Q3 2023 Peloton Interactive Inc Earnings Call

May 4, 2023

In our remarks, we will be immediately going into our Q&A session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising that your hand is raised to withdraw your question Press Star one again.

Due to time restraints, we ask that you. Please limit yourself to one question and one follow up question. Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker, Peter Stapler head of Investor Relations. Please go ahead Sir.

And why.

Good day and welcome to the peloton interactive third quarter 2023 earnings call. At this time, all participants are in a listen only mode.

Thank you Shirley and good morning, and welcome to follow up on fiscal third quarter Conference call joining today's call, our CEO , Barry Mccarthy and CFO Luke Huntington.

After a few brief opening remarks, we will be immediately going into our Q&A session.

Comments and responses to your questions reflects 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.

Ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising that your hand is raised to withdraw your question Press Star one one again.

Due to time restraints, we ask that you. Please limit yourself to one question and one follow up question. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker, Peter Stapler head of Investor Relations. Please go ahead Sir.

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.

Thank you Sherry and good morning, and welcome to follow up on fiscal third quarter Conference call joining today's call, our CEO , Barry Mccarthy and CFO Huntington.

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.

I will now turn the call over to the operator for our first question.

Thank you one moment for our first question.

And that will come from the line of Doug Anmuth with Jpmorgan. Your line is open.

Thanks, so much for taking the questions.

I just wanted to ask Barry if you could talk more about the upcoming changes in brand positioning and just little bit more about what you think is misunderstood around the brand and the products and how people use them.

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.

And how those changes and grand position can help drive growth going forward and then also perhaps Liz if you could just talk about the potential I know that the dish settlement will weigh on free cash flow in <unk> can you just update us on your path to positive free cash flow ex that settlement. Thank you.

Now I'll turn the call over to the operator for our first question.

Thank you one moment for our first question.

Yeah.

And that will come from the line of Doug Anmuth with Jpmorgan. Your line is open.

Good morning, Doug and thanks, everybody for making time to join US This morning.

I'm not going to say too much about the brand repositioning.

Thanks, so much for taking the questions.

I just wanted to ask Barry if you could talk more about the upcoming changes in brand positioning and just a little bit more about what you think is misunderstood around the brand and the products and how people use them.

I want.

I want everybody to experience it.

Along with the consumers at the same time.

In the letter I spoke about the fact that we're primarily known as the bright company.

The behaviors of our members.

Extend well beyond that.

Into many different categories of exercise and a large percentage of folks.

New snow hardware at all.

We haven't done a very good job of communicating.

Communicating that to prospective members.

Good morning, Doug and thanks, everybody for making time to join US This morning.

And we're looking to improve upon that.

I think the advertising can be more inclusive.

I'm not going to say too much about the brand repositioning.

Then it has been historically.

I want.

And then lastly of course.

I want everybody to experience it.

We have been promising to reintroduce the app.

Along with the consumers at the same time.

At the moment is soon to be upon us and in that we'll receive considerable focus.

In the letter I spoke about the fact that we're primarily.

One is the bike company.

In marketing, we launched as well.

Behaviors of our members.

And well beyond that.

Yes.

And Doug to address your question about free cash flow as Barry mentioned in the shareholder letter.

And many different categories of exercise and a large percentage of folks.

No hardware at all.

<unk> and related expenses associated with that settlement.

We haven't done a very good job of commute.

Communicating that to prospective members.

<unk> on our free cash flow in Q4.

So if you exclude those items, we actually are pretty closely within striking distance of achieving free cash flow breakeven and we are in the progress that we've made.

And we're looking to improve upon that.

I think the advertising can be more inclusive.

And it has been historically.

Very positive for.

And then lastly of course.

The deposit.

We have been promising to reintroduce the app.

Thank you one moment for our next question.

At the moment is soon to be upon us and that will receive considerable focus.

Yeah.

And that will come from the line of Ron Josey with Citi. Your line is open.

Great. Thanks for taking the question I wanted to ask about the us and telephone and PCR given both I think accounted for about three quarter of new subs.

In marketing, we launched as well.

Okay.

And Doug to address your question about free cash flow as Barry mentioned in the shareholder letter that does that.

This quarter and so talk to us a little bit more just how these products are are going how youre going to market with these products and how they are being differentiated relative to the full membership understood. There's nuances in between and then what is I think this quarter guidance calls for a little bit of a decline in subs is a seasonally slower quarter would love to hear more insights in terms of what.

And related to expenses associated with that settlement.

So.

Glued those items, we actually are pretty closely within striking distance of achieving free cash flow breakeven and we are in the progress that we've made it very positive.

Youre seeing there as well thank you very much.

Thank you one moment for our next question.

This takes our guidance I'll talk about that.

Okay.

And that will come from the line of Ron Josey with Citi. Your line is open great.

Refurbished bikes.

From a marketing perspective.

Thanks for taking the question I wanted to ask about the us and peloton and PCR given both I think accounted for about three quarter of new subs this quarter and so talk to us a little bit more just how these products are are going how youre going to market with these products and how they are being differentiated relative to the full membership understood.

We're doing nothing to.

Basically in support of those products. So people are finding them on their own.

In some instances, there's a banner across.

Top of our homepage script fuse steered you towards one or the other.

For the most part you have to discover SaaS.

Once it is in between and then what is I think this quarter guidance calls for a little bit of a decline in subs its seasonally slower quarter would love to hear more insights in terms of what youre seeing there as well. Thank you very much.

Clicking down a couple of layers.

On the web so think of it mostly as organic pull through.

I'm talking about the guidance piece.

Let's take the guidance piece.

Sure Yeah. So Ron you alluded to the fact that we are guiding down on connected fitness subs for Q4.

About that.

From a marketing perspective.

A few comments on that so the fourth quarter is seasonally our toughest or rather our least efficient quarter for us to grow subscribers.

We're doing nothing to Vince basically.

Basically in support of those products. So people are finding them on their own.

