Q3 2022 Peloton Interactive Inc Earnings Call

[music].

Good day and welcome to the peloton interactive third quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question Press Star then two please note. This event is being recorded and that was in the question queue. Please limit yourself to one question and one follow up I would now like to turn the conference over to Peter Stabler Senior Vice.

President Investor Relations. Please go ahead.

Good morning, and welcome to peloton third quarter fiscal 2022 conference call.

Joining today's call, our CEO and President Barry Mccarthy 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.

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

During this call we will discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter with that I'll turn the call over to Barry.

Good morning, everyone and thank you for joining today's call.

Earlier. This morning, we released a letter to shareholders, which discusses our strategy for growing peloton business.

The Q3 performance.

I'm not going to repeat what we've said in the letter except to thank our employees for their hard work.

And our 7 million members for giving our work, meaning and purpose.

Before we begin today's Q&A I'd like to acknowledge the contributions of William Lynch. So the growth of peloton.

Part of the leadership transition that peloton Williams decided to resign from my board to pursue other interests and we wish him continued success in this next endeavor.

Operator, let's turn to our first question.

We will now begin the question and answer session to ask a question Press Star then one on your Touchtone phone to withdraw your question Press Star then two and if you're using a speaker phone it may be necessary to pick up your handset before pressing the keys and I said before please limit yourself.

To one question and one follow up please the first question comes from Doug Anmuth with J P. Morgan. Please go ahead.

Thanks for taking the questions Barry trying to understand the the recent hardware price reductions just in the context of your bigger plans, where they just an effort to move inventory and perhaps drive a little bit more revenue near term and do you really envision fast becoming the primary or only business model over time, Besides the digital.

And what are you seeing in those early tests.

And what could that service look like thanks.

Hey, Doug.

So the price increase was geared towards moving hardware and.

Alleviating some of the threats we were seeing in inventory. We've also learned quite a bit about price elasticity and have seen a significant increase in total revenue as a result of the price decrease so I'm feeling pretty good about that and I'm looking to sustain it.

We're thinking about the unit economics begins and ends with L. T D.

And then.

The CAC expense associated with the L. T D.

And today, we're operating can we operate in the range of.

I'd say broadly two to one to three to one.

Depending on the seasonality, which I feel.

Really good about.

What was the third part of the question.

Oh, just what the.

Yes, it will be a complement to to our business. So they are absolutely remembers who want to own the bike outright and we're delighted to sell it to them and then there are others for whom that the cost of entry.

Poses a barrier.

And roughly 53% of our customers year to date by the way have household incomes of less.

$100000.

So fast as an opportunity for us.

To continue.

Continued to introduce consumers.

Mass market to our value proposition.

I'm not sure what the mix will be over time.

We need to test our way into an understanding of that as well as an economic model that enables us to earn an attractive return on investment what we can say with certainty at the moment is that we're seeing faster growth than I had hoped we would see so I'm enormously encouraged.

But the early test results, but it's early the that the total number of units that we placed so relatively small on the order of 1000 were looking to aggressively expand the test on our E. Commerce platform I think will be fully live.

With a b test and by the end of June we got some engineering work to do to enable at maybe it'll be a couple of weeks center, we'll have to see so that's complementary to the core business not yet sure what that mix over time will be where what the ultimate pricing will be but we need to test or waiting to figuring that out.

Thank you I appreciate it.

The next question comes from Justin Post with Bank of America. Please go ahead.

Great a couple of questions.

Can you help us understand the churn contemplated in your sub growth outlook for Q4.

It looks like it steps up 1% quarter over quarter, just the dynamics of the quarter.

The testing Youre doing it and then the churn.

And then Opex was up 19% year over year any any update on your cost cutting efforts and whether you're trending ahead or below your plan. Thank you.

I'll take the churn part and Jill will take the cost cutting parts. So.

We're hedging our bets a little bit in guidance related to churn.

We saw a very small increase in cancellations, when we announced the price increase one of all access service from 39 to 44 blocks.

But the price change doesn't actually hit until June one and so we're still a little bit uncertain about what.

When the dust settles that the churn impact will be to date.

I would say it's been quite small.

And on the restructuring side, if you look at the Opex and Cogs savings in the second half of fiscal 'twenty, two so what's already achieved and we.

About $165 million of Opex savings in the second half and we're certainly on track.

For $450 million in Opex savings for fiscal 'twenty three in terms of cards, we expect about 30 to 35 million in savings in the second half already baked in.

We're on track for about 100 million of savings in fiscal 'twenty three so.

