Q2 2024 Peloton Interactive Inc Earnings Call
One.
Yeah.
Good day and welcome to the peloton Interactive Q2 2024 earnings call. At this time, all participants are in a listen only mode.
After a few brief opening remarks, we will begin 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 your hand is raised.
All 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.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Peter Stabler head of Investor Relations, Mr stable or the floor is yours.
Peter Stabler: Thanks very good.
Peter Stabler: Good morning, and welcome to peloton second quarter fiscal year 'twenty 'twenty four conference call joining today's call, our CEO, Barry Mccarthy and CFO Lewis cutting tip.
Peter Stabler: Our comments and responses to your questions reflect management's views as of today only and.
Speaker Change: We will include statements related to our business that are forward looking statements under federal Securities law.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: I'll now turn the call over to the operator for our first question.
Speaker Change: Thank you one moment for our first question.
Speaker Change: And that will come from the line of Doug Anmuth with J P. Morgan Your line is open.
Doug Anmuth: Great. Thanks, so much hi bearing with US a couple of questions you called out that the treadmill market is to ask that of bikes can you just help us understand how you're going to lean into those products more going forward and if tread plus demand is strong why isn't that helping free cash flow more in the back half of this.
Doug Anmuth: Year, just given the considerable existing inventory that you have and then secondly can you just help us understand the current mix of sales or perhaps sub additions across peloton direct and third party and.
Doug Anmuth: Bike rental and any thoughts on how this could trend going forward. Thanks.
Doug Anmuth: Hmm.
Speaker Change: Let me take the first part of the question maybe Louis can take the second part Doug.
Speaker Change: Thanks for joining today.
Speaker Change: The demand for tread.
Speaker Change: It's been stronger than we anticipated both for <unk> and for <unk> plus.
Speaker Change: Think that.
Speaker Change: Interest in trip Pluses is has.
Speaker Change: Thanks.
Speaker Change: Look even more attractive in comparison because of the price point differences.
Speaker Change: So that would be one category one.
Speaker Change: The other exciting thing about the trend and the fact that we're seeing real growth year over year in units.
Speaker Change: Is that for as long as I've been associated with the business, we've been largely dependent on on the bike business and now it appears that.
Speaker Change: We have at least an important second leg of the stool Ted to help support growth.
Speaker Change: Now with.
Speaker Change: Respect to tread plus.
Speaker Change: Yeah.
Speaker Change: We do have a substantial number of units in inventory. The good news is we've paid for them. So.
Speaker Change: Each sale is quite helpful to cash flow.
Speaker Change: Initial demand was quite strong.
Speaker Change: But we have limited sales experience.
Speaker Change: And we have limited even more limited sales experience at full price.
Speaker Change:
Speaker Change: And so a little bit uncertain about.
Speaker Change: What the demand will be coming into Q4.
Speaker Change: I'm also a little bit uncertain about our ability to fulfill that demand so.
Speaker Change: Our first obligation is to retrofit the existing units in the field with the rear guard.
Speaker Change: To the extent that we are manufacturing more air cars than we have capacity for.
Speaker Change: Installs have retrofits than they are available for us to read.
Speaker Change: Trophy of existing inventory in.
Speaker Change: And shipped to new purchasers.
Speaker Change: So that's the perspective on trend plus 50.
Speaker Change: There was a mix part of the question.
Speaker Change: Gonna kick over to you.
Sure.
Speaker Change: In terms of the mix I think the question was about what are we thinking in terms of our mix going forward into the back half of the year.
As far as kind of a hardware sales piece of the business.
Speaker Change: From a bike rental perspective, we are lending into that but we do expect to continue to see our mix shift toward the bike rental.
Speaker Change: Rental.
In terms of third party.
Speaker Change: That's half of the year, our third party business is impacted by a lot of key moments in those third party channel.
Speaker Change: So well.
Speaker Change: But we'll lean into those in it depending on how well those actually do that all that May result in some mix shift into third party third party at certain moment, but we don't expect it to be a significantly higher portion of our sales in the back half of the year versus the first half of the year.
Speaker Change: One just don't comment about trends.
Speaker Change: I am pretty excited about some of the content that we're going to bring to the platform.
Speaker Change: Oriented towards.
Speaker Change: More of the performance athletes, particularly marathon training we.
Speaker Change: We entered into a partnership with New York Road runners I'm Super excited about that.
Speaker Change: We filmed in <unk>.
Speaker Change: Marathon course, the New York Marathon of course this year.
Speaker Change: That will be available on our platform for runners who are training for the marathon.
Speaker Change: And we also.
Speaker Change: Captured the meta data and so the elevation on the treadmill automatically changes as you progress down the course.
Speaker Change: And we hope to expand that to other leading marathons around the world and continue to lean in.
Speaker Change: To that segment of the marketplace.
Speaker Change: Which.
Speaker Change: Thank helps to.
Speaker Change: And the brand in important ways.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Ron Josey with Citi. Your line is open.
Ron Josey: Great. Thanks for taking the question Hi, Barry highlights I wanted to ask on engagement Barry was up 6% year over year and you know just curious can you tell us how engagements.
Ron Josey: <unk> on the platform over the last several years with peloton offering more content across more devices of course, the app or are we seeing members adopting more of a hybrid style or is it one or the other is question one and then Barry you mentioned.
Speaker Change: In the letter you would be disappointed the team can improve performance in the current quarter as you did in the second quarter just talk to us about some of the improvements you saw in <unk> that help numbers come in better than expected. Thank you.
Speaker Change: Sorry, I was having trouble hearing.
Speaker Change: During the second quarter improvement and one will help them beat Q2, but helped US beat Q2 is that the question.
Speaker Change: Yes, I think you said you'd be disappointed if the team can improve performance in the quarter similar to <unk>. So I'm curious what happened in the last quarter to maybe do better here going forward.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Part of it and it doesn't take part.
Speaker Change: Well as you mentioned engagement was up 6% the connected fitness.
Speaker Change: Engagement was up 4% year over year in the App is up 7% year over year.
Speaker Change: We have not really made <unk>.
Speaker Change: <unk> progress yet.
Speaker Change: And.
Personalization.
Speaker Change: <unk>.
Speaker Change: Said differently, we've made good progress but.
Speaker Change: We can run a lot faster and and we can do significantly better.
Speaker Change: Im tremendously excited about that.
Speaker Change: The work that we have.
Speaker Change: We're doing now and and the insights that Nick Caldwell brings to the table.
Speaker Change: And I think a year from now we're going to be in a significantly.
Speaker Change: Better place.
Speaker Change: And and it will have a really positive impact on engagement and we know that.
Speaker Change: Engagement is a big driver of churn churn was down.
Speaker Change: In the quarter and engagement was up and and I think there are opportunities to continue to broaden engagement plus.
Speaker Change: We're doing some really interesting things in the content team on different platforms.
Speaker Change: Ed.
Speaker Change: Our.
Speaker Change: <unk> to the overall improvement in user experience I am thinking by way of example in entertainment.
Speaker Change: With Youtube video and NBA League pass.
Speaker Change:
Speaker Change: Just by way of example.
Speaker Change: We've seen it.
Speaker Change: Very substantial increase in engagement in that content amongst tread users by way of example.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: We've come a long way, but we're going to come a lot farther faster.
Speaker Change: In the foreseeable future.
Speaker Change: Certainly AI.
Speaker Change: <unk> will play an important role here.
Speaker Change: Yeah, a few things to add about our outperformance in Q2. So some of the areas that really worked well for us where our bike rental at bass, the third party and our refurbished inventory build our bike sales those were those all outperformed our internal expectations on the quarter, which is great and our bike rental also.
Speaker Change: <unk> benefited from the fact that we've had we had lower churn so that helps us subscribers and also.
Speaker Change: We launched a self service buyouts on our platform, which was a really great win because we saw 11% of our rental members buy out in the quarter, which.
Speaker Change: Which also contributed to some of the outperformance there are other there are some other factors that are impacting our subscriber subscriber growth for the quarter.
Speaker Change: As we mentioned our hardware demand was a bit lower overall than we forecasted, but we had some offsetting tailwind that benefited us first our supply chain team did a great job and outperformed in terms of delivery efficiency that means we had a bit of a pull forward in our deliveries into Q2 that we had expected to have in Q3. We also had passed our subscription.