Even with our best in class retention, we need a base level of gross additions to offset our churn, which while still quite low also tends to be seasonally highest in Q4.

In some instances there was a banner across.

The homepage, which skews scares you towards one or the other.

Also important to understand that we are committed to growing our subscribers efficiently and while we have and we expect to target a lower LTV to CAC ratio in Q4 than we did in Q3, our Q3 LTV to CAC was actually above the two.

For the most part you have to discover SaaS right.

Clicking down a couple layers.

Which I'll talk about the guidance piece.

Our forecast assumes that we will maintain a strong financial discipline, and we will not overspend, either via media spending or by cutting prices slashing them to acquire unprofitable subscribers.

Sure Yeah, so suraj.

And you alluded to the fact that we are guiding down on connected fitness subs for Q4.

A few comments on that so the fourth quarter is seasonally our toughest or rather our least efficient quarter for us to grow subscribers, even with our best in class retention, we need a base level of gross additions to offset our churn, which while still quite low also tends to be seasonally highest in Q4.

I also want to point out that we do have some uncertainty in our Q4 guidance as Barry mentioned in the letter and as we've talked about already on the call. We are re launching the brand to better communicate our value proposition and we do expect that to widen our Tam over time and we're also reintroducing the app.

And we don't know the impact that these launches are going to have on our connected fitness gross in Q4.

We're cautiously optimistic about that but we have not baked any of that optimism into our guidance forecast.

Our forecast assumes that we will maintain a strong financial discipline, and we will not overspend, either via media spending or by cutting prices slashing them to acquire unprofitable subscribers.

And when you speak of that efficiency, you're talking about.

Long term value to CAC LTV to CAC ratio exactly.

Thank you one moment our next question.

I also want to point out that we do have some uncertainty in our Q4 guidance as Barry mentioned, we're in the letter and as we've talked about already on the call. We are re launching the brand to better communicate our value proposition and we do expect that to widen our Tam over time, and we're also reintroducing the app and we don't know.

That will come from the line of Justin Post with Bank of America. Your line is open.

Maybe one for <unk> and one for Barry.

First.

<unk>.

When you think about the pricing and the touring how do you protect the connected fitness price, but also offer a very robust app that people can use their devices. How do we think about that and then Barry maybe a big picture question added about 120000 subs this year.

The impact that these launches are going to have on our connected fitness I've got in Q4.

We're cautiously optimistic about that but we have not baked any of that optimism into our guidance forecast.

For the quarter and when you speak about efficiency, you're talking about the long term value to CAC LTV to CAC ratio exactly.

I know theres, a lot of macro and competitive headwinds and execution with the new team. How do you think about the right rate of growth for the company on subs as you look past. This year was this an unusually challenging year and you're optimistic or is this kind of a new baseline how do we think about sub growth from here. Thank you.

Thank you one moment for our next question.

That will come from the line of Justin Post with Bank of America. Your line is open.

First.

<unk>.

When you think about the app pricing and the touring how do you protect the connected fitness price, but also offer a very robust app that people can use their devices. How do we think about that and then Barry maybe a big picture question added about 120000 subs this year.

I'll take the first part of the question first.

So Justin we're not sharing today any details about our new app tiers, and the pricing associated with them, but the way to think about it is that they aren't all going to offer the same offering to consumers. So.

For example, what we offer for connected fitness as all of our content on our hardware.

Along with access to the occupied get everything it's all access the different app to it will have different amounts of content experiences available to you at different price points. So that's how we're protecting the all access membership in that regard.

Okay.

Let me talk about the current environment and then try to.

Do you want me to take the first part of the question first.

Share with you how I think about the new baseline.

What some of the vectors for growth would be.

And a super challenging here.

I think since walked in the door.

For example, what we offer for connected fitness as all of our content on our hardware.

And restructurings and devaluation.

Along with access to the App, you kind of get everything it's all access the different app tier will have different amounts of content experiences available to you at different price points. So that's how we're protecting the all access membership in that regard.

Write downs.

Something like $1 seven.

Yeah.

And so there's been a tremendous amount of effort.

<unk> invested in.

Let's say restructuring the business we are building the league team the rest of it.

Okay.

Yeah.

Well, let me talk about the current environment and then try to.

And as a leadership team we are still finding our rhythm building relationships of trust all the soft tissue relationships.

Share with you how I think about that the new baseline.

What some of the vectors for growth would be.

That's mid teens great.

Only happened overtime and so if we can if we manage that process, where we will execute faster.

And a super challenging here.

I think since I walked in the door.

And the business will perform better with the passage of time.

And restructurings and revaluation.

Write downs.

We said it's been.

My observation.

Something like $1 billion seven.

My previous company.

And so there's been a tremendous amount of effort.

Here are a couple of aspects vectors of growth there are a couple of aspects of the business.

<unk> invested in.

We have been in the process of restructuring.

Yeah.

And as a leadership team we are still finding our rhythm building relationships of trust all the soft tissue relationships.

Only just beginning to see glimmers of.

The benefits of <unk>.

That's mid teens great.

Some of the efforts that we've invested in.

Only happened overtime and so if we can.

I'm thinking, particularly about the commercial and corporate wellness business.

If we manage that process, where we will execute faster.

We're starting to see some good momentum there.

And the business will perform better with the passage of time.

We're starting to see some good momentum in three piece.

We said it's been.

And.

And we're knows we have a lot of learning to do to become a good partner.

On.

Previous.

Companies.

In a <unk> relationship.

Here are a couple of aspects vectors of growth there are a couple of aspects of the business.

But thats showing signs of life international.

I think.

<unk> will provide opportunities for growth for us.

We have been in the process of restructuring.

Only just beginning to see glimmers of.

Also we introduced new hardware platforms.

The benefits of.

This past year.

Some of the efforts that we've invested in.

Let's take the ROE by example.

I'm thinking, particularly about the commercial and corporate wellness business.