As we outlined last quarter. This is something we're incredibly.

<unk> committed to and we've already made a lot of progress and I think culturally the organization understand what we have to do.

Great. Thank you.

Yeah.

The next question comes from Youssef Squali with <unk> Securities. Please go ahead.

Great. Thank you very much Barry just in terms of the supply chain issues can you, maybe just clarify a bit how andy and angel or improving.

The process I think you had a nice.

<unk> mentioned in the letter and just broadly speaking your predecessor had followed this strategy of maybe owning a bunch of productive assets, including pre core is that still strategic to the direction of the company and how that fits in your overall solution. Thanks.

Well about the supply chain, let me say that.

I don't think we had the visibility that that maybe we would have wanted.

And and we had a number of systems issues related to supply chain that we needed to address.

And we've taken steps to do both.

I think we also we hadn't made quite as much progress in right sizing.

The production is as we needed to.

Ah we're been working closely with our.

Partners in the supply chain as we needed to related to the ordering long lead time parts.

And so and.

And he and his team.

<unk> taken important steps in addressing all of those issues and in the in the process, we have a much greater visibility into.

How the supply chain issues that affect the business overall so.

Got.

It was an area, where we had work to do we're making a lot of progress, we'll make more but I'm feeling pretty good about about that piece of the business I would characterize it urgent need when I stepped in in.

I'm proud of the progress we're making.

With respect to pre Covid there were.

A couple of things we were trying to accomplish with that acquisition bolsters our.

Our go to market strategy.

In commercial.

Along with corporate wellness, it's important here you go.

For us.

In our core business.

On that I haven't spent a lot of time yet.

Thinking about.

We're looking at the pre core business.

For the moment I just wanted to put a pin in it not signaling that it's not core, but I'm not saying that this quarter either I've just been so many other issues to address I just haven't gotten there yet.

Great. Thank you, but the overarching strategy is look it's all about connected fitness, it's about the magic that happens.

In the tablet right, we need to be good at hardware, but being good at hardware it does not.

Nearly sufficient.

That that makes us special that accounts for the low churn rates that drive.

Outrageously high net promoter scores is all the magic that.

And caught her and her team.

And our instructors.

He was into the service and we need to be absolutely great at that.

And that calls for I think a shift in our investment priorities.

Business leases compared to what you spent money historically.

And in order to double.

<unk> doubled down on the things that have made us great.

Great. Thanks for the clarification Barry.

Yeah.

The next question comes from Ron Josey with Citi. Please go ahead.

Thanks for taking the question, maybe I want to talk a little bit more or help to understand better understand gross margin assumptions in third party delivery I think of them in the note in the letter we talked about lower gross margins for products in the range of 300 million. So maybe just help us understand where these savings are coming from is it greater efficiencies in manufacturing third party delivery and and.

Barry you mentioned some issues in last mile maybe help us understand how those have been fixed or what's going on there.

And then lastly, just still I think in the letter we talked about free cash flow timing changes and how that impacted free cash flow this quarter versus going forward any insights there would be helpful. Thank you.

Sure.

I think what I'll talk about first is our connected fitness gross margin right. So what you have happening currently and what we saw in Q3 or a few sort of one time items right. You have an increase to try plus returns reserve. We also took additional inventory.

With there around accessories, primarily driven by a strategy shift.

The way, we went to market with the peloton guide and we also had higher scrap reserves for bike, which essentially is not resalable inventory that has been returned to lessen cannot be refurbished.

And what we've also seen which we will experience in Q3, and Q4, it's higher detention and demurrage and storage costs given.

The fact that our our inventory position is higher than we expected given the decline in our demand forecast. So a lot of these issues are are one time in nature or short term in.

In Q3 and Q4.

In terms of just the overall restructuring efforts and cost there.

There's a lot behind that right. Some of that was related to the shift to three P. L right, which we did realize some savings certainly going from a much larger than we needed slate of our in house delivery.

And so moving to three P. L helped us variable life that extends and reduce some of that fixed cost overhead.

That was a challenge to.

To collaborate with lower demand volume.

But there's a lot more optimization, we can do here, there's more we can do in better warehouse management better optimization of our labor structure. So that's part of what I think we can see on the horizon for fiscal 'twenty, three and what I would add to that is next year, we've negotiated better.

Rates, which we've talked about I do think there is future opportunity in the longer term to look at them better procurement.

Better sourcing.

And better.

Product margins as a result of reworking them the way that we're designing and building our products and taking some costs out and then lastly, I think on warranty management, if we deliver our products better.