Speaker Change: Activations in the quarter than we expected sometimes over the holidays people lag a bit with activating their subscriptions and we saw that was faster than we expected to so that helped with subscribers and then another benefit that we had is we had lower new subscription pauses in the quarter and higher than expected reactivation from a pod state and then.
Speaker Change: We expect it so that helped overall retention and is one of the drivers of our better than expected Q2 churn result, and the other thing that is also really important to understand about our performance in the quarter as the secondary market that continues to outperform our expectations and and was a key contributor of subscriber growth and acquire.
Speaker Change: Yeah.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Andrew Boone with JMP Securities. Your line is open.
Andrew M. Boone: Thanks, So much for taking my questions I wanted to ask about the increase in media spend that you guys called out in the letter as we get further away from the relaunch of the digital App, how should we think about marketing, especially as we just mentioned.
Operator: 1 Good day, and welcome to the Peloton Interactive Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After a few brief opening remarks, we will begin 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.
Andrew M. Boone: The pullback in overall demand for hardware.
Andrew M. Boone: And then is there anything you can call out in terms of connected fitness gross margins going forward that stepped up in the quarter. How do we think about that for the back half of the year and then going forward. Thanks, so much.
Operator: You will then hear an automated message advising 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, Mr. Peter Stabler, Head of Investor Relations. Mr. Stabler, the floor is yours.
Speaker Change: So the first question it sounds like it was about an increase in media spend that we saw in Q2.
Speaker Change: So we always generally are typically see an increase in our media spending in Q2, because it is our holiday quarter and we use that as a way to drive leads and demand for our hardware products and and our app on all of our products.
Peter Stabler: Thanks, Sheree. Good morning, and welcome to the Peloton second quarter fiscal year 2024 conference call. Joining today's call are CEO Barry McCarthy and CFO Liz Cottington. 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. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.
Speaker Change: In the back half of the year, we do expect to spend less in media just seasonally so we do expect lower quarterly media spending going forward now remember another thing to understand about our business I would really come back to this on it on these calls is to talk about LTV to CAC and so we're trying to optimize for that for the business.
Speaker Change: So when we look at our media spending we are trying to make sure that the army is spending is efficient and drives a.
Speaker Change: LTV to CAC.
Speaker Change: Over one ideally we want to be in the two to three X range, we were not there for Q2, but we were above one.
Speaker Change: Our goal is to you know to move towards more on increasing media efficiency.
Speaker Change: Now on the connected fitness gross margin.
Speaker Change: Do expect we aren't we don't.
Speaker Change: We don't guide specifically to connected fitness gross margin, but we do expect some improvement in the back half of the year in part because our 10 plus deliveries, which actually just just started will benefit gross margin in the back half.
Operator: I'll now turn the call over to the operator for our first question, and that will come from the line of Doug Anmuth with J.P. Morgan. Your line is open. Great. Thanks so much.
Speaker Change: That will be we do see a little bit of pressure from areas like bike rental as that continues to take share that will put a little bit of pressure on our connected fitness gross margin, but we do expect sequential quarterly improvement now.
Doug Anmuth: Hi Barry and Liz, a couple of questions. You called out that the treadmill market is 2x that of bikes. Can you just help us understand how you're going to lean into those products more going forward? And if tread plus demand is strong, why isn't that helping free cash flow more in the back half of this year, just given the considerable existing inventory that you have? And then, secondly, can you just help us understand the current mix of sales or perhaps sub-additions across Peloton Direct and third parties and bike rental and any thoughts on how this could trend going forward? Thanks. Let me take the first part of the question. Maybe Liz can take the second part.
Speaker Change: It is important to note, though with gross margin coming back to the LTV to CAC Keith.
Speaker Change: Gross margin and promotional activity.
Speaker Change: Ill say that affect gross margin and so we're optimizing for LTV to CAC and if we see the opportunity is better to reduce our LTV by reducing our gross margin and optimizing our media spend accordingly, well, we'll make that tradeoff and evaluate it as we go.
Speaker Change: I would say at a high level I'm pretty optimistic about our ability to try to bring more efficiency out of the out of the marketing spend and were making some structural changes in the way that we run the business.
Speaker Change: That will help contribute to.
Speaker Change: Increased operating leverage.
Barry McCarthy: Doug, thanks for joining us today. The demand for TRED has been stronger than we anticipated, both for TRED and for TRED+. I think that the interest in TRED makes the tread look even more attractive in comparison because of the price point differences. So that would be category one.
Speaker Change: And.
Speaker Change: I realize I'm being big I'm being intentionally vague, but.
Speaker Change: It's among the reasons why I have some optimism about that.
Speaker Change: Go forward performance.
Speaker Change: Thank you one moment for our next question.
Speaker Change: That will come from the line of Schweitzer <unk> with Evercore ISI. Your line is open.
Barry McCarthy: The other exciting thing about the tread and the fact that we're seeing real growth year over year in units is that, for as long as I've been associated with the business, we've been largely dependent on the bike business. And now it appears that we have at least an important second leg of the stool to help support growth. Now, with respect to TREAD+, we do have a substantial number of units in inventory. The good news is that we've paid for them. So each sale is quite helpful to cash flow, and initial demand was quite strong. But we have limited sales experience, and we have even more limited sales experience at full price, and so we are a little bit uncertain about what the demand will be coming into Q4.
Schweitzer: Thanks, a lot for taking my questions I have two please.
Schweitzer: One Liz could you. Please talk about the free cash flow. So your guidance now calls for lower expectations than what you talked about last quarter.
Schweitzer: You expect to be positive free cash flow in the fourth quarter.
Schweitzer: And not for the full year, just help us think about why the change and what drove that and then the second question is on how to think about the impact from <unk> and little Lemons is $10 million a quarter that you.
Schweitzer: Quantified last time.
Schweitzer: Did it come in better than expected how should we think about it go forward and then the impact of kicked off on P&L. Please. Thank you.
Speaker Change: Sure. So let's start with the free cash flow question why is our free cash flow outlook lower than we had previously expected so.
Speaker Change: For Q2, while our paid subscriptions for our connected fitness and outperformed our expectations. Our hardware sales as I mentioned earlier were a bit softer than we expected. So we're projecting that softness at the and from a trend perspective to continue into Q3, and Q4 and that creates a bit of a cash headwind for us. We're also continuing to see that mix shift into.
Barry McCarthy: We're also a little bit uncertain about our ability to fulfill the demand, so our first obligation is to retrofit the existing units in the field with the rear guard. And to the extent that we're manufacturing more rear guards and we have capacity for installs and retrofits, then they're available for us to retrofit existing inventory and ship to new purchasers. So that's the perspective on TREAD+. There was a mixed part to the question. Liz, I was going to pass it over to you.
Speaker Change: A bike rental or fast and that puts pressure on our cash because again, we don't collect all of that hardware revenue upfront.
Speaker Change: And then if you put that together it means we have a bit of a cash headwind from inventory compared to our prior forecast and that's mainly coming from from.
Speaker Change: From our bikes.
Speaker Change: Also had a few payment timing benefits that pushed from Q2 into Q3 that helped Q2 cash flow about well will impact us a bit and in Q3.
Liz Cottington: Yeah, sure. In terms of the mix, I think the question was about what are we thinking in terms of our mix going forward into the back half of the year. As far as kind of the hardware sales piece of the business, from a bike rental perspective, we are leaning into that. So we do expect to continue to see our mix shift toward the bike rental or the fast rental. In terms of third-party, for the back half of the year, our third-party business is impacted by a lot of key moments in those third-party channels. And so we will lean into those, and depending on how well those actually do, that may result in some mix shift into third-party at certain moments. But we don't expect it to be a significantly higher portion of our sales in the back half of the year versus the first half of the year. We just don't comment on TREAD.
Speaker Change: Now the other question was about tick tock and Lulu Lemon I can probably take the Lulu piece Barry I don't know if you want to achieve is anchored on.
Speaker Change: $10 billion I think wanted confirmation Oh, yeah. So yes, our Lulu lemon partnership at least thought they were talking about the studio.
Speaker Change: Studio all access numbers that have the what was formerly known as the near our hardware product.
Speaker Change: That performed as expected actually if there are slightly better than we expected so that is on track.
And then tictoc.
Speaker Change: That's that is really a marketing relationship with Tic Toc.
Speaker Change: We you know it's early days, we don't have a lot of explicit assumptions around how that is going to provide upside to our to our financials going forward in Q3 and Q4.
