Q3 2024 Peloton Interactive Inc Earnings Call

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Operator: Good day, and welcome to Peloton's third quarter fiscal year 2024 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer 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. To withdraw your question, press star-one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, James Marsh, Head of Investor Relations. Please go ahead.

Speaker Change: Good day, and welcome to peloton third quarter fiscal year 2024 conference call.

Speaker Change: At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.

Speaker Change: So what's your all your question Press Star one again.

Speaker Change: Please be advised that today's conference is being recorded I would now.

Speaker Change: Now I'd like to hand, the conference over to your Speaker James Marsh head of Investor Relations. Please go ahead.

Speaker Change: Yeah.

James Marsh: Thank you, operator. Good morning, and welcome to Peloton's third quarter fiscal year 2024 conference call. Joining today's call are Peloton board members Karen Boone and Chris Bruzzo, who will be stepping in as Interim Co-CEOs, as well as Chief Financial Officer Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal security laws. Actual results may differ materially from those contained in and implied by these forward-looking statements due to risks.

James Marsh: Thank you operator, good morning, and welcome to <unk> third quarter fiscal year 2020 for Congress.

James Marsh: Joining today's call are Calpine board members, Karen Boone, Chris Bruce will be stepping in as interim co Ceos as well as Chief Financial Officer, 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 laws.

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

James Marsh: 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 provide.

James Marsh: 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. I'll now turn the call over to Karen.

James Marsh: In today's shareholder letter.

James Marsh: I'll now turn the call over to Karen.

Andrew M. Boone: Thank you all for joining us today. For those who don't know me, I've been a member of Peloton's board since early 2019 and have served as chairperson since September of 2022. We have a lot to cover this morning.

Andrew M. Boone: Thank you all for joining today.

Andrew M. Boone: Those who don't know me I've been a member of Health plans Board since early 2019, and I've served as chair person at September of 2022, we've a lot to cover this morning, So let's begin with the leadership update.

Andrew M. Boone: So let's begin with the leadership update. As you may have seen in our release this morning, Barry McCarthy is stepping down as president and CEO and has also resigned as a member of the Peloton board. Barry will continue to serve as a strategic advisor to Peloton. I know I'm speaking for the entire board when I say that we're very grateful for his contributions to Peloton, and he joined Peloton during an incredibly challenging time for the business. During his tenure, he laid the foundation for scalable growth by steadily re-architecting the cost structure of the business to create stability and reach the important milestone of achieving positive free cash flow.

Andrew M. Boone: As you may have seen in our release. This morning, Barry Mccarthy is stepping down as president and CEO and has also resigned as a member of the telephone board.

Andrew M. Boone: Barry will continue to serve as a strategic advisor for peloton.

Andrew M. Boone: I know I'm speaking for the entire board when I say that we're very grateful for his contributions to peloton bear.

Andrew M. Boone: Barry joined peloton during an incredibly challenging time for the business.

Andrew M. Boone: His tenure he laid the foundation for scalable growth by steadily re architected in the cost structure of the business to create stability and to reach the important milestone of achieving positive free cash flow.

Andrew M. Boone: With a strong leadership team in place and the company now on solid financial footing, the board has decided that now is the appropriate time to search for the next CEO of Peloton. While our search for a successor is underway, Chris and I will be stepping in as interim co-CEOs, and Jay Hogue, who has served on the board since 2018, will step into the role of chairperson of the board. The Peloton is at a critical inflection point.

Andrew M. Boone: With a strong leadership team in place and the company now on solid financial footing. The board has decided that now is the appropriate time to search for the next CEO of peloton.

Speaker Change: While our search for a successor is underway, Chris and I will be stepping in as interim co Ceos and Jay Hoag, who has served on the board for 2018 will step into the role of chairperson of the board.

Andrew M. Boone: And as the board works to identify a permanent CEO, Chris and I will partner with our remarkable leadership to ensure Peloton continues to deliver a best-in-class experience to our members and continue our work to achieve profitable growth. To get some background on Chris and my areas of expertise, I have significant experience with consumer brands, both at the executive and board level. Most recently, I was President, Chief Financial Officer, and Chief Administrative Officer of Restoration Hardware.

Speaker Change: Peloton is that a critical inflection point and as the board works to identify a permanent CEO, Chris and I will partner with a remarkable leadership team to ensure peloton continues to deliver a best in class experience to our members and continue our work to achieve profitable growth.