Similarly has of 4% unaided brand awareness guide is at 1%.

We're starting to see some good momentum there.

We're starting to see some good momentum.

The App is at 5% I think we have opportunities to improve all of those significantly.

<unk>.

And.

And we're knows we have a lot of learning to do to become a good partner.

Let's take the App by way of example, we can before we invested in making it better.

<unk> relationship.

But thats showing signs of life international.

The net promoter score is 20% higher.

Thank you.

Sure.

And our next highest rated product, which is <unk>, plus which has been quite successful for us.

Opportunities for growth for us.

Also we introduced new hardware platforms.

Only 5% of people even know it exists.

This past year.

Which makes it 10 times lower than bike.

Let's take the ROE by example.

Still a long way.

So there is lots of opportunity for us to enter into that.

4%.

Brand awareness guidance at 1%.

We will have a full year of Roe.

The App is at 5% I think we have opportunities to improve all of those significantly.

<unk>.

At some point in our future I anticipate we'll have a second treadmill product.

Let's take the App by way of example, even before we invested in making it better.

Two years ago roughly.

We withdrew trip us from the marketplace, we don't control that.

The net promoter score is 20% higher.

Timing on that but we.

We have invested a lot in our relationship.

And our next highest rated product, which is bike plus which has been quite successful for us.

Yes.

Only 5% of people even know what it is here.

With the government and that relationship has dramatically improved since.

Which makes it 10 times lower and bike.

Tim Entertainment.

Okay.

Invest in time and.

Opportunity for us to continue.

With our engineering team so.

And of that and we will have a full year of Roe.

I think that'll become Dr for Brooks, so new platforms new businesses commercial.

At some point in our future I anticipate we'll have.

International of course, we have new marketing leadership.

Treadmill product.

<unk>.

It was two years ago roughly.

We'll be leaning in aggressively.

<unk>.

To support them as they grow the business and then lastly.

Good through trip us from the marketplace, we don't control the timing.

Timing on that but we.

Conor and her team really.

We have invested a lot in our relationship.

I think.

<unk> signs of great.

Yes.

<unk> worth and turning around our accessories, and our apparel business the apparel business in particular can be significantly more meaningful.

With the government and that relationship has dramatically improved since.

Timmy Entertainment.

Okay.

It has been.

Invest in time.

I'm excited about.

Some of the initiatives that you're pursuing that you haven't discussed publicly that will unlock some growth opportunities. There so sorry to be so long winded, but thats kind of coexist.

With our engineering team so.

I think that'll become Dr progressed, so new platforms.

New businesses commercial.

International of course, we have new marketing leadership.

Yes.

The new baseline and the vectors of growth.

<unk>.

Thank you one moment for our next question.

We'll be leaning in aggressively.

To support them as they grow the business and then lastly.

And that will come from the line of Edward <unk> with Piper Sandler Your line is open.

Conor and her team.

Really.

I think.

Hey, good morning, Thanks for taking the question I guess first one broader question I know you guys called out Amazon has been a success story I wanted to understand if you had any more context behind the remainder of <unk>, particularly physical retail like a dip and then just a clarifying point on the re launched apps will connected fitness devices have the option for a more.

Showing signs of.

Great progress for us.

Turning around our accessories, and our apparel business the apparel business in particular can be significantly more meaningful.

And it has been.

And I am excited about.

Some of the initiatives that she is pursuing that you haven't discussed publicly that will unlock some growth opportunities. There. So sorry to be so long winded, but thats kind of current trading.

Our cart subscription option or is that mean is that to remain the all access membership. Thank you.

The new baseline and the vectors of growth.

It will remain all access membership.

Thank you one moment for our next question.

So can you comment on Dick's in Turkey.

Yeah sure I think the way to think about this is it still very much a new partnership in new relationship for US the call that we only launched that partnership back in November . So we've only got a couple of quarters under our belt with fixed and as Barry commented.

And that will come from the line of Edward <unk> with Piper Sandler Your line is open hey.

Good morning, Thanks for taking the question I guess first one broader question I know you guys called out Amazon has been a success story I wanted to understand if you had any more context behind the remainder of <unk>, particularly.

It's also about us learning how to be a good wholesale partner to a retail business that is more traditional brick and mortar that's not where our business has come from within most of web centric in how we sell and how we deliver to our consumers. So we're still working through with Vic how on how to be a good partner to them and how to lever.

Physical retail like a deck and then just a clarifying point on the re launched apps will connected fitness devices have the option for a more ala carte subscription option or is that to me is that to remain the all access membership. Thank you.

Today, our channel so that we can be even more successful.

It will remain all access membership.

Comment on Dick's in Turkey.

Thank you.

Yeah sure I think the way to think about this because it is still very much a new partnership in new relationship for US the call that we only launched that partnership back in November . So we've only got a couple of quarters under our belt with fixed and as Barry commented.

One moment for our next question.

That will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thanks, so much for taking my questions.

First you talked a lot about the commercial opportunity via the hospitality industry and the letter and you've obviously got the Hilton partnership can we talk a little bit about what do you think that means in terms of a driver for either the connected fitness subscriber funnel <unk>, bringing additional people into the digital app.

It's also about us learning how to be a good wholesale partner to a retail business that is more traditional brick and mortar that's not where our business has come from we've been mostly web centric in how we sell and how we deliver to our consumers.

We're still working through with <expletive> how how it would be a good partner to them and how to leverage their channel. So that we can both be even more successful.

We would utilize your hardware in a more nomadic sort of business travel type sense through partnerships like that just wondering how you think about that as a stimulant to multiple different parts of the business and then.

Thank you one moment our next question.

In terms of the guidance you gave one quarter forward wanted to understand a little bit of some of the puts and takes in the gross margin guidance that we could better understand how some of the headwinds and tailwind might evolve not just in Q4, but as we roll forward into the next fiscal year. Thanks, So much.

That will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thanks, so much for taking the questions first.

I don't have.

Talking about the funnel and hospitality.

