cross across multiple platforms.
Yes, we don't break we don't break those files out Jonathan I'm, sorry, but.
But I will say that the business model is such that the primary subscription pool is the Bod subscriber and then what we do is in as we're onboarding them, we offer people a free trial and the live content and we get a significant percentage of the people that will take.
<unk> subscriptions.
Through this free 30 day trial, and then also obviously a significant segment of those digital subscribers also become nutrition subscribers.
And then in terms of the Super users those track to bike sales and.
<unk>.
I don't believe we breakout those cohorts and our discussions on these calls.
But when you when you look at the live content any any thoughts on how the uptake spend now a few quarters in gist.
As you've made some adjustments to the content.
Had some time to spend with that.
Yeah actually that business frankly, as a unit unto itself I.
I feel very good about what it has done since its launch last fall just in terms of.
The relationship of subscriber count.
Our subscriptions to the.
The cost to produce it I will say, though that one of the significant things that we did in the last two.
Two or three months is now.
Is it sort of finesse the production so that we maintain our quality and this incredible experience where the subscriber gets to be up there on the screen with the trainer.
But we've taken some costs out without sacrificing that distinction that differentiation in the marketplace and.
I would say if that was a business unto itself, we would consider that a success in this environment and now we just get to really just pull certain expenses out get a little bit more efficient for instance, as we are.
Integrating the platforms going moving from a two platform company to this one single beach body on demand platform, we get too.
Reduce our footprint in terms of how we're producing that live content and that hasnt significant decrease in costs. So overall.
We're moving in the right direction and I feel good about the the cost structure relative to the demand for those lives workouts.
Okay. That's that's helpful. And then maybe one broader question just on the outlook to get back to profitable growth and positive free cash flow I'm wondering.
The path from from today to that point, if you could provide any color on.
When do you expect to get there and then when you look at the <unk>.
Bridge and the major moving pieces, how much is coming from the mix of business.
Versus how much from the rest of the business.
Any comments on the major moving pieces to get there would be helpful. Thank you.
Well the primary driver.
I'll just I'll just start it up soon then you do the technical stuff.
The primary driver of this business is new content launches and the.
As we said in our last call the back half of 2021, the post pandemic environment.
It was just like spring break.
Wanted to get healthy and we've seen this gradually turn with the launch of job, one which was quite successful and now the launch of this for we got protocol program.
An enormous success for us.
What that does is it turns the flywheel for our social Influencer network, our coaches as they get more productive they bring in more coaches who are also more productive those people get results, they're promoting them on social media that generates more productivity. This is a snowball effect and now that the environment of the post pandemic mindset has.
Given way back to a more normal mindset of people wanting to take care of their health and wellbeing, we're seeing a return to the productivity of our launches and I want to.
Make a specific point here, we only had one new program launch in the back half of 2021.
And this year, we effectively have seven programs launching in 2022, plus some additional.
Nutrition launches within our catalog so we've never had.
More.
Fuel to work the flywheel and to keep the coaches productive. So this is what gets US. This is our normal right. This is our two decades of normal that the business has been so profitable for so many years and again selling the bike on the back end of that is accretive to LTV versus.
<unk> trying to force it and make the bike and acquisition tool now that we've made that correction and stabilize the business from a cost perspective, it really feels like we're back to our knitting. The way. We grew this business since 1999, two I don't know what you want to add to that.
Yeah, I would just say Joe my modeling conservatively because of the macro environment, which we believe is prudent and I will tell you that if we look back at the last 20 or so years between the dot com bubble in 2001 with a global financial crisis in 2008 or even higher than in 2020.
Our business model has been resilient because the primary sales level has been new content as Kyle just said.
Pain types and for example, when a sale is made and that's meant that we've had variable costs versus fixed costs that rule and are fundamental to driving revenue and that's why we can pivot and realign our cost faster than most because our core business is actually quite capex light with variable cost structure.
I think the second comment I'd make just in terms of returning to profitability. Despite the conservative modeling.
Clearly you know accelerated demand.
The network.
And profitable connected fitness and definitely requirements, so that path to profitability, but we're really focusing one quarter at a time now and then the guiding without Q2 guidance, but we feel very good as kaki said about the 2020.
Two launches and also the lineup for 'twenty three.
And with various levers that we've deployed that I mentioned associated with one brand and that consolidated platform efficiencies and focusing maybe.
Alex part of Capex savings.
All of.
A prerequisite to an important initiatives that we've taken that will help us achieve the path to profitability and we're obviously working on getting that even faster.
Those initiatives were critical and we've executed very diligently and we are.
Well on that way.
And just a follow up to clarify I know that the advertising expense increase.
<unk> increased by more than $100 million from 2019 to 2021.
With the sales lower than I think obviously with this as expected at one point.
Do you think you could make a lot of progress getting back to that 2019 level or is that not a fair way to look at it.
I think the selling and marketing expenses in 2009 in Q1 of 2019 were about 109 million right compared to $106 million. This quarter. So relatively similar and I think what's interesting about the $106 million that we just spent in Q1.
One is that roughly.
The 70 million relates to not just media, but also the commission revenue that we pay out coaches so.
I mentioned that because we continue to make sizable investments in selling and marketing like despite the fact that media, which might have a longer term payback has been.
Curated and pull them.
But we are targeting the highest R O Y initiatives with immediate payback by the coach commissions and investing in media to the direct marketing channel with again, a really strong LTV to CAC payback now so.
I think.
That that line item is something that we will flex one as we see opportunity and as the priority for US right now is getting back to profitability managing cash.
And continuing to launch products that engage customers and ultimately drive the flight business.
Okay understood. Thank you.
Okay.