Andrew M. Boone: To give some background on Chris and my areas of expertise.

Andrew M. Boone: I have significant experience of consumer brands, both at the executive and board level. Most recently I was president Chief Financial Officer, and Chief administrative officer of restoration hardware.

Andrew M. Boone: Similarly, Chris brings more than twenty decades of experience working for global consumer brands, most recently as Executive Vice President and Chief Experience Officer of Electronic Arts. As interim co-CEOs, Chris and I will work in lockstep with and do everything we can to support Peloton's executive team. I'm excited about the progress that the product and content teams are driving, as well as the level of focus and efficiency that's being brought to marketing spend.

Andrew M. Boone: Similarly, Chris brings more than two decades of experience working for global consumer brands. Most recently as executive Vice President and Chief experience officer of electronic Arts.

Andrew M. Boone: As interim co Ceos, Chris and I will work in lockstep with and do everything we can to support telephones executive team I'm excited about the progress with the product and content teams are driving as well as the level of focus and efficiency, that's being brought to market with that.

Andrew M. Boone: Chris will expand on this in his remarks. The team has made significant progress in achieving positive free cash flow, which is important as we focus on strengthening our balance sheet and refinancing our debt. We look forward to bringing you updates on our progress in the coming quarters. Let me say that I'm honored to step into this role alongside Chris, whose skill set and background complement my own. I'll now hand it over to him.

Andrew M. Boone: Chris will expand on this in his remarks.

Andrew M. Boone: The team has made significant progress in achieving positive free cash flow, which is important as we focused on strengthening our balance sheet and refinancing our debt. We look forward to bringing you updates on our progress in the coming quarters.

Andrew M. Boone: Let me say that im honored to step into this role alongside Chris whose skill set and background.

Chris Bruce: I'll now hand, it over to him.

Chris Bruce: Thanks, Karen.

Chris Bruzzo: The board has entrusted us to serve an important role, and I couldn't have asked for a better partner than Karen to serve as interim co-CEO. Let me also reiterate our appreciation for Barry.

Chris Bruce: <unk> been trusted us to serve an important role and I couldn't have asked for a better partner than carrying to serve as interim co CEO.

Chris Bruce: Let me also reiterate our appreciation for Berry has been immense and challenging effort to create this turnaround at peloton and we're grateful to him for his contributions over the last two years.

Chris Bruzzo: It has been an immense and challenging effort to create this turnaround at Peloton, and we're grateful to him for his contributions over the last two years. We have already begun a search for Peloton's next CEO and are working with a leading executive search firm on this important effort. Our focus is on identifying a leader who brings the right combination of skill, experience, and vision to execute Peloton's exciting next chapter and drive shareholder value. While there's a lot of important work to do, there's also a lot to be excited about. Particularly when you look at the depth and strength of our team.

Chris Bruce: We have already begun a search for bolt ons next CEO and I are working with a leading executive search firm on this important effort.

Chris Bruce: Is that identifying a leader who brings the right combination of skills experience.

Chris Bruce: Experience and vision to execute peloton exciting next chapter.

Chris Bruce: And drive shareholder value.

Chris Bruce: While there is a lot of important work to do there is also a lot to be excited about at peloton, particularly when you look at the depth and strength of our team while I would love to talk about each member of the team I will just highlight a few examples for you today.

Chris Bruzzo: While I would love to talk about each member of the team, I will just highlight a few examples for you today. Lauren Weinberg, our newly appointed Chief Marketing Officer, is driving transformation in the marketing organization. Since joining in January, she has identified meaningful opportunities for cost optimization in brand and creative spending and has brought a fresh perspective to how we will deploy media. She has a critical eye for marketing efficiency that we're already starting to see materialize in our P&L, and Nick Caldwell, our Chief Product Officer, who joined us in November of 2023, has introduced a faster pace of innovation in our R&D organization.

Chris Bruce: Lauren Weinberger, our newly appointed Chief Marketing Officer is driving transformation in the marketing organization since joining in January if you have identified meaningful opportunities for cost optimization in brand and creative spending and has brought a fresh perspective to how we would deploy media. She is a critical IP or marketing efficiency that we're already starting to see material.

Chris Bruce: In our P&L.