Yes.
Barry McCarthy: I am pretty excited about some of the content that we're going to bring to the platform. It'll be oriented towards more performance athletes, particularly marathon training. We entered into partnership with New York Road Runners. I'm super excited about that. And we filmed the New York marathon course in 3D this year.
Speaker Change: In the third week of.
Speaker Change: Of the tick tock.
We've seen a very substantial increasing and.
Speaker Change: The number of pieces of content.
Speaker Change: And those three weeks.
Speaker Change: We treat compared to week, one I think it was about a 50% increase and we've seen a <unk>.
Speaker Change: <unk> increase in total views, but it's it's.
Speaker Change: Much too early to.
Barry McCarthy: And that'll be available on our platform for runners who are training for the marathon. And we also captured the metadata. And so the elevation on the treadmill will automatically change as you progress down the course, and we hope to expand that to other leading marathons in the world and continue to lean in to that segment of the marketplace, which I think helps to reposition the brand in important ways.
Speaker Change: To know where that's going to land we're excited.
First.
Speaker Change:
Speaker Change: Okay.
Speaker Change: Live class had over 130000 views.
Speaker Change: Pretty good start, but I'm sure we can do much better than the important thing to note with we're reaching a demo.
Speaker Change: Thats much younger and Tictoc is proving to be an enormously effective platform to help us do that.
Speaker Change: So we want to lean into that and I think that if we do it well it has implications for growth in app.
Speaker Change: But.
Speaker Change: It's way too early to.
Speaker Change: To have any meaningful insights yet the other thing I'd say is for those of you who saw the headlines yesterday that tictoc squared off with Universal music rights.
Operator: Thank you. One moment for our next question, and that will come from the line of Ron Josie with Citi. Your line is open. Great, thanks for taking the question. Hi, Barry. Hi, Liz.
Speaker Change: That doesn't implicate our marketing agreement are our content on Tictoc is fully licensed with the locals.
Ron Josie: I wanted to ask about engagement, Barry. It was up 6% year over year. And, you know, just curious, can you tell us how engagements have grown on the platform over the last several years with help from offering more content across more devices. Of course, the app.
Speaker Change: There is one thing I wanted to comment on with regard to the $10 million of Lululemon for the studio all access numbers that was just reflective of November and December so.
Operator: Are we seeing members adopting more of a hybrid style, or is it one or the other? Question one. And then, Barry, you mentioned in the letter you'd be disappointed the team can't improve performance in the current quarter as it did in the second quarter. Just talk to us about some of the improvements you saw in 2Q that helped numbers come in better than. Terri, I was having trouble hearing.
Speaker Change: Just two months in.
Speaker Change: In Q2, and it will be obviously, a full quarter in Q3 and beyond.
Speaker Change: Coming back to the cash flow thing here is what I would say, let's remind ourselves what the two objectives for the business one wanted to stop the bleeding, yes. There is.
Speaker Change: Grow the business.
Speaker Change:
Speaker Change: I would hope that we would generate more cash flow in the second half of the year than we currently think we are going to but the important thing is.
Barry McCarthy: During the second quarter, improvement in what? Health? What helped us beat Q2, is that the question? Yeah, and I think you said you'd be disappointed if the team couldn't improve performance in the quarter similar to 2Q. So curious what happened in the last quarter to maybe do better here. Yeah. I'll do part of it, and Liz will take part.
We still think we will cross the finish line and get cash flow positive in Q4.
Speaker Change: And if you look at our balance sheet.
Speaker Change: It's not going away.
Speaker Change: For a long time was a systemic threat.
Speaker Change: So.
Speaker Change: Because of that we're able to focus on renewed growth now what have we accomplished in the last two years to assist with that well.
Barry McCarthy: Well, as you mentioned, engagement was up six percent. The connected fitness... engagement was up 4% year over year, and the app was up 7% year over year. We have not really made significant progress yet on personalization.
Speaker Change: There's been very little product innovation, we reintroduced an existing product drug class and we launched the railroad, which mostly we sell to existing subscribers and a little bit.
Speaker Change: To new members.
Speaker Change: So not much on the product side, a lot of innovation with respect to the business model different go to market strategies, three P and fast.
Barry McCarthy: I should say differently, we've made good progress, but we can run a lot faster, and we can do significantly better, and I am tremendously excited about the work that we are doing now and the insights that Nick Caldwell brings to the table. And I think a year from now, we're going to be in a significantly better place, and it will have a really positive impact on engagement. And we know that engagement is a big driver of churn. So, churn was down in the quarter, and engagement was up. And I think there are opportunities to continue to broaden engagement. We're doing some really interesting things in the content team on different platforms that are contributing to the overall improvement in the user experience. For example, in entertainment, with YouTube video and NBA League Pass. Just by way of example, and we've seen a very substantial increase in engagement in that content amongst TRED users. We've come a long way, but we're going to come a lot farther and faster in the foreseeable future, and certainly, AI will play an important role here.
Speaker Change: Being two noteworthy examples I think what youre going to see in the next two years.
Speaker Change: Uh huh.
Speaker Change: Significant product innovation.
Speaker Change: And.
Speaker Change: Which I'm very excited about because I think.
Speaker Change: We have a real shot at changing in a meaningful way the growth trajectory of the business.
Speaker Change: And one moment for our next question.
Speaker Change: Yes.
Arnie Sherman: And that will come from the line of our niche Sherman with Bernstein. Your line is open.
Archie Sherman: Great. Thank you.
Bernie Sherman: You've talked about the seasonality of the business with more growth clustered in the winter months can you square that with your view of flat growth in Q3, which is a winter quarter, especially in the light of all the successful initiatives you've highlighted in your letter and then on the other side of this youre lapping a weak Q4 this year.
Bernie Sherman: And do you expect positive growth are you comfortable with having fully lapped the seasonality effect at that point. So from Q4 onward, youre basically like for like on seasonality.
Well our view on.
Bernie Sherman: Maybe we've communicated poorly, but our view on seasonality hasn't hasn't changed actually.
Bernie Sherman: <unk>.
Liz Cottington: Yeah, a few things to add about our outperformance in Q2. So some of the areas that really worked well for us were our bike rental at Bass, the third party, and our refurbished inventory sales. Our bike sales. These all outperformed our internal expectations for the quarter, which is great. And our bike rental business also benefited from the fact that we had lower churn, so that helped with subscribers. And we launched self-service buyouts on our platform, which was a really great win because we saw 11% of our rental members buy out in the quarter, which also contributed to some of the outperformance. There are some other factors that are impacting our subscriber growth for the quarter. As we mentioned, our hardware demand was a bit lower overall than we forecasted, but we had some offsetting tailwinds that benefited us. First, our supply chain team did a great job and outperformed in terms of delivery efficiency.
Bernie Sherman: It is Q2 sort of holiday season, which drives 40 plus percent of the annual volume.
Bernie Sherman: And.
Bernie Sherman: And.
Bernie Sherman: And there is and there is not much seasonality in the rest of the year slows in the summer months, a little bit but.
Bernie Sherman: That would be the only other qualifier I would I would mention.
Bernie Sherman: And I also think it depends on what Youre looking at if Youre if youre looking at subscribers, we do expect to grow subscribers in Q3.
Bernie Sherman: So both on the connected side as well as the upside down.
Bernie Sherman: We did deal with.
Bernie Sherman: Seat post recall beginning in may of last year and that certainly caused a lot of softness.
Bernie Sherman: The one bike and what we've been living with that softness.
Bernie Sherman: The one bike ever since.
Bernie Sherman: It's not like consumers suddenly.
Liz Cottington: That means we had a bit of a pull forward in our deliveries into Q2 that we had expected to have in Q3. We also had faster subscription activations in the quarter than we expected. Sometimes, over the holidays, people lag a bit with activating their subscriptions, and we saw that was faster than we expected, too, so that helped with subscribers.
Bernie Sherman: Rediscovered a love for that product and the aftermath, we see significantly different trajectory for unit growth for for bike plus by the way but.
Bernie Sherman:
Bernie Sherman: And also our treadmill products, we're seeing we're seeing caught up there sorry, I didn't mean to imply that wasn't the case I just meant to say that.