As to talk about them.

Gross margin puts and calls in the guidance.

Really I don't have too much to say about hospitality kept that.

We would utilize your hardware and a more nomadic sort of business travel type sense through partnerships like that just wondering how you think about that as a stimulant to multiple different parts of the business and then.

Ben.

Fruitful source of.

Sure.

Of.

Consumer demand for us.

So normally productive historically would anticipate that that will continue on a go forward basis.

So we like the hospitality business for two reasons, one is profitable in its own right.

Two.

It's a good source of Av.

I don't have all talked about the funnel and hospitality.

Hum.

Future growth for us.

As to talk about the gross margin puts and calls in the guidance.

Because as you say the funnel.

Really I don't have too much to say about hospitality accept that.

And I'll take the question about puts and takes for Q4 margin so far.

Ben.

First just to.

Fruitful source of.

Reminder, that our overall gross margin is actually expected to go up quarter over quarter to 41% versus the 36% that we had in Q3 and the main driver of that is the shift towards subscription revenue from hardware revenue because we do expect our hardware sales to be lower in Q4 versus Q3.

Consumer demand for us.

Uh huh.

Enormously productive historically, we anticipate that that will continue on a go forward basis.

So we like the hospitality business for two reasons, one is profitable in its own right.

Our guidance does assume some expected pressure on connected fitness gross margin pressure is a seasonally weaker quarter for connected hardware sales were also expecting some weaker sales and margin outlook for <unk> as we continue to revamp that business and then we do have about 200 basis points of impact to overall gross margin included.

And two it's a good source of.

<unk>.

Sure.

Future growth for us.

Because as you say it helps feed the funnel.

And I'll take the question about puts and takes for Q4 margin. So.

And our guidance from anticipated one time items that mainly impacts the connected fitness segment.

First just tag.

A reminder, that our overall gross margin is actually expected to go up quarter over quarter to 41% versus the 36% that we had in Q3 and the main driver of that is the shift towards subscription revenue from hardware revenue because we do expect our hardware sales to be lower in Q4 versus Q3.

Yeah.

Okay.

Thank you one moment for our next question.

And that will come from the line of Nissan Chairman with Bernstein. Your line is open.

Thank you and nice quarter. My question is about Opex. So about a year ago, you were talking about maybe your predecessors were talking about $2 billion in opex being the kind of watermarks you're tracking towards that at this point and you brought down the cost base is quite significantly on an underlying basis.

Our guidance does assume some expected pressure on connected fitness gross margin first it is a seasonally weaker quarter for connected hardware sales were also expecting some <unk>.

Our sales and margin outlook for <unk> as we continue to revamp that business and then we do have about 200 basis points of impact to overall gross margin included in our guidance from anticipated onetime items that mainly impacts the connected fitness segment.

Are you at the tail end of the Opex improvement in cost cutting stage or are you looking at this as kind of being the steady state level or are you looking for more improvement in the next year or so.

Yes.

So and so going back to the restructuring plan that we outlined about a year ago. We don't have a perfect apples to apples comparison to that because we had a number of additional actions that have been taken since we set those targets, but if you actually exclude restructuring impairment reserves and settlements our opex is down over 50 550.

Thank you one moment for our next question.

And that will come from the line of Nissan Chairman with Bernstein. Your line is open.

<unk> million dollars on a trailing 12 month basis as of Q3. If you can note that doesn't include the fourth quarter, which still had fairly elevated opex, mainly in G&A and sales and marketing.

On the Cogs side, and we've had significant volume based dependencies, but when it comes to determining the cost savings there and while our volume has come down we've continued to make significant progress in optimizing our cost of goods sold over the past year on our cost structure now reflects the impact of the restructuring actions that we took to outsource our last mile.

Yes.

And so going back to the restructuring plan that we outlined about a year ago. We don't have a perfect apples to apples comparison to that because we had a number of additional actions that have been taken since we set those targets, but if you actually exclude restructuring impairment reserves and settlements our opex is down over 50 $550 million.

While delivery exit our own manufacturing and really effectively shifts are high fixed cost business model to a much more variable cost model from a cost structure perspective, we are in much better shape, we do see some further opportunity to optimize cost of goods sold particularly in the middle mile and we're going to be working on that over the coming quarters.

On a trailing 12 month basis as of Q3. If you can note that does include the fourth quarter, which still had fairly elevated opex, mainly in G&A and sales and marketing.

With regard to Opex overall, we have made great progress, we're not finished and we're going to continue to optimize but the big step function improvements are likely not to happen, it's going to be more about identifying improvements as we go things like reducing our professional services spend.

On the Cogs side, we've had significant volume based dependencies, but when it comes to determining the cost savings there and while our volumes have come down we've continued to make significant progress in optimizing our cost of goods sold over the past year.

Cost structure now reflects the impact of the restructuring actions that we took to outsource our last mile delivery exit our own manufacturing and really effectively shifts are high fixed cost business model to a much more variable cost model from a cost structure perspective, we are in much better shape, we do see some further opportunity to optimize the cost of goods.

Addressing our test that mix should drive some efficiencies there may be some efficiencies and member support we're going to continue to look at lowering our real estate costs over time.

There are some of the areas, where you'll continue to see further optimization over the coming quarters.

I would add then thank you.

Sorry.

So, particularly in the middle mile and we're going to be working on that over the coming quarters.

Go forward basis, I think there is opportunity for us to take the several categories, where there are tens of billions of dollars of savings to be had as opposed to hundreds of billions of dollars of savings.

No.

The things related to our it infrastructure.

But as mentioned middle mile and this past year, we had a lot of supplier.

Addressing our test that should drive some efficiencies there may be some efficiencies and member support we're going to continue to look at lowering our real estate costs over time.

Payments by way of <unk>.

Heading out inventory commitments and things that are now in the.

After this quarter will be completely in the rear view mirror for us.

Those are some of the areas, where you'll continue to see further optimizations over the coming quarters.