Chris Bruce: And Nick Caldwell, our Chief product Officer, who joined US in November of 2023 has introduced at faster pace of innovation and our R&D organization and we are excited about the impact that our product initiatives will have improved the business experiences for our current and new members.

Chris Bruzzo: And we are excited about the impact that our product initiatives will have on the fitness experiences of our current and new members. And Jen Cotter, our Chief Content Officer, who, over the course of her five years at Peloton, has assembled a team of world-class instructors who keep millions of members motivated and engaged on our platform. Not only has her team built a library of over 40,000 classes presented in a way that it's curated, data-driven, programmatic, and purposeful. Jen's team continues to expand our content, which now includes 16 modalities, 4 content formats, and three languages.

Chris Bruce: And Jen Carter, our chief content officer, who over the course of her five years of peloton has assembled a team of world class instructors, who keep millions of members motivated and engaged on our platform.

Chris Bruce: Not only as our team does a library of over 40000 classrooms, it's presented in a way that it's sure rated data driven programmatic and purposeful James team continued to expand our content offerings, which now include 16 modality more content format and three languages.

Chris Bruzzo: All of us share the conviction that Peloton is an amazing company with tremendous growth potential, and we look forward to finding the next great leader to drive this company forward. While our growth trends are challenged in the near term as the connected fitness market continues to normalize post COVID, I'm incredibly excited about the trajectory of the connected fitness space, which appears to be nearing an inflection point of return to growth. We're deliberately investing in key areas of the business like software, hardware, and content innovation to drive growth and engage more people who want to improve their fitness and wellness.

Speaker Change: All of our share of the conviction that peloton is an amazing company with tremendous growth potential and we look forward to finding the next great leader to drive this company forward.

Speaker Change: While our growth trends are challenged in the near term at the connected fitness market continues to normalize post COVID-19 I'm incredibly excited about the trajectory of the connected fitness space, which appears to be nearing an inflection point of return to growth.

Speaker Change: We are deliberately investing in key areas of the business like software hardware and content innovation to drive growth and engage more people, who want to improve their fitness and wellness.

Chris Bruzzo: We offer an incredible experience that makes a huge impact on people's lives. We're confident in our ability to capitalize on the opportunities ahead. The steps we're taking today will make Peloton stronger. Ultimately, this is about propelling us into our next phase of growth and innovation. I have the utmost confidence in the team here to do that. And with that, I'll hand the call over to Liz.

Speaker Change: We offer an incredible experience that makes a huge impact on people's lives.

Speaker Change: We are confident in our ability to capitalize on the opportunities ahead.

Speaker Change: Steps, we're taking today will make peloton stronger.

Speaker Change: Ultimately this is about propelling us into our next phase of growth and innovation.

Speaker Change: Have the utmost confidence in the team here to deliver.

Speaker Change: And with that I'll hand, the call over to Ms.

Liz Coddington: Thank you, Karen and Chris. I'd like to take a few minutes to discuss our newly announced restructuring plan, then spend some time talking through our Q3 results, and finally discuss our current outlook for the remainder of fiscal year 2024. Today we are announcing a new restructuring program to reduce annual expenses by more than $200 million. The objective of the cost reduction is to reshape Peloton to align our cost structure with the current size of our business and position Peloton to generate sustained and meaningful positive free cash flow, which is a top priority for us.

Speaker Change: Thank you Karen and Chris.

Liz Coddington: We expect to achieve the 200 million run rate savings by the end of fiscal 2025, with a significant share of the cost reductions taking place immediately. When fully implemented, we expect to reduce our team size by approximately 15%, or roughly 400 global team members. Operationally, we will continue to reduce our retail showroom footprint.

Speaker Change: I'd like to take a few minutes to discuss our newly announced restructuring plan and then spend some time talking through our Q3 results and finally discuss our current outlook for the remainder of fiscal year 2024.

Liz Coddington: We are also reimagining our go-to-market approach for our international markets to be more targeted and efficient. While we have no plans to exit any of our existing international markets, we will leverage global strategies and capabilities where we can, allowing us to optimize and consolidate resources with localized access. We made some very tough decisions, and while we firmly believe these actions are the right thing to do for the business, Cut voices are painful, both because we're disrupting people's lives and because we're saying goodbye to genuinely good and talented people.