We service products better I think there is there a way for us to with improved quality to also bring down our cost of warranty. So I think there's a lot for us to do within that segment over the next year or two.

As it relates to last mile.

Let me say, we have parts of the world like Australia, where.

Our partnerships with retail work seamlessly.

Seamlessly for us and users have a good experience.

When we transitioned to three PL after the restructuring had put in place any systems integration that enabled us to work and it's in this way with those partners.

And as a consequence.

Our members who are being serviced by some of those partners had extremely press.

Frustrating experiences so.

To begin with when we transitioned to three P. L. Thereabout 10000 orders in our system they've got transferred to three P. L that means right out of the box 10000 people got rescheduled and we did nothing to communicate with those people initially about that transition.

And then many of them had deliveries that were rescheduled and reschedule them reschedule and we had no ability.

And our customer service organization.

To see into the delivery schedules of our three PL partners to help deal with the <unk>.

Delivery issues that our members we're experiencing it.

These are just some of the examples of some of the input meditation later issues that we've experienced it has created.

Our membership related issues that had been attacks on our net promoter score that we are looking to address on a go forward basis.

And I'm, sorry, I just realized I missed part of your three part question on free cash flow.

Certainly as outlined in the letter we're focused on getting to free cash flow positive in fiscal 'twenty three.

And there's really four drivers and one of those is obviously growing the business, which we outlined in the shareholder letter the various strategies that we're going to employ over the next several months.

To grow our subscriber base, we have multiple libraries in connected fitness margin improvement again.

We've outlined a lot of these so I won't rehash them.

But again, a lot to optimize to get back to a positive connected fitness gross margin structure restructuring savings. We touched on are on track next year, we expect significantly lower capex spend we expect to sell the land and the facility.

That we purchased for our Ohio manufacturing and then of course, most importantly inventory, we expect to turn from a source of cash or use of cash towards source of cash in fiscal 'twenty three.

Yeah, Let me just jump in here and say with respect to free cash flow. The objective here is to get the business to positive free cash flow in FY 'twenty three just full stop.

And.

With the money that we raised in the term loan Im very confident we've got plenty of capital to do that.

Regardless of what happens in the economy.

Full stop so to the extent that there are any concerns amongst investors about our ability to do that.

<unk> share of them and I want to be clear about that.

Next question Tom.

The next question comes from Schweitzer Cowdria with Evercore. Please go ahead.

Thank you very much let me try two please you mentioned several growth drivers one of them was a third party retailer partnerships possible to at least provide a little bit more color on how the economics of those partnerships with work understood maybe very early but how you're thinking about it perhaps and then the second question.

Is.

Another growth driver you called them what value prop that adding valuable digital app at App subscriptions. So as that our subscription base grows where do you think churn rates could shake out over the next call. It a couple of years with growing our digital app subscribers as well.

Net subscribers. Thank you.

Well I don't know the answer to the second question honestly.

Okay.

And on.

Until we know what the.

What the.

The monthly revenue is the gross margin and the acquisition costs won't really have context for thinking about the churn.

I know from experience.

Why is that because I know from experience that the way you build a successful subscription business model is by managing the interplay sac churn and gross margin.

And no one of them independently if the other two.

So I realize that may not yet be satisfying but.

It is what it is.

We need to figure out how to widen the marketing funnel and tend to use the digital lab as a vehicle to do that could be some premium kind of model it could be a straight subscription model not yet sure.

The consumer mix is about 80% female 20% mail I think we need to drive it more towards an internet norm of kind of 50 50, the net promoter or sorry, the unaided brand awareness is 4%. So it's the greatest that nobody's ever heard of.

And we absolutely need to fix that and of course, because it's relatively lightweight.

It has the potential.

To grow rapidly.

Across geographies.

And expanding the business internationally is one of the priorities.

So.

The first part of the question related to.

Third party retail.

Hi.

We're not I'm not actually going to talk about that today other than I wanted I thought it was important given the.

The strategy of the.

That preceded to signal a.

Let's shift potential shift we're in discussions with several potential retail partners now.

I would say it's still early early enough to have the draws to have a sense for what some of the cost benefit trade offs might be but but too early for us to talk publicly.

About it no reason, particularly think that any deals that we were able to negotiate with the different than anybody else, who distributes hardware through third party retailers.

Right.

Okay. Thank you Barry.

The next question comes from our team Khachaturian with UBS. Please go ahead.

Alright, Thank you for taking my question.