Operator: And then another benefit that we had is that we had lower new subscription pauses in the quarter and higher than expected reactivations from a pause state than we expected. So that helped overall retention and is one of the drivers of our better than expected Q2 churn results. Another thing that is really important to understand about our performance in the quarter is the secondary market. That continues to outperform our expectations and was a key contributor to subscriber growth in the quarter. Thank you. One moment for our next question, and that will come from the line of Andrew Boone with JMP Securities. Your line is open. Thanks so much for taking my questions.
Bernie Sherman: Are you expecting sort of a resurgence in demand.
Bernie Sherman: See posted recall for the one bank debt that really hasn't that hasn't happened.
Speaker Change: And if I can ask a quick follow up do you believe at this point youre kind of huge inflection in growth. Your 2000 22021 cohorts have those COVID-19 users now sort of normalized in terms of churn and Youre trying level is now back to normal across cohorts, including the cobot cohort.
Speaker Change: Yes, I would assume that's the case, yes.
Speaker Change: I think there was a short thesis that maybe they came in with Covid and they're all going to play out the door afterwards and that just that's just flat wrong. If you look at our churn profile, our turn rates and you look at the monarch on a cohort basis like a 12 month churn rate by cohort.
Andrew M. Boone: I wanted to ask about the increase in media spend that you guys called out in the letter. As we get further away from the relaunch of the digital app, how should we think about marketing, especially as you just mentioned, the pull back on overall demand for hardware. And then, Liz, is there anything you can call out in terms of connected fitness course margins going forward that stepped up in the quarter? How do we think about that for the back half of the year and then going forward? Thanks so much.
Speaker Change: If not it's not coming down substantially in any way.
Speaker Change: They only factors that are influencing add one more comment the only factors that do influence our time or the mix into the bike rental which we've talked about in prior quarters, where our bike rental subscriptions do you have a higher churn rate than our regular all access members. Although we are working to bring that down and it did improve quarter over quarter.
Speaker Change: In Q2, which is great.
Liz Cottington: So the first question sounds like it was about the increase in media spend that we saw in Q2. So we always generally or typically see an increase in our media spending in Q2 because it is our holiday quarter, and we use that as a way to drive leads and demand for our hardware products and our apps on all of our products. In the back half of the year, we do expect to spend less on media just seasonally. So we do expect lower quarterly media spending going forward. Now, remember, another thing to understand about our business, and I will come back to this on these calls, is to talk about LTV to CAC. And so, you know, we're trying to optimize for that for the business. And so when we look at our media spending, we are trying to make sure that, you know, our media spending is efficient and drives a, you know, an efficient LTV to CAC. Definitely over 1.
Speaker Change: Then also I think we've talked about in prior calls that the secondary market, which is the people who buy a bike not through us, but there's someone else like throw marketplace of some sort that those do have a slightly higher churn than people, who buy directly from us.
Speaker Change: And so as that increases that will put some pressure on our churn as well, but our underlying trends are all access members that come through it has it is pretty stable.
Speaker Change: Thank you one moment for our next question.
Yes.
Speaker Change: Okay.
Speaker Change: Our next question will come from the line of Edward <unk> with Piper Sandler Your line is open.
Hey, guys two quick ones from me I guess first Barry a bigger picture question.
Edward: <unk> been at this for some time and certainly had some success in turning the business around but I guess as you step back and think about connected fitness and growing at it seems like you've had most success, we were able to lower the cost of ownership, so I'm trying to understand it.
Liz Cottington: Ideally, we want to be in the 2 to 3x range. We weren't there for Q2, but we were above 1. And our goal is to, you know, move towards more and increasing media efficiency. Now, on the connected fitness growth margin, we do expect we aren't, we don't, you know, we don't guide specifically to connected fitness growth margin, but we do expect some improvement in the back half of the year, in part because our Tread Plus deliveries, which actually just started, will benefit growth margin in the back half. That that will be, you know, we do see a little bit of pressure from areas like bike rental as that continues to take share, and that will put a little bit of pressure on our connected fitness growth margin. But we do expect sequential quarterly improvement. Now, it is important to note, though, with growth margin coming back to the LTV to CAC piece, growth margin and promotional activity obviously affect growth margin. And so, you know, we're optimizing for LTV to CAC.
Edward: As further growth predicated on continuing to drive down cost of ownership and things like rental or is it still a marketing issue and then as a follow up just so I'm clear on the pop sale.
Edward: Was that aligned with the impairments you've taken and are there further impairments are necessary. When you closed that thank you.
Speaker Change: Let me acknowledge that you are quite right.
Speaker Change: That the go to market innovations that have resulted in.
Speaker Change: Lower cost of entry like.
Speaker Change: That's like Refurb.
And I have been enormously successful I mean fast is now a $100 million run rate business from from zero.
Speaker Change: And recruit.
Speaker Change: Excuse me Richard grew.
Speaker Change: Not quite 300% year over year.
Barry McCarthy: And if we see the opportunity to reduce our LTV by reducing our growth margin and optimizing our media spend accordingly, we'll make that trade-off and evaluate it as we go. I would say, at a high level, I'm pretty optimistic about our ability to try to bring more efficiency out of the marketing spend. And we're making some structural changes in the way that we run the business that will help contribute to increased operating leverage. And I'm being, I realize I'm being vague, but I'm being intentionally vague. But it's among the reasons why I have some optimism about that. Go forward, perform.
In the quarter and we see.
Speaker Change: Very fast growth in the secondary market north of 40%.
Speaker Change: Okay.
So.
Speaker Change: Value matters now.
Speaker Change: Now.
Speaker Change: So lots of ways to deliver value and one of the ways to do it which we had great success with Spotify and Netflix was.
Speaker Change: By investing in and the product.
Speaker Change: Is your experience.
Speaker Change: And I think theres, a tremendous opportunity for us going forward to lean into the performance aspect of the market with premium priced products.
Speaker Change: In order to.
Operator: Thank you. One moment for our next question. That will come from the line of Shweta Khajuria with Evercore ISI. Your line is open. Thanks a lot for taking my questions. I have two, please.
Drive new growth for us meaningful growth and I think in existence proof.
Speaker Change: There is a apathy.
Speaker Change: Appetite amongst consumers for that kind of positioning is the tread plus by way of example.
Shweta Khajuria: One, Liz, could you please talk about free cash flow? So your guidance now calls for lower expectations than what you talked about last quarter. You expect to have positive free cash flow in the fourth quarter and not for the full year. So help us think about why the change and what drove that.
Speaker Change: So if you give people something they want to be delighted to pay for it.
Speaker Change: But it has to be.
Speaker Change: But uniquely compelling.
Speaker Change: User experience.
Speaker Change: <unk>.
Speaker Change: Which is why we're leaning heavily into.
Speaker Change: Investing in product innovation.
Liz Cottington: And then the second question is how to think about the impact of TikTok and Lululemon. So, is $10 million a quarter that you quantified last time, did it come in better than expected? How should we think about it going forward? And then the impact of TikTok on P&L, please. Thank you.
Speaker Change: Now you have to have the right talent in the building to pursue that.
Speaker Change: We had some pretty interesting talent walk into the building last quarter.
Speaker Change: And.
Speaker Change: And I'm pretty optimistic based on.
Speaker Change: What's being discussed in the building today.
Speaker Change: And then just really quickly on that question about popped on impairments in Q2, we did book an impairment charge of roughly about $2 million.
Liz Cottington: Sure, so let's start with the free cash flow question. Why is our free cash flow outlook lower than we had previously expected? So for Q2, while our paid subscriptions for Connected Fitness outperformed our expectations, our hardware sales, as I mentioned earlier, were a bit softer than we expected. So we're projecting that softness from a trend perspective to continue into Q3 and Q4, and that creates a bit of a cash headwind for us. We're also continuing to see that mix shift into bike rental or FAS, and that puts pressure on our cash because, again, we don't collect all of that hardware revenue up front. And then if you put that together, it means we have a bit of a cash headwind from inventory compared to our prior forecast, and that's mainly coming from our bikes. We also had a few payment timing benefits that pushed from Q2 into Q3 that helped Q2 cash flow but will impact us a bit in Q3. Now, the other question was about TikTok and Lululemon. I can probably take the Lulu piece, Barry.
Speaker Change: Great.
Speaker Change: The value of popped in line with what we sold it for a net debt closed in early Q3.
Speaker Change: Okay.
Speaker Change: Thank you one moment our next question.
Speaker Change: That will come from the line of Youssef Squali with <unk> Securities. Your line is open.