Speaker Change: Today, we are announcing a new restructuring program to reduce annual expenses by more than $200 million.

Speaker Change: Objective of the cost reductions are to reshape peloton to align our cost structure with the current size of our business and position peloton to generate sustained and meaningful positive free cash flow, which is a top priority for us.

Speaker Change: We expect to achieve the $200 million run rate savings by the end of fiscal 2025.

Speaker Change: With a significant share of the cost reductions taking place immediately.

Speaker Change: When fully implemented we expect to reduce our team size by approximately 15% or roughly 400 global team members.

Speaker Change: Operationally, we will continue to reduce our retail showroom footprint. We are also re imagining our go to market approach for our international markets to be more targeted and efficient.

Speaker Change: While we have no plans to exit any of our existing international markets, we will leverage global strategies and capabilities, where we can.

Speaker Change: Lauinger to optimize and consolidate resources with localized execution.

Speaker Change: We made some very tough decisions.

Speaker Change: And while we firmly believe these actions are the right thing to do for the business.

Speaker Change: Like these are painful.

Speaker Change: Both because we are disrupting people's lives.

Speaker Change: We're saying goodbye to genuinely good and talented people.

Liz Coddington: We wish our outgoing colleagues the best, and while these decisions are always difficult, they have been made carefully to ensure we can continue to provide the best fitness experience for our members, maintain positive free cash flow over the long term, and continue to invest in core areas of our business that will drive subscriber growth. We will continue to invest in innovation across our software, hardware, and content portfolios and in improvements to our member support experience to meet the needs of current and future members.

Speaker Change: We have Richard outgrowing colleagues the best.

Speaker Change: And while these decisions are always difficult. They had been made carefully to ensure we can continue to provide the best fitness experience for our members.

Speaker Change: <unk> maintained positive free cash flow over the long term.

Speaker Change: And continue to invest in core areas of our business that will drive subscriber growth.

Speaker Change: We will continue to invest in innovation across our software hardware and content portfolio and an improvement to our member support experience to meet the needs of current and future members.

Liz Coddington: We'll also transform our marketing efforts to increase engagement with new targeted audiences and drive more efficient growth at scale. Now, let me touch briefly on our balance. We are mindful of the timing of our debt maturities, which consist of convertible notes and a term loan. And we know this is also on the minds of our shareholders. We believe that achieving positive free cash flow makes Peloton a more attractive investment for debt holders.

Speaker Change: Also transform our marketing effort to increase engagement with new targeted audiences and drive more efficient growth at scale.

Speaker Change: Now, let me touch briefly on our balance sheet.

Speaker Change: We are mindful of the timing of our debt maturities, which consist of convertible notes and a term loan and we know this is also on the minds of our shareholders.

Speaker Change: We believe that achieving positive free cash flow next peloton, a more attractive investment for debtholders.

Liz Coddington: Overall, our refinancing goals are to deleverage and extend maturity at a reasonable blended cost of capital. We want you to know that we've been working closely with our lead banks, JPMorgan and Goldman Sachs, and our financial advisor, BDT, and MSD partners on our refinancing strategy.

Speaker Change: Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital.

Speaker Change: We want you to know that we've been working closely with our lead bank Jpmorgan and Goldman Sachs and.

Speaker Change: And our financial adviser BBT and MSP partners on our refinancing strategy. We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more about this topic.

Liz Coddington: We are encouraged by the support and inbound interest from our existing lenders and investors, and we look forward to sharing more about this topic. Now, let's spend a few minutes on our Q3 results. We ended Q3 with $3.06 million in paid connected fitness subscriptions, reflecting a net increase of $52,000 in the quarter. Average net monthly paid connected fitness subscription churn was 1.2%, which outperformed internal expectations. Spike Rental continued to outperform internal expectations in Q3, with new rentals up 10% year-over-year.

Liz Coddington: Our rental buyouts also exceeded expectations. While the churn rate for rental remains higher than that of outright purchase, churn from rental subscribers improved 60 basis points quarter over quarter. Peloton certified refurbished and third-party retail sales had strong growth year over year and outperformed our expectations. We also continue to see strong growth in subscriber additions who purchased their Peloton equipment in the secondary market. We ended the quarter with 674,000 paid app subscriptions, reflecting a net reduction of 44,000 in the quarter. Paid app subscriptions were lower than our forecast due to a couple of factors. First, Auditions were lower than expected.