Thank you so much and if I can ask a quick follow up for Liz on your comment about Q4.

I would add that thank you.

Hum.

On a go forward basis, I think there is opportunity for us to to.

Can you reconcile your comments about seasonality and.

There are several categories, where there are tens of billions of dollars of savings to be had as opposed to hundreds of billions of dollars of savings.

Lower subs versus your guidance of only a modest increase in churn is it just about expecting lower gross adds.

So.

Seasonally it's both right so its lower gross additions in the quarter expected because of the lower efficiency to go out and acquire them in the quarter as well as a seasonal uptick in churn that we see we've seen every year.

The things related to it infrastructure and.

As mentioned the middle mile and this past year, we had a lot of supplier.

And then by way of settling out inventory commitments and things that are now in the.

If we were to relax.

The constraint we've imposed on marketing spending if we were to relax.

And after.

After this quarter will be completely in the rear view mirror for us.

Free cash flow goal that we've set for ourselves we can absolutely grow faster.

Thank you so much and if I can ask a quick follow up for Liz on your comment about Q4 can.

But we're not prepared to make that trade off.

Can you reconcile your comments about seasonality and.

At the moment and so it is kind of is what it is.

Lower subs versus your guidance of only a modest increase in churn is it just about expecting lower gross adds.

Yeah.

The focus is on as I was going to say the focus is on LTV to CAC and making sure that while we are willing to go lower than we were at in Q3.

So.

It has to be relatively efficient.

This priority is free cash flow second priority is growth.

If we were to relax.

Thank you one moment our next question.

The constraint we've imposed on marketing spending if we were to relax.

That will come from the line of Schweitzer <unk> with Evercore ISI. Your line is open.

Free cash flow goal that we've set for ourselves we can absolutely grow faster.

Thanks, a lot for taking my questions.

Yes.

Please could you please remind us.

Not prepared to make that trade off.

What promotions you ran in the quarter and what your expectations are for the upcoming quarter and for maybe upcoming quarters.

At the moment and so it is kind of is what it is.

Yeah.

The focus is on.

I'm just going to say the focus is on LTV to CAC and making sure that.

And then in addition to maybe perhaps talking about the just the overall demand environment.

Well, we're willing to go lower than we were at in Q3.

And then the.

It has to be relatively efficient.

The other follow up question I have is on free cash flow. So excluding the settlement costs you are striking distance from breakeven could you. Please help us just remind us outside of our growth.

This priority is free cash flow the second priority is growth.

Thank you one moment for our next question.

Growth that you expect coming in toward the next year, what are the key levers and how should we be thinking about working capital for the next fiscal year. Thanks a lot.

That will come from the line of Schweitzer <unk> with Evercore ISI. Your line is open.

Thanks, a lot for taking my questions.

Please could you please remind us.

Yeah.

What promotions you ran.

Okay, I think there were a bunch of questions in there.

In the quarter and what your expectations are for the upcoming quarter and for maybe upcoming quarters.

With a question.

Promotion, so what promotions that we have in Q3 so.

If you recall, we went into the Q3 with a promotion in January unrelated to kind of getting into fitness in the new year that ended I don't have the exact date, but that promotion, but that was part of January and then we did have a promotion. We did have some referral rewards promotion. We also had a.

And then in addition to maybe perhaps talking about the just the overall demand environment.

And then the.

The other follow up question I have is on free cash flow so excluding the settlement costs.

Striking distance from breakeven could you. Please help us just remind us outside of our group.

Which is basically if someone referred from once a peloton bike.

That person gets a discount and then the person who doesn't get the credit for apparel purchase and we also did a ah.

Spring promotion in March that had discounts on hardware purchases in bundles as well as.

Okay, I think there were a bunch of questions in there.

With a question.

A promotion on our reefer products and we also offered a financing promotion therapy, where we would offer free financing zero percent financing for that all of the term length for a period of time.

Promotion, so what promotions that we have in Q3.

If you recall, we went into the Q3 with a promotion in January related to kind of getting into fitness in the new year that ended I don't have the exact date, but that promotion, but that one for a part of January and then we did have a promotion we did have some referral rewards promotion. We also had a.

In Q4, we do have some promotional activity planned, but our mothers day, which actually launches today, our mothers day promo.

That will be that will be starting today.

Yeah.

Which is basically if someone look for someone to telecom they get.

With regard to free cash flow and the question about working capital. So just from a for Q3 to give you a sense. We did have a cash tailwind from inventory was about to the tune of about $100 million.

That person gets a discount and then the person who doesn't get the credit for apparel purchase and we also did a.

Spring promotion in March that had discounts on hardware purchases in bundles as well as.

Net of any supplier settlements that we had in the quarter. We are nearing the tail end of those supplier settlement, we only have about $3 million left that will incur in Q4.

A promotion on our reefer products and we also offered a financing promotion therapy at where we would offer free financing zero percent financing for that all of the term length for a period of time.

Yeah.

For Q4, we also expect inventory to be a bit of a tailwind as a source of cash, but it will be materially lower than what we observed in Q3 again in part because of the fact that we won't be selling less hardware in Q3, our initial forecast of Q3.

In Q4, we do have some promotional activity planned, but our mothers day, which actually launches today, our mothers day promo.

So that will be that will be starting today.

And then we're not really providing much perspective on FY 'twenty four yet, but as we move into 'twenty FY 'twenty four we expect the tailwind from inventory to continue to moderate over time, because we will need to continue to we will need to produce connected fitness hardware inventory for specific school.

I'd say about the demand environment.

Uncertain.

We've seen consumers respond very favorably to.

Promotional activity in the current environment, maybe even more so than historically.

There is certainly no zoom brands in the marketplace.

But it is not frozen either so.

It's kind of a mixed bag.

We're definitely uncertain about.

What's next.

In terms of the economic environment I'm wondering if there's a recession. This is a soft landing.

What happens with job selling certain people it.

It seems like household incomes.