Youssef Squali: Great. Thank you so a couple of questions, maybe starting with bike rental.
Youssef Squali: One of the.
Youssef Squali: Positive developments that you had in the business can you maybe just remind us about maybe the size of it today, but more importantly kind of the unit economics I think in the letter you mentioned attractive unit economics I'll have they.
Youssef Squali: Kind of.
Youssef Squali: Performed over time, where are we now relative to maybe.
Youssef Squali: The rest of the business.
Liz Cottington: I don't know if you want to talk about it. She was anchored on 10 million and, I think, wanted confirmation. Oh, yeah. So, yes, our Lululemon partnership, at least we're talking about the studio, the studio all access numbers that have the what was formerly known as the mirror hardware product that performed as expected, actually a slightly bit better than we expected. So that is on track. And then TikTok, that's really a marketing relationship with TikTok that we, you know, it's early days. We don't have a lot of explicit assumptions around how that is going to provide upside to our financials going forward in Q3 and Q4. Yeah, we're in the third week of the TikTok deal.
Youssef Squali: And then on Q4 guide Q.
Youssef Squali: Q4 is typically one of the weaker quarters, yet youre guiding for an inflection point to growth. There can you maybe just help us with.
Youssef Squali: The puts and takes as to what needs to happen for you.
Youssef Squali: To hit that milestone.
Speaker Change: I'm going to let as supposed to take most of that but I just wanted to make one observation about fast linking back to a previous question we had about seasonality.
Speaker Change: One thing we learned last year about fast and so again this year versus it is not very seasonal.
Speaker Change: <unk>.
Speaker Change: The demand seems to be pretty consistent across the calendar year now we did see accelerated growth in SaaS this quarter, but that's because of some work we've done on landing pages and the way we're merchandising it too to members to make it more easily discoverable and put it on level footing with.
Barry McCarthy: And we've seen a very substantial increase in the number of pieces of content, like, you know, in those three weeks, week three compared to week one, I think it was about a 50% increase. And we've seen a 3x increase in total views, but it's, it's much too early to know where that's going to land. We're excited; our first live class had over 130,000 views, which is a pretty good start, but I'm sure we can do much better than that.
Speaker Change: With the sale.
Speaker Change: Rather than bearing it down in the footnotes, where it previously lived.
Speaker Change: Coming into service.
Speaker Change: Google on Google.
Speaker Change: Google search by way of example, rather than.
Speaker Change: Bearing in.
Speaker Change: <unk>.
Speaker Change: Liz do you want to talk about the Q4, yeah. So let me let me first let me talk I'll I do want to provide a little bit of information about thoughts around the unit economics. So our unit economics for fast there are improving our churn was better than it was in Q1 as I mentioned, it's still higher than it is for those who buy our bikes.
Barry McCarthy: The important thing to know is that we're reaching a demo that's much younger than, and TikTok is proving to be an enormously effective platform to help us do that. So we want to lean into that. I think that if we do it, well, it has implications for growth and the app. But it's way too early to have any meaningful insights yet. The other thing I'd say is, for those of you who saw the headline yesterday that TikTok is squared off with Universal over music rights, what I want you to know is that doesn't affect our marketing agreement. Our content on TikTok is fully licensed with the label.
Speaker Change: Outright and then we're continuing to work on closing the gap between that rental churn and purchase trend, but but it did improve quarter over quarter. It was slightly under 5% and we've talked about being around 5% to 100 basis points quarter over quarter with 100 basis points of improvement quarter over quarter versus Q1.
Speaker Change: Part of that as a result of that we have an average payback is now averaging around 16 months, which is also an improvement over Q1, but one thing to note about that is that we are still using pretty rich mix of refurbished units.
Barry McCarthy: There is one thing I wanted to comment on with regard to the 10 million from Lululemon for the studio All Access members. That was just reflective of November and December. So, you know, it was just two months in Q2, and it will obviously be a full quarter in Q3. Coming back to the cash flow thing, here's what I would say. Let's remind ourselves what the two objectives for the business were. One was to stop the bleeding, and the other was to grow the business.
Speaker Change: And as we lower our churn going going forward and continue to make improvements there and also continue to provide the right incentive structure for our folks to buy out their rental we expect to be able to shift to a richer mix of new bikes at some point in the future as we continue to sell down sell through that refurbished inventory, while achieving an attractive payback recall.
Speaker Change: So that's all good news.
Speaker Change:
Speaker Change: Now there was a question about the Q4 inflection and I think that that is really looking at revenue growth.
Barry McCarthy: I hope that we generate more cash flow in the second half of the year than we currently think we're going to, but the important thing is we still think we will cross the finish line and get cash flow positive in Q4. And if you look at our balance sheet, you know that the business is not going away, which for a long time was a systemic threat. So because of that, we're able to focus on renewed growth. Now, what have we accomplished in the last two years to assist with that? Well, there's been very little product innovation. We reintroduced an existing product, Dread+, and we launched the rower, which we mostly sell to existing subscribers and a little bit to new members.
Speaker Change: Q4 is.
Speaker Change: From a subscriber perspective.
Speaker Change: Our guidance is that we'll end the year for connected fitness subs, just fly and if you look at our implied guidance has us ending just slightly above where we started the year and so it is a seasonally tough quarter for growth.
Speaker Change: And part of the revenue growth that you see in Q4 is driven by the fact that we will be continuing to deliver tried plus.
Speaker Change: So so again our truck pluck next to date, so far maybe that hopefully that will shift over time skus a lot towards existing subscribers rather than do one and.
Speaker Change: And again that makes sense, because we just relaunched it.
Barry McCarthy: So, not much on the product side. A lot of innovation with respect to the business model, different go-to-market strategies, 3P and fast, being two examples. I think what you're going to see in the next two years is significant product innovation, and I'm very excited about it because I think we have a real shot at changing in a meaningful way the growth trajectory of the business. And one moment for our next question. And that will come from the line of Anisha Sherman with Bernstein. Your line is open.
And so that will help bolster our revenue in Q4 on a year over year basis.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And that will come from the line of Simeon Siegel with BMO capital markets. Your line is open.
Simeon Avram Siegel: Hi, good morning, everyone. So.
Simeon Avram Siegel: So congrats on the strength of third party retailers can you remind us what the unit level revenue and margins look like for a bike sold or any equipment sold via a third party retailer versus when you sell it directly and then you called out and I think you've spoken a few times and encouragingly about the continued growth in the secondary market sales can you just let us know what roughly what percent of the current CF subscriptions are on.
Operator: Great, thank you. Barry, you've talked about the seasonality of the business, with more growth clustered in the winter months. Can you square that with your view of flat growth in Q3, which is the winter quarter, especially in the light of all the successful initiatives you've highlighted in your letter? And then, on the other side of this, you're lapping a weak Q4 this year, and you expect positive growth. Are you comfortable with having fully lapped the seasonality effect at that point? So from Q4 onward, you're basically like for like on seasonality?
Simeon Avram Siegel: Second life or so thank you.
Speaker Change: So the first question it sounded like it's related to unit economics for third party.
Speaker Change: So.
Speaker Change: From a gross margin perspective.
Speaker Change: Unit economics for selling through a third party channel like a Dick's sporting goods on Amazon are lower because obviously they are at that margin that we have to get to that at the wholesaler to that third party retailer, where we where are we sort of make up the difference on that is in our market our sales and marketing spend so we expect our customer.
Barry McCarthy: Well, our view on Maybe we've communicated poorly, but our D1 seasonality hasn't hasn't changed, actually. It is Q2, so the holiday season, which drives 40 plus percent of the annual volume. And, And there's not much seasonality in the rest of the year. It flows in the summer months a little bit, but that would be the only other qualifier I would mention.
Speaker Change: Acquisition costs through those channels to be substantially lower enough, what we optimized for as well as driving as much of that doesn't mean that that's incremental units through those channels as they possibly can on there. So that's the key difference. So you see the gross margin pressure from third party and it should be offset and that's our that's how we that's how we model it and that's how we we run those back.
Speaker Change: Those channels with more efficient sales and marketing spending.
Speaker Change: Now the.
Speaker Change: The other question was what percentage of our connected fitness subs are coming from the secondary markets I think.
Liz Cottington: And I also think it depends on what you're looking at. If you're looking at subscribers, we do expect to grow subscribers in Q3. So both on the Connected Fitness side as well as the app side. Yeah, now, we did deal with the seat post recall beginning in May of last year, and that certainly caused a lot of softness on the V1 bike.
