Q4 2022 Peloton Interactive Inc Earnings Call

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Okay.

Good day, and thank you for standing by.

Non interactive fourth quarter 'twenty two earnings call at this time, all participants on a listen only mode.

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Safe Harbor.

Like to hand, the conference over to your speaker.

Today, Peter Stabler head of Investor Relations. Please go ahead.

Good morning, welcome to peloton fiscal fourth quarter conference call.

Joining today's call, our CEO , Barry Mccarthy and CFO Louise Coddington.

Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward looking statements under federal Securities law.

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

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

During this call we will discuss both GAAP and non-GAAP financial measures are.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

I'll now turn the call over to our operator to take our first question.

Operator.

As a reminder, that star one wants to ask a question.

Well go ahead and take a minute for the Q2.

Sample.

Yeah.

Okay.

Okay.

Alright, and our first question comes from the line of Justin Post from Bank of America. Your line is open.

Great. Thanks, a couple first when you when you said churn about a $1 41, and I think it would be lower if you adjust for Canada is that what you're looking for in the first quarter or is it is the adjusted.

With Canada, and then secondly, just thinking about the shape of the year looking for flattish subs in the first quarter. How are you thinking about holiday seasonality going forward and what needs to happen to get to breakeven cash flow. Thank you.

Take the first two parts on the cash flow.

So the first question.

I believe I understand correctly was related to churn and what our expectations are for the first quarter.

As we mentioned in our shareholder letter.

We saw a modest increase in our monthly churn.

And for Q4 and that was what that was related to our all access subscription price increase that we had in June .

Happy to say, though that for July we saw churn level declines from churn and it declined from the Q4 average so we expect our attention levels to remain attractive our engagement trends suggest that trend will continue to remain low.

Quarter and for the rest of the year.

With regard to the flat stuff.

You know seasonally Q1 is a low growth quarter for connected fitness product sale.

We did increase prices on bike and tread and that took effect on 812 and while we do expect our Q1 churn to remain low as I said before our volume of connected fitness gross additions in Q1 is expected to be offset by churn due to the size of the sub base now how does that play for seasonality going forward further.

Rest of the year.

We're not providing any full year guidance on revenue or subscribers, but we do expect revenue for the year to most closely resemble the seasonality for fiscal 'twenty two in terms of revenue per quarter hopefully that's helpful.

And then I think the third part of your question Joseph Abboud cash level, we have to get to breakeven cash flow.

And the short answer is not to be glad we need to right size the spending of the business the run rate of the business whatever the run rate of the business turns out to be.

And then secondly, I made this point.

When I first joined the company, both employees and to investors.

It's not enough to just kind of <unk>.

Spencers, we have to grow revenue.

And.

We've taken a number of steps in order to accomplish that objective.

We have substantially picked up the pace of innovation and testing and risk taking in order to accomplish that objective.

Among the new initiatives or fitness as a service.

The sale of previously owned by <unk>.

Evolution of our digital App.

Strategy, which will have more to say over the next several months.

<unk>.

Among other initiatives.

The introduction.

Well, we're right in the new pricing strategy.

Okay.

So.

We happen to sit right smack in the middle of the pivot.

We have made substantial progress addressing all of the infrastructure related headwinds of the business.

And now it's time to get back to the business.

Expanding the franchise into do that principally by expanding the Tam and we do that principally with a good better best strategy.

That target not only the premium segment of the market, but the value segment of the market and the use case for connected fitness with competitive platforms.

Yes.

Great I'll, let someone else ask more questions.

Thank you and one more for next question.

Our next question comes from the line of Doug Anmuth from Jpmorgan. Your line is open.

Thanks for taking the questions you've had multiple product price changes over the past several months.

Trying to understand how comfortable you are now with the most recently revised pricing that creates this greater gap between entry level premium products, and then how youre going to communicate those options and your marketing and then Greg If you could perhaps also update us on fitness as a service.

We should be thinking about kind of full full rollout and how youll increase awareness around the product going forward. Thanks.

Yes.

Okay.

Doug I had.

Ali hearing, but I think the first part of the question is about pricing generally.

And then loan market and the second piece of the question is about how do we think about it and what our plan for it.

Let me begin with.

And then I missed anything I'm going to ask what is the jump on top.

So.

We've.