Was wondering if you could walk through the hardware versus software margin outlook for Q4, and what makes up the 31% guidance because it implies meaningful improvement versus Q3, so I'm just trying to understand.

How you get there.

Yeah.

Yeah. So.

I think what you can see on the subscription margin.

Blade versus Q3, a slight continued leveraging of fixed cost and we'll have a small benefit from the pricing increase from one month of that but remember most of our costs within subscription are variable on the connected fitness side.

You know we expected a negative margin. There's a few factors at play we just reduced our prices pretty meaningfully across the portfolio back in April to drive scale and drive growth.

But we also had some items that are consistent with Q3 around managing our excess inventory, we're still going to see elevated detention and demurrage and storage costs.

We think those will largely abate as we move through fiscal 'twenty three so those.

Those are not permanent but.

And I guess.

The third factor and connected fitness margin is gonna be around logistics again with the lower demand forecast, we're not getting the fixed cost collaborators that we would've expected within logistics.

But our new supply chain leadership team has only been here for about six weeks and mix. It certainly an area of focus to get that better optimized and as I said previously with our labor force optimization and better utilization of our of our warehouse space I think there's a lot. We can do in the short term to make some good <unk>.

Movement.

Okay. Thank you that's helpful. And then just a quick follow up is there anything you could share on price elasticity of demand that you saw as a result of price cuts.

Anything you could sort of quantify understand commentary could be limited given some of the competitive nature of pricing in general, but anything else you could share in terms of <unk>.

And change that you saw was the result of your pricing initiatives.

Well, we've talked about the unit increase in the in the letter right. So that was you know in the range of 70%.

The revenue increase.

Was less of course, but it was also a pretty dramatic.

I think it was on the order of 50%.

As compared with sort of the baseline growth we were seeing before we made the price change.

So it's it's abundantly clear.

That.

The business was better serves as a result of the reduction.

Now still remains to be seen what the net impact is once the price increase kicks in in June but early indicators are that.

The churn related to that will be slow but.

We won't know until we know.

Yes.

Thank you very much.

Yeah.

Next question Tom D. The next question comes from John Blackledge with Cowen. Please go ahead.

Hi, Good morning. This is James on for John in the letter you mentioned rolling out additional international markets, what geographies should we be thinking about next are you still focused on Latin America.

European adjacent markets any color on timing would also be helpful. And then as a follow up you mentioned the goal to reach 100 million members. Joe could you could you provide an update on how you're thinking about.

Across the regions are currently and I think it's got a while since the last update which I think was around 20 million global Sam back in 2020. Thank you.

Well with respect to international I'm not sure yet.

And.

In part because we are.

We're still in the middle of <unk>.

Developing our final FY 'twenty three plan.

One two.

There are a finite number of resources to spread across the business.

The threshold question for Us is how.

Hum.

How many of those resources to allocate to growth in international.

It's something we need to be able to figure out how to do reason.

The reason I say that is if we were to look by way of example that subscription revenue growth in the current quarter in North America was 53%, but in international with 92% so.

So international has the potential to drive a lot of growth.

The more growth that drives early in its development the more money, we lose and since the overarching goal is to get.

To positive sustained positive cash flow for the business in FY.

<unk> 23.

Positive cash flow trumps growth.

So.

TBD now there are things, where we are looking at internationally, which will make it more.

Economical for us to launch new markets, I'm thinking, particularly about.

Last mile delivery.

Yeah.

An example would be just illustrative.

Don't need to do any signaling but were.

Today, our bike.

Our trade has to be installed.

But.

A much simpler solution would be if we designed it and shipped it in a way that it could be delivered.

Delivered by Fedex.

Wouldn't have to be home to receipt receive it and have it be installed and it would cost significantly less than it would be much easier logistically for us to launch new international markets.

Some of the ways, we're thinking about.

Flexing the model in order to.

Make accessible to its markets that might not otherwise be but.

First we have to make the asset allocation decision.

In order to do that we need to wait it out.

Tradeoffs in the growth opportunities that we see.

In the in the business. So new Geos is is one growth vector in new products is another I spoke earlier about consumer wellness corporate.

Another.

Growth opportunity all of which we would like to lean into and yeah over the next 12 months.

And then and then for Jill just to follow up on if you could if you had any color on the on the Sam which I think was $20 million when loss provided.

Sure and obviously that analysis hasn't been updated for the most recent price change, which I suspect will significantly expand Tam since that's the primary barrier.

100 million goal I don't know Barry if you want to jump in but obviously its a long way from where we sit.

Today.

We.