Speaker Change: It's it's.
Speaker Change: It is increasing quarter over quarter.
Speaker Change: Sure.
Speaker Change: In Q2, it was actually slightly down as a percentage of our total gross additions versus Q1, just under just under 30% coming from that channel.
Speaker Change: Let me come back to <unk> for a minute.
Speaker Change: <unk>.
Barry McCarthy: But we've been living with that softness for V1 bike ever since, and so it's not like consumers suddenly rediscovered a love for that product. In the aftermath, we see a significantly different trajectory for unit growth for for bike plus, by the way, but also our treadmill products; we're seeing growth there. Sorry, I didn't mean to imply that wasn't the case.
Speaker Change: And and and.
Speaker Change: Let's talk about fast and the same concept that rental program in the same context.
It only makes sense to give up margin. If the customers you are acquiring are or if a large percentage is incremental and it's relatively easy to do.
Speaker Change: Do the math to figure out what the crossover point is where you are economically advantaged.
Speaker Change: By making the lower margin trade off.
Speaker Change: In Q4, we had explosive growth with a three peat partners.
Barry McCarthy: I just meant to say that if you're expecting a sort of resurgence in demand, Post-Seq, Post-Recall for the B1 bike, that really hasn't happened.
Speaker Change: And.
Speaker Change: And and it cost us an incremental 80.
Speaker Change: And so it was really it.
Speaker Change: It was really important lesson and once we were in the end of the quarter. There was no way to undo that.
Anisha Sherman: And if I can ask a quick follow-up question, do you believe at this point your kind of huge inflection and growth, your 2020-2021 cohorts, have those COVID users now, you know, sort of normalized in terms of churn, and your churn level is now back to normal across cohorts, including the COVID cohort? Yes, I would assume that's the case. Yeah. I think there was a short thesis that maybe they came in with COVID and they're all going to flee out the door afterwards. And that just, that's just flat wrong.
Speaker Change: The sales of inventory that debt.
Speaker Change: Through our third <unk> partners that were competing with us during the holiday season.
Speaker Change: So what we've learned is there periods.
Speaker Change: We're uniquely special.
Speaker Change: We're just those partners and digitally.
Speaker Change: Prime day by way of example are on promotion.
Speaker Change: We can move a whole lot of units.
Barry McCarthy: If you look at our churn profile, our churn rates, and you look at them on a, on a cohorted basis, like at a 12 month churn rate by cohort, you know, it's, it's, it's not, it's not coming down substantially in any way. The only factors that are influenced, just to add one more comment, the only factors that do influence our churn are the mix into the bike rental, which we have talked about in prior quarters, where our bike rental subscriptions do have a higher churn rate than our regular all-access members. Although we are working to bring that down, and it did improve quarter over quarter in Q2, which is great. And then also, I think we've talked about in prior calls, the secondary market, which is the people who, you know, buy a bike, not through us, but through someone else, like through a marketplace of some sort. Those do have a slightly higher churn than people who buy directly from us. And so, as that increases, that will put some pressure on our churn as well, but our underlying churn for our all-access members that come through is pretty stable. Thank you. One moment for our next question. Our next question will come from the line of Edward Yerma with Piper Sandler. Your line is open. Hey guys, Two quick ones from me.
Speaker Change: And there are other times of the year when.
Speaker Change: You could come to US you could go to them.
Speaker Change: Consumer might be indifferent, but.
Speaker Change: Not.
Speaker Change: We need to be more thoughtful about.
Speaker Change: Our sell through to those partners during those periods of time.
Speaker Change:
Speaker Change: I think we've talked about the incrementally on fast it's north of 60%.
Speaker Change: And the like more like $63 62 pretty consistently since we started so.
Speaker Change: Even though the economics as compared with the.
Speaker Change: The cash flow aspects of it are less attractive than the sell through we're absolutely able to attract a significant audience that we wouldn't otherwise be attracting.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And that will come from the line of John Blackledge with TD Cowen Your line is open.
John Blackledge: Great. Thanks, just on the chart plus list kind of just addressed my question is this demand more so from existing members or is it a mix of existing and new members I think she said more so from existing members now, but I guess as we get through the second half and into next year.
Would you see would you expect to see more demand from new members given the market is two times bigger.
John Blackledge: Then the bike market and then my second question on paid apps. The high end it looks like the high end of paid App subs. It was down a little bit just how should we think about trajectory of paid up subs.
Edward Yerma: I guess first, Barry, a bigger picture question. You've been at this for some time and certainly had some success in turning the business around. But I guess as you step back and think about connected fitness and growing it, it seems like you've had the most success where you're able to lower the cost of ownership. So I'm trying to understand it.
Into the back half in and kind of into fiscal 'twenty five and beyond.
Speaker Change: I think we'll probably comment here John Thanks for the question.
John Blackledge: I think youre absolutely right.
Speaker Change: It's reasonable to expect that we would see a shift in the mix from existing members and new members because of course today.
Speaker Change: Really the only members who know what the plus represents our the existing members.
Barry McCarthy: Is further growth predicated on continuing to drive down the cost of ownership to things like rental? Or is it still a marketing issue? And then, as a follow-up, just so I'm clear on the pop sale, was that aligned with the impairments you've taken? And are there further impairments that are necessary when you close that?
Speaker Change:
Speaker Change: We also are 10 plus is actually just reviewed as the best overall trend in 2024 by C. N N, which is which should also help.
Barry McCarthy: Thank you. Let me acknowledge that you're quite right that the go-to-market innovations that have resulted in lower costs of entry, like FATs, like refurbs, have been enormously successful. I mean, FAST is now a $100 million run rate business from zero, and Reefer grew not quite 300% earlier in the quarter. And we see very fast growth in the secondary market north of 40%. So, value matters. Now.
Speaker Change: Grow the awareness of the product.
Speaker Change: And with respect to the to the App.
Speaker Change: <unk>.
Speaker Change: I think in the past, we've referred to it as well.
Speaker Change: The best product, we have that nobody knows about.
Speaker Change: The unaided brand awareness, which was down a percent.
Speaker Change: As is.
Speaker Change: Is it brand awareness of 6%.
Speaker Change: There was a question about the range. So I can I can take that part.
Speaker Change: No.
Speaker Change: I'm, sorry hang on Sac.
Barry McCarthy: There are lots of ways to deliver value, and one of the ways to do it, which we had great success with at Spotify and Netflix, was by investing in the product and the user experience. And I think there's a tremendous opportunity for us going forward to lean into the performance aspect of the market with premium price products in order to drive new growth for us, meaningful growth. And I think the proof that there's an appetite amongst consumers for that kind of positioning is the Tread Plus, by way of example.
Sac: Yeah, I just wanted to talk about sort of momentum and where we are in the learning curve and.
Sac: Because I think it's important to us about our go forward view.
Speaker Change: So is.
Speaker Change: Is it a very high level I think a fair question is.
Speaker Change: So okay. So we restructured our app pricing model.
Speaker Change: As the business better off for having done it.
Speaker Change: And the answer is at today not yet.
Speaker Change: But we think that crossover point happens in June.
Speaker Change: And we're pretty optimistic about that.
Speaker Change: Trend line, we're on now.
Speaker Change: We flipped bolted early when we focus primarily on free.
Liz Cottington: So if you give people something they want, they'll be delighted to pay for it, but it has to be a uniquely compelling user experience. And that's why we're leaning heavily into investing in product innovation. And now, you have to have the right talent in the building to pursue that. We had some pretty interesting talent walk into the building last quarter, and I'm pretty optimistic based on what's being discussed in the building today. And then just really quickly on that question about POP and impairments. In Q2, we did book an impairment charge of roughly $2 million to bring the value of POP in line with what we sold it for.
Speaker Change: We struggled with that for.
Speaker Change: Several months and then we pivoted to focusing on the paid piece and ever since we focused on the paid piece.
Speaker Change: We have seen significant progress.
Speaker Change: And.
Speaker Change: We continue to make important steps in improving the overall user experience and by the way this is ware.
Speaker Change: The work we're doing in personalization.
Speaker Change: Well be having its.
Speaker Change: Its biggest impact and where some of the.
Speaker Change:
Speaker Change: Partnerships with stripe flake tick tock by way of example.