Sort of gradually expanded that.

Footprint for SaaS, and our marketing initiatives around SaaS.

We're selling selling ramping at a pace of.

And round numbers, 30% to 40000 units.

<unk> basis.

It's a relatively small footprint.

We haven't really leaned into it yet.

And it begs the question why because we've been at it for a while and the answer is in order to know whether or not.

The value proposition works for consumers and it works for peloton, we need to understand what retention behavior is an implied churn rates. So we can calculate lifetime value and figure out whether or not.

We've created a nuclear bomb or were.

For the past of the promised land.

And I would say so far we are encouraged by the churn data we've seen.

Recognizing that.

Yes.

It's a growing but limited sample.

So I'm guardedly optimistic I would say that I would think a win for us might be something like 125 to 150000.

<unk> a year.

Renters.

And the ability, which we have just brought online.

To utilize our certified pre owned inventory.

Yes.

Two.

To fulfill demand under that program.

So I would say net net that looks pretty encouraging.

There will be some.

Substitution behavior I think between certified pre owned.

And growth in fitness as a service because it put target basically the same segment of the marketplace.

Sure.

You minded chopper.

And it's pretty clear that we are bringing into the peloton family.

Our younger slightly more female demo than we have historically, which is good news.

As programs are expanding the Tam now as it relates to CPO. He said, we've seen substantially better performance.

We have a very small numbers so.

Take it with a grain of salt, we outperformed our forecast by three X.

And we have a lot of bikes in inventory.

Used bikes that we can recycle into that program, we've been talking about it for a year. We finally got it live.

We're going to lean into it remains to be seen how big that program can become and as it scales.

The substitution behavior will be with the fitness of the service okay.

Okay. So let me talk to you about that sorry, as it as it relates to pricing.

I would want us to pursue a good better best strategy. So.

We believe and I think the net promoter scores for our various products.

Support that notion at.

In the premium segment of the marketplace. The integrated hardware user experience with Alcon is the absolute best and there are people who are willing to pay a premium for that.

And we want to serve that marketplace well.

But we also want if we're going to grow our revenues.

As fast as we would like we're going to have to increase the Tam and if we're getting increased the Tam we're going to have to reach for new market segments, and that's where the good and better comes in and Thats, where the path and fitness as a service and the digital App strategy.

In the play with respect to the digital lab strategy I had previously.

I'm told investors that I wanted us to pursue our freemium strategy, we are going to implement that there'll be various price points.

And you'll have access to different kinds of content, depending on how much you pay for the digital app.

Roughly half of our paying customers today use our connected fitness related content on the app. So it is quite clear they are using the app on somebody else's hardware.

Which is something we've always shied away from <unk>.

Going forward, it's something we're going to lean into I would be delighted for you to use our content on somebody else's hardware aging or purchased it that's the big installed base and I think it's a big opportunity for monetization for us and we're going to lean into that segment of the market as well.

We're going to grow Tam so.

We will figure out the pricing as we go I think if we have the luxury like we do because of our cash position and the changes we've made in the business.

Price products in order to earn a reasonable return on hardware we will.

That wasn't the case earlier in the year, we absolutely need to liquidate hardware managed for cash that we did but we put that in the rearview mirror at the moment.

Did I answer your question.

Very helpful. Thank you Barry.

Yes.

Thank you Omar for next question.

Our next question comes from the line of Ron Josey from Citi. Your line is open great.

Great. Thanks for taking the question I wanted to ask maybe bigger picture on gross margins and Barry I know, we talked about the focus being on free cash flow, but help us understand how you view gross margins maybe on the subscription side given the pricing increase and then on the product side as you exit manufacturing in last mile and <unk> gain share here just just as you know.

We think bigger picture on the way towards free cash flow.

Maybe a second one just on that.

Inside or help us understand how you view inventory just continuing to coming down going forward. Thank you.

I'm going to ask us to take the gross margin.

Yeah.

Subscription and bigger picture piece and I'll, just take the inventory liquidation.

I think.

There might be a perception that big.

Because we have we.

We have a large inventory position that we will be liquidating during FY 'twenty three we will have a large wind at our backs on the free cash flow perspective that will help us achieve our objective in FY 'twenty three but we will not have the benefit of an FY 'twenty four.

I just want to burst that ballooned and say actually on a net basis.