Speaker Change: Now, let's spend a few minutes on our Q3 results.

Speaker Change: We ended Q3 with three or $6 million paid connected fitness subscription, reflecting a net increase of 52000 in the quarter.

Speaker Change: Average net monthly paid connected fitness subscription churn was one 2%, which outperformed our internal expectations.

Speaker Change: Bike rental continued to outperform our internal expectations in Q3.

Speaker Change: With new rentals up 10% year over year, our rental buyout also exceeded expectations.

Speaker Change: While the churn rate for rental remains higher than that of outright purchase churn from rental subscribers improved 60 basis points quarter over quarter.

Speaker Change: Peloton certified refurbished and third party retail sales had strong growth year over year and outperformed our expectations.

Speaker Change: We also continue to see strong growth in subscriber additions who purchased their peloton equipment in the secondary market.

Speaker Change: We ended the quarter with 674000 paid app subscription, reflecting a net reduction of 44000 in the quarter.

Speaker Change: Apps descriptions were lower than our forecast due to a couple of factors.

Speaker Change: First additions were lower than expected, we saw underperformance in the peloton for business channel and softer trial demand.

Liz Coddington: We saw underperformance in the Peloton for Business channel and softer trials. Additionally, we saw higher than expected average monthly paid app subscription churn of 9.2%, primarily driven by subscription cohorts whose legacy pricing for App Plus expired. Given the current growth headwinds we're seeing for the app, we decided to hold back media investment as we evaluate the tiered pricing strategy and subscriber acquisition funnel. We are continuing to invest in the product experience and in improving product market fit.

Speaker Change: Second we saw higher than expected average monthly paid app subscription churn of nine 2%, primarily driven by subscription cohort, whose legacy pricing for.

Speaker Change: Expired.

Speaker Change: Given the current growth headwinds, we're seeing for App redesign to hold back media investment as we evaluate the tiered pricing strategy and subscriber acquisition funnel, we are continuing to invest in the product experience and an improving product market fit.

Liz Coddington: It's worth noting that while paid app subscription declined quarter over quarter, app subscription revenue increased 2.4 percent, driven by continued growth in our premium app plus subscription. Q3 total revenue was $718 million, which was within our guidance range of $700 million to $725 million. Our revenue consisted of $438 million of subscription segment revenue, which represents 61% of total revenue, and $280 million of connected fitness segment revenue. Total Q3 gross profit was $310 million, resulting in a growth margin of 43.1%, roughly 60 basis points ahead of our 42.5% guidance.

Speaker Change: It's worth noting that while paid app subscription declined quarter over quarter as subscription revenue increased two 4% driven by continued growth in our premium plus subscription.

Speaker Change: Q3, total revenue was $718 million, which was within our guidance range of 700 million to $725 million.

Speaker Change: Our revenue consisted of $438 million of subscription segment revenue, which represents 61% of total revenue.

Speaker Change: And $280 million of connected fitness segment revenue.

Speaker Change: Total Q3 gross profit was $310 million, resulting in a gross margin of 43, 1% roughly 60 basis points ahead of our 42, 5% guidance.

Liz Coddington: Our connected fitness segment growth margin was 4.2%, in line with internal expectations. Excluding the impact of a one-time write-down of $9 million for guide product inventory, our adjusted connected fitness segment growth margin was 7.4% in Q3. Subscription segment growth margin of 68.1% was in line with our expectations and up 80 basis points quarter over quarter. Adjusted EBITDA was $6 million in Q3, exceeding the high end of our Q3 guidance range by roughly $26 million due to lower operating expenses across multiple areas. Within sales and marketing, we scaled back media spend that we determined to be less efficient than our investment thresholds.

Speaker Change: Our connected fitness segment gross margin was four 2% in line with internal expectations excluding.

Speaker Change: Excluding the impact of a onetime write down of $9 million for guide product inventory or adjusted connected fitness segment gross margin was seven 4% in Q3.

Speaker Change: Subscription segment gross margin of 68, 1% was in line with our expectations and up 80 basis points quarter over quarter.

Speaker Change: Adjusted EBITDA was $6 million in Q3 exceeding the high end of our Q3 guidance range by roughly $26 million due to lower operating expenses across multiple areas.