Add money to pay that money.

<unk>.

They are able to spend.

And then there is everybody else and to them there is a lot of uncertainty.

But even more so than historically.

And while there's certainly uncertainty when we do our demand forecasting we incorporate the latest trends that we see into our bottoms up forecast and so we believe our guidance contemplates some of that macroeconomic.

There's certainly no zoom branch in the marketplace.

Yeah.

But it's not frozen either so.

Yes.

It's kind of a mixed bag and I and.

Headwind does that maybe that we may be observing even though it's hard to explicitly identify what they are.

We're definitely uncertain about.

What's next.

In terms of the economic environment I'm wondering if there's a recession as a soft landing.

But we and since we have no explicit assumption around what's going to happen in Washington around the desktop.

What happens with job selling certain people it.

It seems like household incomes.

And then a blast radius.

Okay.

Had money to build that money.

And ability if congress.

Hum.

Resolve that with the president just by way of example, so which assuming the world continues on as we know it today.

They're able to spend but and then there is everybody else and to them, there's a lot of uncertainty.

And while there's certainly uncertainty.

And you will see.

We do our demand forecasting we incorporate the latest trends that we see into our bottoms up forecast and so we believe our guidance contemplates some of that macroeconomic.

Yeah.

Thank you one moment for our next question.

That will come from the line of Andrew Boone with JMP Securities. Your line is open.

Headwind does that may be that we may be observing even though it's hard to explicitly identify what they are.

Hi, good morning, and thanks, so much for taking my question.

I wanted to ask now that we're a year into the price increase just philosophically. How you are thinking about subscription price increases going forward given your time at Netflix. It felt like there was a steady cadence here does that relate to peloton.

But we kind of since we have no explicit assumption around whats going to happen in Washington around the debt limit.

And then a blast radius associated with an ability if congress.

I don't think so.

Resolve that with the president just by way of example, so which assuming the world continues on as we know it today.

For the longest time Netflix strategy is actually to reduce price.

And grow share.

And it was only after they became.

And we will see.

Yeah.

Dominant on a global basis.

Thank you one moment for our next question.

Good day.

Extract a premium from the marketplace.

That will come from the line of Andrew Boone with JMP Securities. Your line is open.

Associated with the share so left to my own devices that would be lowering prices.

Hi, good morning, and thanks, so much for taking my question.

<unk> prices I think it's a very effective way to drive.

A virtuous cycle of incur.

Increased engagement and increased word of mouth lower marketing expense.

You can increase value by making trade offs against gross margin.

I don't think so.

For the longest time Netflix strategy was actually to reduce price.

And I would like us to be able to do that but I don't proceed.

And grow share.

That being possible given the financial constraints.

And it was only after they became dominant on a global basis.

Of the business.

But we will see as Liz commented.

Good day.

Extract a premium from the marketplace.

Increasing gross margins that are a function of structural shifts in the business for instance.

Associated with the share so left to my own devices that would be lowering prices not not raising prices I think it's a very effective way to drive.

As it relates to the rate of growth in the subscription business versus the hardware business. So.

By way of example last quarter.

A virtuous cycle of.

Subscription revenue exceeded hardware revenue by $30 million this quarter it exceeded by $100 million.

Increased engagement and increased word of mouth lower marketing expense.

You can increase value by making trade offs against gross margin.

It's growing significantly faster I think that is.

A long term trend in the business as I flagged last quarters.

And I would like for us to be able to do that but I don't foresee.

Investor letter.

That being possible given the financial constraints.

But I don't foresee big structural changes in the gross margin of the subscription business itself or even above.

Of the business.

We will see as Liz commented.

Increasing gross margins that are a function of structural shifts in the business for instance, and that.

Hardware business.

So.

Excluding the restructuring charges.

As it relates to the rate of growth in the subscription business versus the hardware business. So.

Excellent.

Yes.

Eventually.

By way of example last quarter trips.

That too would be anniversary here.

Friction revenue exceeded hardware revenue by $30 million this quarter exceeded by $100 million.

Okay.

And then I just wanted to touch on the underlying new subs that are coming on the platform are you guys seeing any change there in terms of income or age or anything else that that would be worth highlighting thank you. So much.

It is growing significantly faster I think that is.

A long term trend in the business as I flagged.

Last quarters.

Investor letter and.

No not so much.

But I don't foresee big structural changes in the gross margin of the subscription business itself or even above the hardware business itself.

With respect to the new marketing campaign.

We will be.

Reaching slightly younger.

That's a tam play.

<unk>.

Inclusivity play.

Excluding restructuring charges.

But.

So all of that.

No.

So eventually.

Our changes, particularly I had noted previously.

That too would be in the rear view mirror.

That would bring in a slightly different demographic is slightly more female.

Okay.

And then I just wanted to touch on the underlying new subs that are coming on the platform are you guys seeing any change there in terms of income or age or anything else that there would be worth highlighting thank you so much.

With high household income interestingly enough is it professional women who value the optionality that continues to be true.

But it's not skewing that.

The macro numbers, particularly.

No not so much.

Yeah.

Thank you one moment for our next question.

With respect to the new marketing campaign.

We will be.

Reaching slightly younger.

And that will come from the line of Mario Lu with Barclays. Your line is open.

That's a tam play.

<unk>.

And inclusivity play.

Great. Thanks, guys. This is Alex Hughes on for Mario.

But.

No.

Just had a couple of questions around the rubber product do you have any updates on <unk>.

Org changes, particularly I had noted previously that.

Sales versus your internal expectations for that and you guys launched the <unk> classes last quarter.

That would bring in a slightly different demographic.

With more female.

High household income interestingly enough is it professional women who value the optionality that continues to be true.

Any update on user traction on that or how thats progressing thanks.

But it's not skewing, but.

The macro numbers, particularly.

Okay.

Net sales versus expectations.

Yeah.

Okay.

But we aren't sharing explicitly what our sales are for those or but.