Thank you Mr. <unk>. The next question is from the line of venture Linda with Cantor Fitzgerald You May proceed.
Oh, Hey, guys. Thanks for taking my question.
Just kind of wanted to double click a little bit on the free cash flow burn.
Yeah.
You mentioned in your prepared remarks that.
Why don't you free cash flow was impacted by timing, but you've got free cash flow burn in half relative to <unk> 'twenty one.
And it seems like Youre kind of betting big on the market normalizing in the next quarter or two with the investments you made in <unk> and technology media and inventory.
To your question is if the market doesn't improve in <unk>.
Curious with you.
What levers do you have just to.
Significantly cut down on this on this cash burn thanks, John I have a follow up on that.
I think I'll start with that so if I could just the.
Really the way the business model is built I would.
Sort of.
Change the perspective I don't believe we are betting big I think frankly, what we've done is.
Conservatively model against predictable outcomes from our product launches based on a profitable or a more reasonable expectation of return on media based on.
Investing only in those media opportunities that are immediately accretive to cash flow. So we've just tightened what we would call our immediate allowable at the same time, we've maximized the efficiency and productivity of our coach network and continue with training programs and incentives to mobilize this incredibly powerful.
<unk> <unk>.
Promotional force and.
Marketing team if you will.
That only generates an expense if.
A sale is made.
So the tempo of launches that we have for the balance of 2022.
Is something that we have a very good line of sight to predictability to the outcome of those launches.
At the same time that we haven't leaned into it we're not over our skis because we've cleaned up our.
Cash burn we've cleaned up our pulled back on Capex expenses, because we're still digesting those investments that we've made last year to take advantage of those.
Now we are using content and nutrition to turn the flywheel and return the company to its appropriate relationship of revenue to EBITDA.
That's the way I look at it I really don't think that the.
The bet and the final quarters the.
Quarters is.
Is hoping that demand returns is actually more.
Looking through the lens of our 20 years of experience in terms of what the outcome is when we launch a new program into this ecosystem.
Yes, okay.
So I would say beyond that.
We have modeled conservatively.
To be confused with the fact that if demand were to increase we would get to profitability faster, but we are absolutely not modeling that and you can see that Ben reduction. If you just look at Opex from Q4.
Admittedly huddle permanent it's even if you go back to Q3 Opex as a percent of sales was 99% and that's reduced to April Capex as Tom mentioned, we are now and I think Christian will reap the benefits, especially with the consolidation of our container board and.
I'm enjoying that form basically run the business on Capex and switches from 28 million in Q4 to $18 million in Q1 and inventory you know when the vessel from the cash flow you've gone from cash used in Q4 to cash provided of about $16 million in Q1, So you're going to continue that in Q1 will be our highest quarter of the year.
With that we will continue to see improvements in the backend of the year using a conservative model than a gamma demand were to pick up will be upside from that but that's not what we're forecasting.
Okay, and then maybe just a.
Follow up on the Opex lines.
How much of the sales and marketing expense is variable and kind of looking at it.
Wanted to come.
Come down off of the peak.
But even excluding connected fitness gross loss.
It's not.
Not really is barely covering kind of the gross profit from digital and nutritional so.
You guys had to cut down.
Sales and marketing expense dramatically.
What would that look like I was on the on.
On Google trying to compare the price of a bite the peloton and I noticed you guys are still bidding on Google keywords and peloton was not.
There's something that you see in the market that says you know.
Demand is coming back.
Soon or I'm, just trying to get a sense of modeling free cash flow burn.
Yes.
Well I'll answer the question on bidding.
Quite disciplined about the way we approach.
The whole ecosystem, obviously, the most difficult thing about media purchasing is attributing orders to particular media and so our team has done an incredible job of managing.
Media spend.
To the.
The appropriate ratio of awareness and last click media and they've really pulled that in to the most.
<unk> near term cash flow accretive media mix.
Frankly that we've seen in the last three years.
And the coach network, which is the variable side of it really delivers significant value taking advantage of.
These new launches in fact.
The coaches will create.
Within within 72 hours of launching a new program or announcing a new program. It will become a trending term on social media and a searchable terminal come up in the top.
10 searches for a particular word so.
But that expense.
Doesn't cost us anything until sales actually happened in I don't know Sue if you want a breakout.
The sales and marketing expense as Ben was asking or not I'm not sure. If you have that note.
Yeah Yeah.
Exactly right at all.
<unk> expenses are completely variable.
Have a doubt the biggest line item on our P&L.
And as Kathy said, we only pay our culture when a sale is made.
And for Q1, you know I think we're proud of the amount was about $70 million mm title.
Media and commission expenses in Q1, so that's the majority that's a material what is that about two thirds I think of that selling and marketing line for Q1.
And then again, we continue to optimize all the line items.
Technology, and development and general and administrative but the other key line item that impacts cash burn quite significantly is capex.
2000, a month for example, it was about 120 man versus 40 trains and our Capex in 2019.
In 2020 will still.
Recently high end this year.
Again, we haven't shared that number for the full year that will.
Materially lower number than each of them sit in 'twenty, one and 2020.
Yeah.
Okay. Thanks, guys.
Yeah.
Thank you Mr. Sherlund that concludes the Q&A session I will now turn the call back over to Carl to be clear for closing remarks.
Alright, thanks, so much and I appreciate everybody.
<unk> on for US again, thank you Sue for an incredible tenure with us and.
I look forward to our next earnings call.
Introduce you to Mark should we then and hopefully have encouraging news as we really work hard to deliver the.
Shareholder value that we expect and also the results that people need to live healthy fulfilling lives. So thanks for your faith in us your belief in our mission and thanks for joining us today.
That concludes today's conference call. Thank you for joining.