Speaker Change: Within sales and marketing, we scaled back media spend that we determined to be less efficient than our investment thresholds. We also benefited from cost reductions Loren made during the quarter to improve the efficiency of our brand and creative investments, including reductions to spend with outside agencies.

Liz Coddington: We also benefited from cost reductions Lauren made during the quarter to improve the efficiency of our brand and creative investments, including reductions to spend with outside agencies. GMA's expense was lower than expected due to lower legal, IT, and software expenses. R&D expense also came in favorable due to efficiencies in software development and contractor spend. We generated $9 million in free cash flow in Q3, the first quarter of positive free cash flow in 13 quarters.

Speaker Change: G&A expense was lower than expected due to lower legal and software expenses.

Speaker Change: R&D expense also came in favorable due to efficiencies in software development and contractor spend.

Speaker Change: We generated $9 million in free cash flow in Q3, the first quarter of positive free cash flow in 13 quarters.

Liz Coddington: Pre-cash flow exceeded our expectations. While the majority of our outperformance is permanent savings, we did incur an amount of timing savings that we expect to shift into Q4. We ended the quarter with $795 million in unrestricted cash and cash equivalents.

Speaker Change: Free cash flow exceeded our expectations, while the majority of our outperformance if permanent savings we did incur an amount of timing savings that we expect to shift into Q4.

Speaker Change: We ended the quarter with $795 million in unrestricted cash and cash equivalents.

Liz Coddington: And we also have access to a $400 million revolving credit facility, which means it is undrawn today. Overall, our Q3 performance reflects our continued leadership in the connected fitness category and the strength of our subscription business, as well as the tremendous progress we have made in re-architecting our cost structure, as evidenced by our achievement of positive free cash flow for the first time in over three years. I'd also like to highlight a few key areas of progress across the business in Q3. After a successful relaunch of TreadPlus pre-orders in Q2, we started delivering TreadPlus in Q3. Our logistics and delivery teams exceeded internal expectations for delivery times, delivering 67% of pre-orders in the quarter.

Speaker Change: And we also have access to a 400 million revolving credit facility, which means on drawn to date.

Speaker Change: Overall, our Q3 performance reflects our continued leadership in the connected fitness category and the strength of our subscription business as well as the tremendous progress we have made and re architect our cost structure as evidenced by our achievement of positive free cash flow for the first time in over three years.

Liz Coddington: We have also made substantial progress in the delivery and installation of rear guards requested by members who purchased the TreadPlus before the product was released. We're continuing to see growth within the secondary market and are leaning into the opportunity. We recently launched the Peloton History Summary that provides greater visibility to our bike's age, usage, and service history to enhance the secondary market buying experience. Anyone can access a Peloton History Summary for a bike or bike plus by searching the serial number on our website.

Speaker Change: I'd also like to highlight a few key areas of progress across the business in Q3.

Speaker Change: After a successful relaunch of truck plus preorders in Q2, we started delivering tread plus in Q3, our logistics and delivery teams exceeded internal expectations for delivery time, delivering 67% of pre orders in the quarter.

Speaker Change: We have also made substantial progress in the delivery and installation of rear guard requested by members who purchased the <unk> plus before the product recall.

Speaker Change: Okay.

Speaker Change: We're continuing to see growth within the secondary market and are leaning into the opportunity. We recently launched the peloton history summary that provides greater visibility to our bikes age usage and service history to enhance the secondary market buying experience.

Speaker Change: Anyone can access a telecom history summary for a bike or like plus by searching the serial number on our website.

Liz Coddington: TRED remains a key growth opportunity, and we were thrilled to recently launch the New York Roadrunner Collection on TRED and TRED+. This is a series of scenic classes filmed on the TPS New York City Marathon course. In a first-of-its-kind experience, these classes provide members with the ability to train the marathon course with auto-incline functionality that matches the course's gradient fluctuation. We are also seeing positive results in service levels and member satisfaction in response to recent initiatives focused on turning around our member experience. These initiatives include investments in our global member support team, improvements to systems and tools, and onboarding new onshore outsourcing partners. We have also observed improvements in net promoter scores across multiple connected fitness products.

Speaker Change: <unk> remains a key growth opportunity and we were thrilled to recently launch the New York Road runner collection on tread Amtrust plus this is a serious Athena classes filmed on the Tcs New York City Marathon course.