Thank you one moment for our next question.

It is still a new product and similar to what Barry said.

And that will come from the line of Mario Lu with Barclays. Your line is open.

R R.

Great. Thanks, guys. This is Alex Hughes on for Mario.

It doesn't have a high unaided awareness yet so one thing to point out is that our current sales are actually pretty heavily skewed towards to our existing connected fitness subscribers, which.

I just had a couple of questions around the rubber product do you have any updates on sand sales versus your internal expectations for that and you guys launched live Rowan classes last quarter any update on user traction on that or how thats progressing. Thanks.

Which is similar to what we saw with our <unk> when we launched it.

And so we are expecting sales to be more accretive to sub growth overtime and to continue to build over time as we grow our unaided awareness product, let me add that.

It received very favorable critical reviews.

Do you want to talk about sales versus expectations.

I think it's made it much more difficult for.

But we aren't sharing explicitly what our sales are for those that are but.

Some of the competitors.

In that space in particular.

It is still a new product and similar to what Barry said.

So it's grabbed a lot of share.

But as mentioned that the awareness is still low I think we have opportunities to work on that.

R R.

It doesn't have a high unaided awareness yet so one thing to point out is that our current sales are actually pretty heavily skewed towards to our existing connected fitness subscribers, which.

<unk>.

Frankly, we didn't really know what to expect.

When we launched it.

And so we are expecting sales to be more accretive to stop growth overtime and to continue to build over time as we grow our unaided awareness product, let me add that.

And that.

But the combination of the favorable critical reviews, and then the reception from our users.

It received very favorable critical reviews.

It's been quite good.

Yes.

Slide rated net promoter score slightly below.

In that space in particular.

The tread product.

So think of it is on par with the bike and tread.

But as mentioned that the awareness is still low I think we have opportunities to work on that.

Which I think for new products.

Pretty good.

<unk>.

I think we have opportunities to continue to improve.

Frankly, we didn't really know what to expect.

When we launched it.

The content.

But it's a new category for us.

And that.

Confident that we will.

But the.

The combination of the favorable critical reviews, and then the the reception from our users.

But that's not based on any research by the way that's just my own assessment.

Are you there.

Has been quite good.

Yeah.

And then I did want to add is only available in the U S. And we are looking to launch it internationally and to enter other markets.

It's up slightly.

The net promoter score is slightly below the.

Tread product.

At a time.

So think of it is on par with the bike and tread.

Yes.

Thank you one moment for our next question.

Which I think for new product is pretty good I.

That will come from the line of Deepak Matthew Bannon with Wolfe Research. Your line is open.

I think we have opportunities to continue to improve.

Great. Thanks. This is zach on for Deepak just first on marketing just given with the brand relaunch and the App relaunch later this month.

The content.

But it's a new category for us and I'm confident that we that we will.

That could affect kind of the typical seasonality of.

That that's not based on any research by the way that's just my own assessment of.

Marketing spend this year or over the next couple of quarters.

Kind of relative to historical periods.

Either.

And then second just on SaaS.

Yeah.

And then I did want to add is only available on the U S. And we are looking to launch it internationally into other markets.

Churn stepped up a little bit kind of quarter over quarter now at 5%.

Kind of how do we obviously still early days, but how do we think about the key drivers to kind of bring that down.

Okay.

Yes.

Thank you one moment for our next question.

Well over the long term and that kind of gives you confidence in.

That will come from the line of Deepak Matthew Brannon with Wolfe Research. Your line is open.

The unit economics.

That model over the long term.

Great. Thanks. This is Jack on for Deepak just first one on marketing just given with the brand relaunch and the App relaunch later this month.

And I will tag team this in terms of seasonality.

Marketing expense Q over Q decline.

It could affect kind of the typical seasonality of.

This quarter versus last quarter.

Marketing spend this year or over the next couple of quarters.

But it will be up.

Slightly.

Kind of relative to historical periods.

Single digit percentages kind of.

And then second just on SaaS.

On a year over year basis.

Churn stepped up a little bit kind of quarter over quarter now at 5%.

It was quite low year ago Q4.

Kind of how do we obviously still early days, but how do we think kind of about the key drivers to kind of bring that down.

And other than that I don't expect particularly any any big changes.

Well over the long term and that kind of gives you confidence in.

Seasonal pattern then the reason it's up year over year because of the maybe end of March.

The unit economics of that.

That model over the long term.

In terms of churn from my Netflix experience I would say, it's all about the user experience.

And I will tag team this in terms of seasonality.

Marketing expense Q over Q will decline.

Alright.

Okay.

And maybe be more clear.

This quarter versus last quarter.

We reported average term average churn as a function of.

But it will be up.

Slightly.

The average life of the user base, if you're pumping and a lot of new subs.

Single digit percentages kind of.

On a year over year basis.

They're going to churn at a higher rate than sub two.

It was quite low.

This for a long period of time like I say 12 months.

A year ago Q4.

I've seen that in every subscription business that.

And other than that I don't expect particularly any any big changes.

Been a part of and have been a part of three of them now.

Seasonal pattern and the reason, it's up year over year because of the leading into the launch at <unk>.

Churn declines over time in my last few businesses those asymptotic yet at 12 months, you'll see something similar here. So when growth accelerates trend picks up slightly when growth slows down the average reported churn ticked down so to really understand what's happening with churn you need that you need to actually see that the co.

<unk>.

And see how over time the churn curve. This is a slow changing is it shifting in parallel like what is what's happening.

And Thats, how you drive increases in lifetime value. So having said that how do you bend the shape of the churn curve you would do that with engagement largely and you do that by controlling the quality of the subscribers that you acquire.

So let me start there that's all about.

Yes.

The responsibility for that rest with marketing.

And.

If you can.

Generally judge how valuable the customer is going to be based on the.

The retention very early in their life and so you just have to self regulate.

Anna acquire subs from sources that are going to meet your expectations in terms of churn.

In terms of engagement.