Benefit in FY 'twenty, three will be all of the $6 million roughly and the reason for that is we have the benefit of course of selling inventory we've already paid for but we also.

And settlement of supply related.

Issues that we dealt with in the past several quarters.

Quite a bit of money.

Flowing out the door so on a net basis.

Our meltdown.

And I think for the full year for successful manner.

Going to our current forecast, we will end the year with about $1 billion in cash, which leaves us well capitalized for the run rate of the business.

Do you want to address the gross margin piece of the question, yes, So with regards to gross margin the way we think about that.

Gross margin is disconnected.

Alright.

The revenue piece, which we.

We increased the prices for by Kauffman, Chad and so that's going to obviously have a positive effect on gross margin overall.

And then from a cost of goods perspective.

Decided to fully outsource our last mile delivery for plc announced that that will have a positive impact on our delivery costs.

We're also focusing on improving our deliberate quality that should also help reduce our warranty costs over time, and then kind of more of a longer term opportunity on gross margin. This is related to the connected fitness side of it.

And our opportunities to reduce the cost of our hard retro how we design our products, but that's obviously like a longer a longer term opportunity. Let me just jump in I mentioned related to that.

Designed to April .

Self install.

Which would dramatically change.

The logistics and the costs associated with last mile.

Domestically and internationally.

I just wondering after Q1, we provided a guidance of around 35% gross margin, but we're not providing any further guidance or the year beyond that time. You also had a question about kind of subscription gross margin and obviously that is.

Yes.

That margin is higher than our products are connected fitness product gross margin of our subscription base continues to grow and mature that will naturally have some benefit to gross margin overall as well.

Thank you Barry Thank you.

One moment for our next question.

Our next question comes from the line of Lauren Schenk from Morgan Stanley . Your line is open.

Great. Thanks, just following up on that last one how should we think about sort of the longer term or stabilized connected fitness gross margin. So my second question in terms of the self install option is that only going to be available on Amazon for the time being any color on the margin benefit from that it looks like pricing is similar or the same as.

Having a professional delivery.

And then in terms of other potential third party partners.

What are you looking for in those new relationships.

Okay.

Well, let's see as it relates to long term gross margin I think increasingly.

Business is driven by the growth in recurring subscription revenue.

That has an inherently higher margin than the hardware side of the business and so the long term trend for margin.

Towards.

The software margin rather than the hardware margin.

Okay.

The cost implications store self install.

Well, let me talk about the implications of self installed generally.

One of the challenges related to the delivery of hardware is.

Coordinating the delivery schedule.

The availability of the members who purchased hardware.

And if we can move to a drop ship model we eliminate.

All of the majority of that friction, which would be a very good thing.

And secondly, if in the process of designing self install capability.

April to decrease the weight.

The unit Theres, some last mile cost related benefits that would flow through to us as well.

And then lastly, if we can get to a self install we think it significantly improves the <unk>.

Opportunities for international growth.

<unk>.

But leading into.

We are able to absorb the incremental cost of that expansion.

And then there was a question generally about <unk>.

Third party retail partners.

And my previous comments to investors.

I had indicated this was the strategy I hope that we would lean into.

It's early we're learning.

This is not a substitute for.

Our owned retail strategy.

This is a recognition that we need to be where our customers far sometimes that's in the stores, sometimes that's on our website.

We know from our own research that.

They are roughly 500000 searches a day on Amazon.

Excuse me a month.

For peloton and.

So there is an opportunity to tell there.

In other.

Retail formats, as well and it's important that we.

Test and learn broadened.

Broadening our distribution to see which of those could be cost effective for us and then we will over time, because we've come to understand the margin implications of that would be great and time it would be terrific. If we could broaden the distribution too.

Peloton hardware platforms on Amazon, but at the moment.

<unk>.

<unk>.

We need to be able to be drop shipped.

In order to be on their platform and our tread.

And our bike plus doesn't lend itself to that solution, yet, which is why it's not yet we have not yet offered it for sale on on their on their platform but.

And Tom I hope that we are able to find a solution to that.

Short term roadblock.

Okay.

Victor next question please.

Thank you.

One more for next question.

Next question comes from the line of Edward <unk> from Piper Sandler Your line is open.