Speaker Change: And our first of its kind experience. These classes provide members with the ability to train the marathon course with auto in client functionality that matches the courses gradient fluctuation.

Speaker Change: We are also seeing positive results and service levels and member satisfaction and response to recent initiatives focused on turning around our member experience. These.

Speaker Change: These initiatives include investments in our global member support team improvements to systems and tools and Onboarding, new onshore outsourcing partners.

Speaker Change: We also observed improvements in net promoter scores across multiple connected fitness products.

Liz Coddington: Next, I'd like to provide context on our financial outlook for the remainder of the fiscal year. We're lowering our outlook for ending paid connected fitness subscriptions by 30,000 or 1% at the guidance midpoint to $2.97 million. Our full-year ending paid connected fitness subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations for seasonally lower demand. Q4 is typically our most challenging quarter to grow due to lower seasonal growth additions as we enter the warmer months of spring and summer.

Speaker Change: Next I'd like to provide context on our financial outlook for the remainder of the fiscal year.

Speaker Change: We are lowering our outlook for ending paid connected fitness subscription by 30000 or 1% at the guidance midpoint to $2 $97 million.

Speaker Change: Our full year ending paid connected fitness subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations for seasonally lower demand Q4 is typically our most challenging quarter to grow due to lower seasonal gross additions as we enter the warmer months of spring and summer.

Liz Coddington: We also anticipate a seasonal increase in paid connected fitness subscription churn in Q4, in part due to seasonally higher subscription pause rates that we expect to come down in early fiscal year 2025. We're also lowering our outlook for ending paid app subscriptions by 150,000, or 19%, at the guidance midpoint, to 605,000. Our full year ending app paid subscription guidance reflects lower growth additions due to expectations that Q3 trends will continue through Q4. We are maintaining our disciplined approach to app media spend as we evaluate our app tiers and pricing and refine the paid app. Subscription Acquisition Funnel

Speaker Change: We also anticipate a seasonal increase in paid connected fitness subscription churn in Q4 in part due to seasonally higher subscription pause rates that we expect to come down in early fiscal year 2025.

Speaker Change: We're also lowering our outlook for ending paid app subscriptions by 150.

Speaker Change: 419% at the guidance midpoint to 605000.

Speaker Change: Our full year, ending app paid subscription guidance reflects lower gross additions due to expectations that Q3 trends continue through Q4.

Speaker Change: We are maintaining our disciplined approach to media spend as we evaluate our app tears and pricing and refine the paid app subscription acquisition funnel.

Liz Coddington: As a result of trends driving our outlook for ending paid connected fitness subscriptions and ending paid app subscriptions, we're lowering our full year revenue guidance by $25 million, or 1%, at the guidance midpoint to $2.687 billion. Additionally, we're raising our full year outlook for total growth margin by 50 basis points to 44.5%, primarily due to a revenue mix shift towards our subscription setting. We're also raising our outlook for full-year adjusted EBITDA by $37 million at the guidance midpoint to negative $13 million. This increase is largely driven by outperformance from Q3, combined with lower media spend and cost reductions from today's announced restructuring plan.

Speaker Change: As a result of trends driving our outlook for ending paid connected fitness subscription and ending paid app subscriptions, we're lowering our full year revenue guidance by $25 million or 1% at the guidance midpoint to $2 68 7 billion.

Speaker Change: We are raising our full year outlook for total gross margin by 50 basis points to 44, 5%, primarily due to a revenue mix shift towards our subscription segment.

Speaker Change: We're also raising our outlook for full year adjusted EBITDA by $37 million at the guidance midpoint to negative 13 million. This increase is largely driven by outperformance from Q3, combined with lower media spend and cost reductions from today's announced restructuring plan.

Liz Coddington: While we are not providing any specific guidance on free cash flow, we do expect to deliver modest, positive free cash flow in Q4, despite the timing shift from Q3 and cash outlays related to today's restructuring announcement. We also expect that the cost optimization measures announced today will enable us to drive meaningful free cash flow for the 2025 fiscal year. However, we do expect to have both positive and negative quarters within the year due to working capital impacts from timing of inventory purchases and seasonality of marketing spend. Before we open the line to questions,

Speaker Change: While we are not providing any specific guidance on free cash flow, we do expect to deliver modest positive free cash flow in Q4, despite the timing shift from Q3 and cash outlays related to today's restructuring announcement.