Have often look at the number of people that have belonged to a gym globally as an interesting data point to understand the number of folks who are interested in fitness and that number is $180 million.

We believe that tech enabled fitness has a massive opportunity to expand the market and.

And we think that software will drive a transformative experience, but we've got to evolve.

Strategy fairly significantly to get to that 100 million and that could include fast that could include further expansion and scaling of the app.

Much more international growth and so there's a lot of different pillar is to get to that but that's a long way away.

Yeah look.

We can't get there without making the digital app.

Big success.

That's pretty clear.

And we can't get there without.

Having a broad scale international business.

It is clear that people outside the United States also care about fitness.

And there is an opportunity for us to capitalize on that.

We'll know how big the Tam is when we get done at setting it.

I know digital apps that already have more than a dozen people that are focused on fitness and I cant for the life of me think why.

Given our success early in the category that we couldnt be one of those digital apps.

So.

Stay tuned.

The next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks, so much for taking my questions bearing great to reconnect.

I'd love to take a step back for a minute and just get your perspective, having been inside the business now over the last couple of months. What did you find that surprised you to the upside from some of your outside perspective, where are you finding that you need to spend more of your time or you think there is a bit of a bit more effort that has to be applied to sort of get the business to where it goes over the medium term just sort of.

A broader question on your perceptions and how Thats resulted in how you spend your time and are realigning assets. Thanks.

Let me make sure that I got the question.

I found internally that.

That.

That makes me optimistic.

Right.

But what surprised me opportunity.

Well.

The nature of turnarounds as they are full of surprises.

I would say the biggest surprise in the quarter was what.

Our cash flow.

And related to that the biggest surprise was with our ability to quickly address it.

Diluting existing shareholders and adequately capitalizing the business so.

Really.

Really pleased with the way the team executed to address that particular issue.

Sound more talented than building honestly than I expected to find.

And and.

And.

Which is.

Really important.

You kind of be able to execute.

Weaker onto everything supply chain than I expected.

But.

We were fortunate to get Andy Andy Smith quickly.

Lattice team and so I'm pretty optimistic about our ability to address that and then I would say lastly.

I was surprised to discover that the.

When I first introduced the concept of fitness as a service business had already been thought about it two years ago, and then <unk> got sucked into the vortex of Covid and so never really leaned into the opportunity.

But had already done thinking about it and so we were able to move on it faster than we would have if they hadn't already thought about it.

And.

And then lastly, I would say I'm really encouraged by the growth.

And my.

I was hoping we'd get to 70% uplift I thought that'd be pretty spectacular and we're pushing north of 90 at the moment. So it remains to be seen whether the.

The value proposition, we're pushing will drive that.

Kind of ROI that we would like to see.

Justified the investment but.

I think that's a really big idea.

It changed dramatically.

The P&L, if we roll it.

There is no hardware gross margin in that business, we own it there's no transfer we own the hardware there's no transfer title, we amortize the hardware over the expected useful life of the <unk>.

Right.

<unk> has a different has a longer shelf life than the.

And the console.

And I expect the gross margins in that business to push high Seventeens low eighty's.

And.

I think we would have.

Super attractive.

Customer acquisition costs, So I'm just in love with the whole thing and nothing I've seen yet.

Gives me pause related to it I know it won't be a straight line from here to there.

When they have to do some engineering, but that that's been the.

Mike.

The biggest.

Surprise on the upside since I walked in the door.

Next question Tom.

The next question comes from Amit <unk> Sherman with Bernstein. Please go ahead.

Thank you for taking my questions. So your point around digital being the tip of the sphere and the the leading force towards getting towards the 100 million.

How does that fit with your point of international would you be considering digital only or digital first expansion internationally to get around some of those some of the drag on margins you talked about earlier on the call and then related to that last quarter, you were talking about going dark on marketing to understand the baseline has that plan changed now that youre thinking about top of the funnel.

And improving brand awareness. Thank you.

Yes.

Yeah going dark on marketing.

Dan.

So mostly I've been focused on what I think makes sense.

Sure.

Driving business growth.

And the frame of reference.

He has brought to that decision, making is LTV to CAC.

As it relates to international growth and digital lab to answer to your question is yes.

It remains to be seen.

What actually we're going to.

What the value proposition for consumers will be whats going to be in the app and how do we position it relative to all access.

Historically the approach has been all access first digital later kind of may be if we get through it.

And I.

I think we need to change the order.

Thank you.

The next question comes from Rohit Kulkarni with M partners. This will be our last question. Please go ahead.