Speaker Change: <unk> will help drive significant growth I think okay assortments over you.
Speaker Change: I was just going to point out that if you look at our guidance. What it implies is that Q2 was sort of the low of our paid apps subscriber base that makes sense because we just completed the timeframe that our legacy paid up members were able to receive the a plus.
Operator: And that deal closed early. Thank you. One moment for our next question, which will come from the line of Yousef Squali with Truist Securities. Your line is open. Great, thank you. So a couple of questions, maybe starting with bike rental.
Speaker Change: Plus level of content for the App, one price and we were actually quite.
Speaker Change: In a positive way surprised that on the retention level of those subscribers.
Yousef Squali: That's one of the, Thank you so much for all the positive developments that you've had in the business. Can you maybe just remind us about maybe the type of it today, but more importantly, kind of the unit economics, I think in the letter you mentioned, attractive unit economics. How have they kind of performed over time? Where are we now relative to maybe the rest of the business? And then on the Q4 guide.
Speaker Change: Given the expiration of their legacy period, so we feel like we've sort of bond it bottomed in Q2 and now the question is how quickly can we grow the sub base from there over the next couple of quarters and as Barry pointed out Theres a lot of great things that we are working on.
Speaker Change: These features will continue to rollout over the coming quarters and saw there is some uncertainty on how quickly we will be able to grow it.
Speaker Change: And then there's also things like because we talk about our peloton for business offerings, and our corporate wellness space, that's a great opportunity for up.
Operator: Q4 is typically one of the weaker quarters that you're guiding for the inflection point to growth there. Can you maybe just help us with the puts and takes as to what needs to happen for you guys to hit that milestone? Thank you.
Speaker Change: We are those deals they are they are there negotiations and they do take time and so there's a lot of uncertainty on when those deals and negotiations we'll close those.
Speaker Change: Those could be a great accelerant in app subscription growth for us, but there isn't a whole lot contemplated in our guidance and that the next couple of quarters for that to happen. So theres a lot of upside potential. It just reflects the uncertainty of how quickly we will be able to accelerate that over the next couple of quarters, but we're a very sad we're super optimistic about it theres lots.
Barry McCarthy: I'm going to ask Liz to take most of that, but I just want to make one observation about FAS, linking back to a previous question we had about seasonality. So, the one thing we learned last year about FAS and saw again this year is that it's not very seasonal, but the demand seems to be pretty consistent across the calendar year. Now, we did see accelerated growth in FAS this quarter, but that's because of some work we did on landing pages and the way we merchandised it to members to make it more easily discoverable and put it on a level footing with the sale, rather than burying it down in the footnotes where it had previously lived and allowing it to serve on Google Search, by way of example, rather than burying it. Liz, Yeah, so first, I do want to provide a little bit of information about FAFSA in relation to unit economics.
Speaker Change: Great signs, particularly on the lower churn front and the engagement front that suggests that the app could be a great opportunity for us to accelerate growth.
Speaker Change: Thank you and our last question for the day will come from the line of Lee Horowitz with Deutsche Bank. Your line is open.
Lee Horowitz: Great. Thanks for taking the question Barry you talked in the letter about outgrowing the overall connected fitness market.
Lee Horowitz: Subs growing sort of marginally year on year, which would suggest that the overall market sort of remains depressed at this point I guess, how do you think about sort of whats holding your market back from growing more meaningfully at this point how do you think about the conditions that may be allow some of those headwinds to abate and sort of what do you think about the sort of long term.
Liz Cottington: So our unit economics for FAFSA are improving. Our churn was better than it was in Q1. It's, as I mentioned, still higher than it is for those who buy our bikes outright, and we're continuing to work on closing the gap between that rental churn and purchase churn. But it did improve quarter over quarter.
Lee Horowitz: Sort of growth rate of this overall market at a steady state.
Speaker Change: I don't really know what the long term growth rate that the market is it's got to be at least population growth.
Liz Cottington: It was slightly under 5%, and we've talked about it being around 5%. So 100 basis points quarter over quarter? Yeah, 100 basis points of improvement quarter over quarter versus Q1. Part of that, as a result of that, we have our average payback is now averaging around 16 months for FAFSA, which is also an improvement over Q1.
Speaker Change: Thank you.
Speaker Change: With a couple of accelerants.
Speaker Change: The more you age the more important it is that you invest in your health and the more likely you are to have disposable income available to make that investment.
Speaker Change: For one.
Speaker Change: Two.
Speaker Change: No question that product innovation drives growth.
Speaker Change: And Theres a lot of really interesting technology coming into the marketplace.
Speaker Change: To help drive that.
Liz Cottington: But one thing to note about that is that we are still using a pretty rich mix of refurbished units. And as we lower our churn going forward and continue to make improvements there and also continue to provide the right incentive structure for folks to buy out their rentals, we expect to be able to shift to a richer mix of new bikes at some point in the future as we continue to sell down and sell through that refurbished inventory while achieving an attractive payback result. So that's all good news.
Speaker Change: In our case, we've really only scratched the surface in Kansas location.
Speaker Change: It's going to be a vector for growth for us was mentioned.
Speaker Change: Corporate wellness.
Speaker Change: That is having a moment in corporate America for sure.
Speaker Change: Where companies are investing.
Speaker Change: At the margin increasingly in.
Speaker Change: And fitness.
Speaker Change: Nutrition.
Speaker Change: Mental wellness by way of example.
Speaker Change: We are well positioned to participate.
Liz Cottington: Now, there was a question about the Q4 inflection, and I think that that is really looking at revenue growth. Q4 is, you know, from a subscriber perspective, our guidance is, is, that will end the year for Connected Fitness Subs just slightly above where we started the year. So it is a seasonally tough quarter for growth.
Speaker Change: In that.
Speaker Change: And then.
Speaker Change: Lastly, it's pretty clear from the introduction of ROE and the introduction of <unk> plus innovation drives growth.
Speaker Change: And with.
Speaker Change: We've been busy saving ourselves the last two years.
Speaker Change: And now we're positioned to.
Speaker Change: Invest in innovation again, it's innovation that put us on the map in the first place.
Speaker Change: A lot of talent in the building, it's a matter of getting organized and focused in a really productive way.
Speaker Change: Yeah.
Liz Cottington: And part of the revenue growth that you see in Q4 is driven by the fact that we will be continuing to deliver Tread Plus. And so, so again, our Tread Plus mix to date so far, maybe that will, hopefully that will shift over time, skews a lot towards existing subscribers rather than new ones. And again, that makes sense because we just relaunched it, and so that will help bolster revenue in Q4 on a year over year basis. Thank you.
Speaker Change: <unk>.
Speaker Change: That is going to be an impactful player. There I think laurent is going to be quite impactful.
Speaker Change: With respect to our approach to marketing as well plus there are bunch of.
Speaker Change: Product innovation drives growth geographic expansion drives growth.
Speaker Change: The unaided brand awareness for the product in the U S is 55%.
Speaker Change: Anybody know by way of comparison with the unaided brand awareness for Starbucks.
Speaker Change: Look.
Speaker Change: North of 90.
Speaker Change: So there is.
Speaker Change: Still a lot of untapped potential even in the U S by way of comparison, the unaided brand awareness in the U K, 37%.
Operator: One moment for our next question, and that will come from the line of Simeon Siegel with BMO Capital Markets. Your line is open. Thanks, hi, good morning, everyone.
And in Germany.
Speaker Change: And so it's.
Speaker Change: I don't know what it is latam, but it's got to be.
Simeon Avram Siegel: So congrats on the strength of third-party retailers. Can you remind us what the unit level revenue and margins look like for a bike sold or any equipment sold via a third-party retailer versus when you sell it directly? And then you called out, and I think you've spoken a few times encouragingly about the continued growth in secondary market sales. Can you just let us know roughly what percent of the current CF subscriptions are in their secondary life or so? Thank you.
Speaker Change: Significantly lower.
And we've got a lot of strength in the latinx community from a content perspective so.
Speaker Change: Product innovation geographic growth.
Speaker Change: And.
Speaker Change: And.
Speaker Change: Product relevance and <unk>.
Speaker Change: Commercial and corporate wellness.
So it won't be vectors for to drive.
Speaker Change: An acceleration in sales in the next couple of years.
Speaker Change: Yes.
Peter Stabler: And Mr. Stabler is that was our final question I will turn the call back over to you for any closing remarks.