Hey, guys. Good morning, Thanks for taking the question I wanted to ask was down a little bit on engagement I know you're going to stop reporting metrics.

Quarterly basis.

Do you think about engagement Holistically, obviously lots of moving pieces post COVID-19.

Seasonality, but.

Are you seeing gave me going over time and is there anything you can do to help drive that number higher thank you.

Let's see.

So let me jump in here.

I've said I wanted to lean into.

And the software it's important that we be.

Be great at both hardware and software, but I think the primary growth opportunity for us is.

Exploiting our.

Singularly unique competitive advantage, which is our.

Content.

Right. It is.

Is that.

It's the crown jewel.

Yes.

And it continued to perform spectacularly well.

Now.

For you to be able to enjoy it you have to be able to discover it.

And.

And the way we improve.

<unk>.

And lower churn and increase lifetime value and drive more organic growth from word of mouth is by making even more delighted with that content and the way we do that.

Is by helping you engage with it by understanding by personalizing yet.

By giving it a front end that understand what your likes and dislikes are and then serving you content that.

As consistent with your preferences.

This is what.

This is widened Netflix deep blockbuster.

And.

This is among the reasons that Spotify has run the table with the world's largest streaming music service.

And the more content you have.

The more important that come with that.

Good.

Great.

At building that personalized user interface.

So.

It is currently a focus for us.

We will be relentless about it and I would say, we're still really in very early stages, I mean, theres a little bit of stuff we serve you.

Q, if you use a bike.

Apple is a little bit of stuff on your screen when you again.

Maybe reflect some of the instructors tutoring classes from but theres a ton of stuff that we continue to serve.

We've never engaged with that.

What we think you should be interested in but what really matters is what you think you should be interested in.

And so we need to close that gap.

Okay.

Next question Victor please thank you.

One moment.

Okay.

Our next question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open.

Thanks, so much for taking the questions maybe just a two parter.

How are you thinking about.

The health of the brand today, and then you came out of the pandemic with a lot of awareness of the brand a lot of Halo effect.

But sales and marketing has been more about an area of reduction in the last couple of quarters. So how do you think about sort.

Sort of returning to sales and marketing was a channel.

We're going to grow awareness of the brand and new sales and marketing as a tool.

To address sort of the better best strategy, you talked about in terms of amplifying. The gross addition dynamic for the platform.

Thanks for the question Eric.

Fortunately I think the health of the brand.

We got the health of the business has been challenged but the brand remains beloved net promoter scores remain extraordinary.

Okay.

If you are what your track record says you are.

We are a U S based bike company 90.

96% of.

Of hardware.

The hardware platforms in People's homes today are buying.

But there is so much more opportunity available to us.

To drive growth.

Not just bank plus.

But the tread the lower the guide.

And especially the digital App.

And coupled with the good better best strategy that opens up segment of the Tam we haven't historically.

Targeted and the opportunity for US now is to invest in growing awareness.

By way of example.

The bike has 53% unaided awareness with.

But the trend is only 21%.

Man aided awareness for the digital App is 4%.

And so there is tremendous upside to be had if we can execute here.

And.

And part of that.

Simple message of my letter is.

Pivoting.

Pivoting now.

A bunch of things we had to fix in order to put ourselves in this position, which did it happen sooner, but it is happening now and we're going to tackle head on this challenge related to marketing and growth.

Okay.

And what I've tried to articulate.

The different initiatives that we're going to pursue.

And in order to drive success, the important thing to recognize is that.

Path to success involves having more swings at the plate.

And and so you've seen us deploy a number of initiatives to accomplish that objective.

And we're going to connect with the ball. It's just a matter of time and I know from my Netflix experience in my experience I can't tell you exactly which one of those initiatives.

Is it can get us.

Where we want to go.

But.

I am confident about the cumulative effect.

Next question for the sector.

Thank you.

Our next question comes from the line of Schweda could urea from Evercore ISI. Your line is open.

Okay. Thank you for taking my questions.

I have one on the <unk>.

Next quarter guide. So I think this was somewhat asked earlier, but I just wanted to get little bit more clarification.

You.

Exclude the Canadian members in the.

And the guide organically does that imply net ads decline because 85% of members actually did take the actions that could you. Please clarify that second is on gross margin as possible to get a little bit more color on the magnitude of impact from the price increases versus the cost cutting actions that you took.