Let's say the last three quarters.

We've seen.

Pretty good improvement of five percentage points.

In the base of customers. So I'd say, who are who are engaged with all access product.

Okay.

Key of course is for Jen Carter and her team.

Instructors continue to make great content.

But that all by itself is not sufficient.

If we make great content that you can't find it.

When you.

Hop on your bike or tread Roe might as well not exist and so.

The product team and engineering team is to be great at.

Driving personalization, we have made that investment priority.

When I walked in the door.

I think we're making a lot of good progress there.

We're also introducing some new categories of content like Lane break.

Where we're seeing really off the charts.

<unk>.

Hum.

Slightly more male and a much younger demo.

So we need to continue to.

Same thing with that results by the way so we need to continue to lean into those use cases.

And the personalization.

Sorry to be so long winded.

I wanted to add just a couple of quick things.

First of all.

First off I just wanted to comment that we are solid in that 8%.

20 months payback periods that we have been targeting even with the slight uptick in churn that we've seen and then there is comments about sales and marketing so our sales and marketing overall expense is actually down expected to be down year over year and support that our media spend is expected to be up so the overall sales and marketing function itself, which includes <unk>.

Things like brand and creative and head count and all those things is down year over year, what we are spending a bit more on media to your point around the brand relaunch in the App. So fast is a great example of how it is you can you can make tradeoffs between marketing spend churn growth in order to drive more overall profitability in the business so fast.

We have a higher churn rate.

But the increments.

Is in the low <unk>.

And so even though the lifetime value we estimate to be in.

Round numbers passed that.

And all access remember, we're growing so much faster because the SaaS, we're driving more process until we're willing to take the churn hit because.

The increase in enterprise value that results from us deploying that strategy.

Yeah.

Thank you one moment for our next question.

Yeah.

That will come from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone. As you think about the shift of the business model and the re launch of the App.

Launch of the App, that's coming how do you see the shape of what the financial profile of the company should look like just the cadence quarterly revenue stream, how do you envision.

The mine on a quantitative basis.

You.

Well.

I'm not sure I fully understand the question, but as we've talked about our business has shifted more towards subscription rollout relative to connected fitness hardware. So as the app grows as a larger share of our business that will continue to shift and more of our revenue will be coming from subscription.

And as we know the gross margin of our subscription business is higher so that will also continue to to help improve our gross margins overall.

It will expand the business, we will continue to grow we'll be able to get scale, which will mean that our opex as a function of revenue will come down so it's leading us all in the right direction towards getting to our Northstar goal, which is to be a bigger business with more subscribers and higher operating income and getting us to operating income breakeven overtime, but structurally it's really more about that.

<unk> that we're continuing to see happen from the mix of connected fitness hardware to subscription now that doesn't mean that some of those apps subscribers over time will also become connected fitness members, but we're going to have to see how that journey evolves and we will have products available for them.

However, they want to join California.

Building off of <unk> comments.

We're successful in it.

And growing the <unk> business will become an increasingly an asset light model and it most definitely will will change the working capital attributes.

The business in a favorable way.

Not to at the risk of sounding like captain obvious.

Sure.

And the margins will benefit as a as a result, both the.

Gross margin and the operating margins right and remember our Northstar around growth is LTV to CAC ratio. So we're going to continue to evaluate how we grow our subscriber base in that framework.

I'll tell you and we are pretty successful in deploying an asset light model, we will probably see faster growth international.

<unk>.

It's much easier to.

To launch internationally.

And app products than it is a hardware business for sure.

And Barry just following up on international or international growth faster than the U S. This quarter what are you seeing internationally.

Leaning into the hospitality business, how do you see the pace of adds new hospitality teams joining the platform.

I'm going to hold off on answering that.

The quick question.

Zinc hospitality for us primarily use.

As a U S based business.

For the coming fiscal year, and then I think there'll be opportunities for us to.

Build beyond that.

And in terms of international growth I'm thinking primarily existing markets.

With.

Sure.

A few additional new markets, but its mostly.

Ed.

<unk>.

We architected our go to market strategy in existing markets with increasingly culturally relevant content that unlocks the growth opportunities of those markets pursue some co branding opportunities for us which is not a strategy that we've deployed.

We're going to have an exciting announcement by way of example over the next couple of quarters in that regard.

Okay help accelerate our growth.

Yeah.

Thank you one moment for our next question.

That will come from the line of Youssef Squali with <unk> Securities.

Okay, great. Thank you very much and good morning, all so Barry that the.

The <unk> brand was built on just great quality physical products historically as the business moves to an app centric strategy asset light strategy can you maybe just speak to the competitive advantages that you are bringing.

The moat you are trying to build and what gives you confidence that you know.

Youll be able you'll be able to maintain the same type of advantage that you've been able to build in the physical world. Thank you.

I think both limited and I will comment here from my part I would say.

Okay.

We face many challenges in the past year.

Almost in every aspect of the business.

For context.

Content is kind of the Golden Goose.

Is the bike and great experience from a hardware perspective better than things that income before it absolutely is but the magic.

And the glue that binds the community.

With almost religious fervor amongst the members.

The content.

The instructors.

<unk>.

So.

If we're successful in extending that into the App world.

And in the pre architect.

<unk>.

Drive personalization, so that you can find and engage with all of that content.

And Ah.

Quickly in a frictionless way.

And I think we'll do quite well.

If we don't do those things we wont.

Yeah, I mean, I completely agree with that with your comments that the one thing that I will add is that it's important.

And for us to continue to innovate on the content experience over time and that is something that we are focused on doing and will continue to do that and over time, you will see new forms of content coming from us and that'll be something that continues to keep that competitive moat there.

And.

The content is to your point is really our secret sauce at peloton, a golden Pacer telephone.

Thank you.

Thank you that is all the time, we have today for our question and answers. Thank you again for participating. This concludes today's program you may now disconnect.

Q3 2023 Peloton Interactive Inc Earnings Call

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