Liz Cottington: So the first question sounded like it was related to unit economics for third parties. So, from a gross margin perspective, you know, the unit economics for selling through a third-party channel like Dick's Sporting Goods or Amazon are lower because, obviously, there is that margin that we have to give to the wholesaler to that third-party retailer. Where we sort of make up the difference on that is in our sales and marketing spend. So we expect our customer acquisition costs through those channels to be substantially lower, and that's what we optimize for, as well as driving as much of those units as incremental units through those channels as we possibly can. And so that's the key difference.
Speaker Change: Thank you everyone for joining us today, we look forward to speaking with you next quarter have a good day.
Speaker Change: Thank you all for participating. This concludes today's program you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Barry McCarthy: So you see the gross margin pressure from third-party, and it should be offset, and that's how we model, and that's how we run those channels with more efficient sales and marketing spend. Now, the other question was what percentage of our connected fitness subs are coming from the secondary market. It's, it's, it's increasing quarter over quarter. In Q2, it was actually slightly down as a percentage of our total growth additions versus Q1, just under 30% coming from that. Let me come back to 3P for a minute.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Yes.
Speaker Change: Mhm.
Speaker Change: Sure.
Speaker Change: [music].
Barry McCarthy: And, and, and let's talk about FAST in the same context, the rental program in the same context. It only makes sense to give up margin if the customers you're acquiring are if a large percentage is incremental. And it's relatively easy to, you know, do the math to figure out what the crossover point is where you're economically advantaged by making the lower margin trade-off. Now, in Q4, we had explosive growth with the 3P partners, and it cost us incrementality. And so it was really, it was a really important lesson. And once we were at the end of the quarter, there was no way to undo the sales of inventory that to our third three-peat partners that were competing with us during the holiday season.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Barry McCarthy: So what we learned is there are periods that are sort of uniquely special, where just those partners, individually, prime Date, by way of example, are on promotion. And we can move a lot of units, and there are other times of the year when you could come to us; you could go to them.
Barry McCarthy: Consumers might be indifferent, but we're not, and we need to be more thoughtful about our sell-through to those partners during those periods of time. I think we talked about the incrementality on fats, it's north of 60% in, more like 63 62 pretty consistently since we started. So even though the economics as compared with the cash flow aspects of it are less attractive than the sell-through, we're absolutely able to attract a significant audience that we wouldn't otherwise be able to attract. Thank you. One moment for our next question, and that will come from the line of John Blackledge with TD Cal, and your line is open.
Operator: That's great. Thanks. Just on TRED+, Liz kind of just addressed it. My question is, is demand more so from existing members, or is it a mix of existing and new members? I think she said, you know, more so from existing members now, but I guess as we get through the second half and into next year, would you expect to see more demand from new members given, you know, the market is two times bigger than the bike market? And then my second question on paid apps, the high end. It looks like the high end of paid app subs is down a little bit. Just how should we think about the trajectory of paid app subs, you know, kind of into the back half and, you know, kind of into fiscal 25 and beyond? Thank you. I think we'll probably go in here, John.
John Blackledge: Thanks for the question. I think you're absolutely right that it's reasonable to expect that we would see a shift in the mix from existing members to new members because, of course, today, really, the only members who know what the plus represents are the existing members. I don't know.
Barry McCarthy: We also, our tread plus is actually just reviewed as the best overall tread in 2024 by CNN, which should also, you know, help grow the awareness of the product, and with respect to the app. I think in the past, we've referred to it as the best product we have that nobody knows about, and the unaided brand awareness, which was down a percent, is 6%. There was a question about the range, so I can I can take that part. So, you know, sorry, hang on a sec.
Barry McCarthy: Yeah, I just wanted to talk about sort of the momentum and where we are on the learning curve because I think it informs us about our go-forward view. So at a very high level, I think a fair question is, okay, so we restructured our app pricing model. Is the business better off for having done it?
Barry McCarthy: And the answer is, today, not yet. But we think the crossover point happens in June, and we're pretty optimistic about the trend line we're on now. We got off to a bad start when we focused primarily on the free.
Barry McCarthy: We struggled with that for several months, and then we pivoted to focusing on the paid piece. And ever since we focused on the paid piece, we have seen significant progress. And we continue to make important steps in improving the overall user experience. And by the way, this is where. The work we're doing in personalization will have its biggest impact and where some of the partnerships we've struck, like TikTok, by way of example, will help drive significant growth. Okay, Liz. Over to you.
Liz Cottington: And I was just going to point out that if you look at our guidance, what it implies is that Q2 was sort of the lowest for our paid app subscriber base. That makes sense because we just completed the time frame where our legacy paid app members were able to receive the app plus level of content for the app one price. And we were actually quite, in a positive way, surprised by the retention level of those subscribers, given the expiration of their legacy period. So we feel like we've sort of bottomed into Q2. And now the question is, how quickly can we grow the sub base from there over the next couple of quarters? And, as Barry pointed out, there are a lot of great things that we are working on. And those features will continue to roll out over the coming quarters.
Liz Cottington: And so there is some uncertainty on how quickly we'll be able to grow it. And then there's also things like, as we talk about our Peloton for business offerings and our corporate wellness space, that's a great opportunity for the app. But those deals, they are negotiations, and they do take time. And so there's a lot of uncertainty on when those deals and negotiations will close.
Liz Cottington: And that could be a great accelerant for app subscription growth for us. But there isn't a whole lot contemplated in our guidance for the next couple quarters for that to happen. So there's a lot of upside potential. It just reflects the uncertainty of how quickly we will be able to accelerate that over the next couple of quarters. But we're, as Barry said, super optimistic about it. There are lots of great signs, particularly on the lower churn front and the engagement front that suggest that the app could be a great opportunity for us to accelerate growth. Thank you. And our last question for the day will come from the line of Lee Horowitz with Deutsche Bank. Your line is open.
Operator: Great, thanks for taking the question. Barry, you talked in the letter about outgrowing the overall connected fitness market, you know, subs growing sort of marginally year on year, which would suggest that the overall market sort of sort of remains depressed at this point. I guess, how do you think about sort of what's holding the market back from growing more meaningfully at this point? You know, what do you think about the conditions that maybe will allow some of those headwinds to abate?
Barry McCarthy: And sort of what do you think about the sort of long-term sort of growth rate of this overall market at a steady state? Thanks. I don't really know what the long-term growth rate of the market is. It's got to be at least population growth, I would think, with a couple of accelerants. The more you age, the more important it is that you invest in your health, and the more likely you are to have disposable income available to make that investment, for one.
Barry McCarthy: Two, no question that product innovation drives growth, and there's a lot of really interesting technology coming into the marketplace to help drive that. In our case, we really only scratch the surface of gamification. That's going to be a vector for growth for us. Liz mentioned corporate wellness. That is having a moment in corporate America, for sure, where companies are investing increasingly in fitness, nutrition, and mental wellness, by way of example. And I think we're, we're well positioned to participate in that. And then, lastly, it's pretty clear from the introduction of Rho and the introduction of DREAD+ that innovation, drugs, growth. And we've been busy saving ourselves the last two years.
Barry McCarthy: And now we're positioned to invest in innovation. Again, it's innovation that put us on the map in the first place. There's a lot of talent in the building. It's a matter of getting it organized and focused in a really productive way. I think Nick is going to be an impactful player there.
Barry McCarthy: I think Lauren is going to be quite impactful with respect to our approach to marketing as well. Plus, there are a bunch of things like Product Innovation Drives Growth, and Geographic Expansion Drives Growth. The unaided brand awareness for the product in the US is 55%. Okay, anybody know, by way of comparison, what the unaided brand awareness is for Starbucks? propaganda. They're north of 90. So there's still a lot of untapped potential, even in the U.S., and by way of comparison, the unaided brand awareness in the U.K. is 37 percent. And in Germany, it's in the 20s, and so it's, and I don't know what it is, Latin, but it's got to be, significantly lower.
Peter Stabler: And we've got a lot of strength in the Latinx community from a content perspective. So product innovation, geographic growth, and product relevance in commercial and corporate wellness should all be vectors for the drive and acceleration of sales in the next couple of years. And Mr. Stabler, that was our final question. I'll turn the call back over to you for any closing remarks. Thank you, everyone, for joining us today. We look forward to speaking with you next quarter. Have a good day. Thank you all for participating. This concludes today's program. You may now disconnect.