Related to customer service.

Outsourcing third party logistics and then the final question is Barry as you think about growth next year possible.

Give a sense of how fast is it.

All the connected fitness market is expected to grow and in terms of the magnitude of the impact of all of these initiatives, whether it is SaaS or international or digital subscription.

App initiatives, which ones do you think in order of magnitude will be most impactful.

Next year, Thank you very much.

Okay.

Deciding how she wants to.

Correct.

Make sure I understand your question.

First question was about.

The Canadian subscribers.

I think what you're asking is if that implies a negative net adds as a result of the fact that these subscribers churn but not.

They're not a growth that if they had not churn.

It wouldn't be an impact is the way that I sort of think about that.

I'm not really they're not they're not considered a growth that is effectively the way.

Thank you.

So it shows up in the net not the gross number correct correct.

The gross margin question I wasn't quite following what you were asking there.

How much of the gross margin.

Correct me, if im wrong, how much of the gross margin improvement comes from.

Last mile member service reduction as opposed to price increase.

That's right. Thank you.

Thank you.

One moment.

No Victor we're not we're not finished with this question, yes, well lives as newly on that let me let me jump in on the.

Connected fitness market.

Next year.

Honestly I don't pretend to know.

Sure.

What's going to happen to the marketplace as a result of.

Different puts and calls in.

With the economy.

I think the challenge for us regardless.

Is is to grow the Tam and to reach market segments that we don't currently reach in order to accomplish that objective.

So.

Which leads me to.

The answer to your question do I think will be the principal leverage points for the business.

Okay.

And then put rollout on the shelf for a moment in answering that question.

Okay, probably certified pre owned.

That just flew out the door.

Followed by.

And my Nirvana would be followed by growth in the digital App.

Because I think that is singularly important to us from a strategic perspective, and if we're successful with that initiative unlock.

Access to the installed base of competitive hardware and use occasions with them currently exists for our content.

I'll end by fitness as a service businesses and service really takes off then theres a whole capital strategy that will we will need to figure out for that business.

I am confident that we will have access to that to the capital.

The margins are as attractive as we think and if it's if it's really growing it as fast as we think.

Mike.

And then I said I'd put grower on the on the shelf.

We will have to see how that product does when it arrives.

It's going to be expensive, but I think we're going to revolutionize.

The market and we'll see how those two cross currents land.

But we anticipate that it will be a significantly better user experience than anything currently available in the marketplace.

Okay.

For the gross margin question I think you were asking like how should we think about the composition of the gross margin improvement and how much is coming from price and how much is coming from our <unk> logistics.

Moving to the outsourcing model for logistics last mile logistics in Q1, the vast majority is going to come from pricing because we just announced them is outsourced.

Third parties, and so that will take a bit of time over the course of the year, we still expect more of it more than 50% come from the pricing and but the logistics will be very impactful and it will be it will be meaningful over the course of the year.

Does that help does that answer your question Scott.

Yes.

Okay.

Next question please Victor.

Alright, one moment.

Our next question comes from the line of Camille guys genre law from Credit Suisse. Your line is open.

Hi, Thanks, good morning, everybody.

Can you talk a little bit about the consumer and maybe the interaction between.

In person studios and gyms and connected fitness, obviously, the industry is down quite a bit and there's a lot of macro effects, but could you maybe just talk about what you might be seeing in terms of the pendulum maybe swing in one direction or the other.

Let's see.

I'm not sure that our experience.

It is.

Translates.

To the experience of our competitors I think it probably doesn't.

In our.

Uniquely different ecosystem, where we just opened up our studios.

The amount of energy.

And.

Amongst our passionate user base is.

Well, it's just something that the old.

People lined up around the block for hours.

Classes oversold crashing our reservation system.

It's just insane.

And.

That's not what the industry is experiencing generally now.

Setback notwithstanding.

Notwithstanding the passion and enthusiasm among their rapid member base.

As a percentage of total classes taken live.

Relatively small.

But it has an enormous halo effect.

And drives tremendous word of mouth.

All of which helps.

Grow the brand.

That's helpful.

Yes that helps would you consider expanding the in person studios and such obviously have a lot of excitement so far but it's fairly small.

I think there is an opportunity I'll tell you how we are thinking about it.

Jen Carter, who runs that business for a spectacularly well.