Oh, great. Thanks for squeezing me in a couple of questions for you, but can you talk about the kind of obvious holes and Darling, but youre trying to fill your peloton you talk about that also any examples as to if you were able to resolve the big improvements.

Improvements in processes and execution.

Timeline that he put a house and then maybe one question on the 800 million annual run rate savings by fiscal year 'twenty four.

Why does it take so long to what you'd be savings.

Mark just by next fiscal year itself was enough as youre trying to get to cash flow breakeven is there a scenario that you could get these savings a lot sooner.

Do you want me to take that restructuring question for sure.

So I can speak on the Cogs side, I mean really when you think about having you.

Having improved cost per unit right through a better design procurement you have to sell through your existing inventory I think we will broadcast.

Our inventory position at this juncture, but you know what.

It will take us through fiscal 'twenty three to a kit to sell down. So that is one of the main reasons for the longer timeframe on getting to a better cost per unit and being able to realize a lot of the cost savings, which I think we said 300 million.

By fiscal 'twenty five.

At 24 and 25 sorry.

And then on Opex, we are going is absolutely fast as we can there are certain things.

That take a little bit more time, as we move out of certain real estate that we occupy from a corporate perspective.

But we are moving as quickly as possible and as I said up to 500 million, we're expecting 450 within fiscal 'twenty three and our goal was to get to that $500 million run rate by the end of fiscal 'twenty, but that Congress will take more time and I'm going to say some of that those savings or a run rate relate.

So thinking $200 million out of marketing well, partly that's a function of.

Taking a different structural approach to how we market.

The product and the savings get realized over time same thing with respect to some of the savings that we have.

Projected that we will achieve and.

In G&A.

The first part of the question was related to imbalance of what any talent talent.

Talent areas of talent.

Well.

None none that I want to highlight on the on the call.

People.

Here at peloton are getting tired of me, saying talent density is job one density is job one.

So.

If there are additional.

Additions that we're gonna happen as the team you'll hear about it after the fact not not before the fact.

But.

Youre going in expectation you are understanding that there may be more talent in the building then Ben.

You might have expected.

The tech.

Tech debt well.

So let me tell the story of this way.

The business was crowdsource or there's a bunch of software that was hacked.

The business started to have success like all tech companies I've ever been associated with all of the resources of the business, we're focused on engineering and product in order to accelerate growth and then Covid hits.

So of the business explodes from 700000 subs to 3 million subs and all of those systems related issues are still present in the business today. So the order management system is still the original code.

That was hacked when the when the business was first organized and pretty much all of that needs to be rewritten and then there are a bunch of downstream issues that happen.

Because of the way that the order management system was architected and and and speaks to the.

To all of the accounting related systems, the ERP system.

Your work in customer service or I think I've heard their 13 or 16 different screens you look at in order to be able to see the entire.

Customer history and.

And he's just hired a new head of customer service and you know we're gonna be addressing some of those issues. So when you actually call up you know our customer service reps are actually able to be helpful. Because we organize all that information you know one and one on one screen. So those are kinds of those are examples of some of the kinds of issues we face.

As relate to our ability to push code and our engineering team and the productivity of edge.

Engineers. This is an issue for instance in the last couple of years that Spotify very effectively Russell to the ground, but even after it was public it was an issue.

You know they have to address and we have to address it here as well and so as a consequence, it slows down the speed with which we're able to he'd be test.

And the speed with which we're able to you know.

Update E Commerce platform.

See that in our ability to quickly get to market to a b test.

Fitness is a service for instance, I mean really we have to wait until the end of June to be able to test.

Test on the website.

That's something that would take a day and a half at Netflix.

Even early on but it is what it is.

Get through it and understand what the issues are now in.

Yes.

But kind of expertise in house to get it fixed or not.

Unsolvable problems theyre not problems that that companies like us haven't seen we just have to get our arms around it.

Fix it and then 12 months, we'll be in a much better place than we are today so they.

They don't threaten the business it just slows down in it.

And we move a little slower than we'd like to as a consequence.

This concludes our question and answer session and I'll turn the conference back over to management for any closing remarks.

Okay, well I'm, sorry that we sort of ended on that on that downturn because actually.

Notwithstanding the stock price feeling pretty optimistic about the path ahead in a number of levers that we have to turn.

To improve the operating performance of the business I don't mean to sound Pollyanna ish.

But.

Hopeful that someday soon we're going to look back on this call.

One of the important turning point in the business and look forward to checking in with you next quarter on our progress.

Yeah.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.