I have spent time thinking about ways in which to create.

Marketing and branding and PR opportunities on.

Our local basis.

Using the celebrity power of our instructors.

In different geographic markets.

So.

If we were to expand I think that would be the.

That's sort of the.

Kernel of an idea that you would try to leverage.

Geographically rather than opening say incremental studios round around that around the country.

Just because the cost of doing that is so prohibitively high.

Thank you.

One moment.

Our next question comes from the line of John Blackledge from Cowen Your line is open.

Great. Thanks, two questions first.

How should we think about the retail store footprint in fiscal 'twenty, three and beyond and the second question on cash flow breakeven is there any way to kind of think about the level of topline in second half 'twenty three to get to that cash.

Cash flow breakeven number thank you.

I'll, let <unk> take the second one let me do the retail footprint.

We don't know how many stores, we're going to end up with when that when the dust settled our objective.

As to repurpose about $50 million worth of.

Run rate spending.

To deploy more productively from a marketing perspective, when the dust has settled.

And.

And we are done.

Restructuring.

So retail footprint.

Domestically.

Internationally.

This is Tim wanted to the capital.

The cash flow question thinking about revenue.

As we mentioned that we are pulling all these different levers on the business right now and so there's a lot of uncertainty about how the how these levers will bear out and so we're not we're not providing any full year guidance on revenue, but we did expect it to follow the seasonality in terms of that range per quarter for prior years now that being said from a cash flow perspective.

We do have the historical that we are we are working to achieve to achieve free cash flow breakeven by the end of the year and we will be maintaining a cash balance of at least $1 billion and what we have to do in order to do that it make sure that we continue to work hard to right size our cost.

Barry mentioned earlier to align with the run rate of the business. So we will continue to do that in order to make sure that we achieve our goal of being breakeven free cash flow by the second half.

I would say by the way related to the retail footprint savings not expecting any savings in FY 'twenty three.

Cost of.

Rationalizing that distributions, mostly consume whatever savings, we would otherwise realize so that.

The savings if there are any would happen in 'twenty four and minor varna it wouldn't be any savings, we would take that $50 million and we redeploy it in marketing to drive incremental growth question is can find ways to spend that cost effectively our LTV to CAC framework.

Thank you.

Amit.

Our next question comes from the line of use of Squali from choice Youre line is open.

Thank you very much I have a couple maybe for Gary.

On the Amazon partnership that you announced yesterday arguably you guys can do a lot more with Amazon.

I wanted to understand just how you think about that partnership right now it seems like based on the type of products, you're allowing Amazon to salary you're selling through Amazon.

Maybe hit the lower end of your good better best strategy.

Is that.

Kind of the way to think about your retail strategy broadly speaking or suggest versus DTC or is it at.

Just as you try to learn more about that strategy since you've basically pivoted from DTC to a broader retail strategy and then maybe.

Can you just talk about the.

<unk>.

Status of pre core within within the company what is the strategic rationale of keeping it.

I'll, let us.

Handle the pre court with respect to Amazon.

To sell all of our connected fitness platforms on an.

<unk> on good better best.

But they need to be at.

At the moment.

The ability to for consumers to opt into self install and thats not possible with with by plus or tread.

And so until or unless.

That constraint changes.

If we complete a redesigned cycle.

You won't see those.

As platforms on Amazon, how important will it be.

We don't know.

Yeah.

And.

And and we have modest assumptions in our forecast related to the impact for that business.

Sure.

I hope that has tremendous upside.

But.

We won't know until we know.

So the point here is to begin the process of learning and then based on the learning.

Make smart operating decisions about.

How to leverage.

Learning into.

A profitable opportunity both for them and for us and so.

That's the journey we're on.

And same thing with SaaS and same thing certified pre owned same thing with the various flavors of digital app that we're going to be rolling out.

So it's your intuition and figure out what the test menu that data and Permian better how to react to the test results we're seeing.

Take risks and move fast and don't be afraid to break stuff.

Okay.

With regard to pre cost if there was a question in there about <unk> <unk>.

Continuing to assess our strategy for a client and it's been helpful for us as we've been building a peloton commercial business.

But with all the other things that work on all of our supply chain work. The fact.

Work that we've been doing pre car hasn't focused on quicker hasnt been our highest our highest priority area and we don't have we.

We don't have much else to share at this point.

There have been other priorities that are consumed our focus and attention I didn't say when I first joined if it wasn't connected fitness related it wasn't going to be part of our long term strategy and strategy to be about choice. Although things are true Liz pointed out it's been very helpful to us that acquisition has been very helpful to us with our commercial business, our commercial business growing at about 35.

<unk> year over year in terms of revenue like to lean into that like to accelerate that growth, making that a priority to make that happen and.

And in the fullness of time, we will have we will have more to say about <unk>, particularly now that we have more bandwidth to be able to.

Think about the role it plays in our long term strategy.

That makes sense Victor we'll take one more question.

Thank you for a moment.

Okay.

And our last question comes from the line of our clients with Sharon from UBS. Your line is open.

Hi, Good morning, Thanks for taking my question in terms of your previously announced 800 million of cost saves.

Appreciate that you are probably looking at many moving parts to that but just if you could sort of bring it all together and outline what's the latest on some of the buckets that youre looking at an overall cost savings you should be targeting sort of more medium term just trying to understand have you identified any areas where that initial expectation of how much.

You could cut could be much bigger than thought and then as a quick follow up.

Now that you've done some testing of removing that upfront cost for the customer to have them pay higher subscription over time do you have a more kind of updated sense of what incremental demand opportunity that is for you. Some numbers. If you could share whatever you are looking at thank you very much.

So with with regard to the cost savings so I.

Hi.

It was a little bit hard to hear on the phone, but maybe youre, referring to the restructuring plan. We have laid out back in February the $800 million of which 509 with opex being in line with comp. So we're actually tracking ahead of the $500 million of Opex target of point.

We will continue like we said to right size the cost structure of the business are in line with the run rate of that.

Whatever that requires.

Some of the things that we've announced with APL strategy shifted part of that cost savings opportunity.

On Cogs.

Sorry, but actually.

Tax rate that three PL shipped is more related to the Cogs side excuse me. So on Cogs are savings is coming from that for the most part and also some head count reduction.

For that $300 million piece, we said that that was going to take longer and it well in part because we had.

It's very dependent on inventory and so that will take more time I think as we move through the inventory that we already have to be able to realize some of that is a function of the way we account for inventory.

Yes.

And then I'm pretty sure I didn't understand the second piece of the question related to upfront costs and subscription.

Now that you've done some testing of removing that upfront cost in terms of customer pay higher subscription do you have because last time you shared some sort of helpful numbers do you have a more updated view or sense of what incremental demand that unlocks for you over time.

Oh I see.

This is related to the rental.

Program was SaaS I think.

That's right yes.

Well.

I think.

What I said on the call earlier I should reiterate here. We're currently at a run rate of about 40000 units annually.

And I think a win for us would be something like 125 to 150000, a year and so the the opportunity and the challenge for us.

To move it from where we are currently to two that higher run rate.

How big a challenge to have that be but we really haven't marketed yet most people really don't know what exists and when we do market. It looks like it grows pretty fast.

<unk>.

Yeah.

And im hesitant to.

Charity numbers because.

I really don't want it to be misleading.

There are a couple of puts and calls which make reading the data.

A little dicey.

No.

We have changed price points.

So the value proposition.

And so we did tuned the value proposition for consumers.

Then we included bike plus then we remove bike plus and we put now we're putting bank plus back in.

When we put <unk> plus back in we saw.

74% increase in volume over eight weeks.

A week, but if we look back to the prior week when we when we had included <unk> plus in the mix.

35% increase over nine weeks, okay, but its still a 35% increase over nine weeks and that's because we started broadening the marketing.

The fast programming and create awareness for it so really the question is how high is the glass ceiling.

And I don't know how long it will take us to get there.

My intuition is that we're onto something really important.

But thats users as I said are younger it skew slightly more female.

The big surprise for me they are actually more engaged than our core users.

Which isn't what I expected since they had a less of a financial investment in the product.

Maybe that reflects that younger age demo im not sure and we'll have to see if that continues to scale. This as we broaden the markets, but it's quite clear that there is a big opportunity for us and in.

In the value conscious segment of the marketplace and so we're going for it.

Thank you very much.

Thank you everyone for your time today and hope you all have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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Okay.

Okay.

Yes.

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