Speaker Change: We also expect that the cost optimization measures announced today will enable us to drive meaningful free cash flow for the 2025 fiscal year. However, we do expect to have both positive and negative quarters within the year due to working capital impacts from timing of inventory purchases and seasonality.

Speaker Change: Of marketing spend.

Speaker Change: Before we open the lines for questions.

Liz Coddington: I want to reflect on the comment at the end of the shareholder letter about being optimistic about our path forward. First off, I'm pleased that we have finally achieved the critical milestone of becoming free cash flow positive. And I am confident that we will be able to sustain it on a full year basis for fiscal year 2020. I'm also optimistic about the prospect of restructuring our debt and eliminating any potential concerns about the timing of our debt maturity.

Speaker Change: I wanted to reflect on the comment at the end of the shareholder letter about being optimistic about our path forward.

Speaker Change: First off I am pleased that we have finally achieved a critical milestone of becoming free cash flow positive and I am confident that we will be able to sustain that on a full year basis for fiscal year 2025.

Speaker Change: I'm also optimistic about the prospect of restructuring our debt and eliminating any potential concerns about the timing of our debt maturities.

Liz Coddington: I'm delighted about our strong NPS for our Connected Fitness products because I believe it reflects the value that our members see in our Connected Fitness platform and should help drive organic growth for us. And I'm inspired by the dramatically faster pace of product innovation and marketing transformation that we are seeing internally, which I hope we'll be able to tell you all about next quarter. I'd be remiss if I didn't mention the important role that Barry McCarthy has played in these accomplishments. During his tenure, Barry successfully re-architected a cost structure that was unsustainable when he arrived.

Speaker Change: I'm delighted about our strong NPS for our connected fitness products because I believe it reflects the value that our members see and our connected fitness platform.

Speaker Change: And should help drive organic growth for us.

Liz Coddington: And I'm inspired by the dramatically faster pace of product innovation and marketing transformation that we are seeing internally, which I hope will be able to tell you all about next quarter.

Liz Coddington: I'd be remiss, if I didn't mention the important role that Barry Mccarthy has played in these accomplishments.

Liz Coddington: During his tenure very successfully re architected a cost structure that was unsustainable when he arrived.

Liz Coddington: He built a strong and talented leadership team and established a scalable foundation for the business to grow. I'd like to sincerely thank Barry for leading us to this point in Peloton's transformation journey. We have so many reasons for optimism as we move into the next phase of Peloton's transformation, focused on returning to profitable growth. And I'm confident that with a stable foundation now in place, and with our stellar employees and loyal members, together we will go far.

Liz Coddington: He built a strong and talented leadership team and established a scalable foundation for the business to grow.

Liz Coddington: I'd like to sincerely, thank Barry for leading us to this point and peloton transformation journey.

Liz Coddington: We have so many reasons for optimism as we move into the next phase of telephones transformation.

Liz Coddington: Focus on returning to profitable growth.

Liz Coddington: And I am confident that with a stable foundation now in place and with our stellar employees and loyal members together, we will go far.

Speaker Change: We can open it up to questions.

Operator: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.

Liz Coddington: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced 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 standby, while we compile the Q&A roster.

Operator: Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first questions will come from the line of Douglas Anmuth with JP Morgan. Your line is open. Great, thanks for taking the question.

Operator: I'm sorry. The first question comes from the line of Douglas Anmuth with Jpmorgan. Your line is open.

Douglas Anmuth: Great. Thanks for taking the questions. Can you talk about what drives your confidence in Peloton being meaningfully free cash flow positive in fiscal 25, how you get there, and does that require the business to return to growth?

Speaker Change: Great. Thanks for taking my questions can you talk about what drives your confidence in telecom being meaningfully free cash flow positive in fiscal 'twenty, how you get there and does that require the business to return to growth. Thanks.

Douglas Anmuth: Okay.

Liz Coddington: So first, I think it's important to highlight that we have a strong connected fitness subscription business, which as of Q3 generates over 1.7 billion in annualized run rate revenue at a 68% growth margin. Additionally, we have a very loyal Connected Fitness subscriber base with 1.2% average net monthly churn as of Q3.

Douglas Anmuth: So first I think it's important to highlight that we have a strong connected fitness subscription business, which as of Q3 generates over one 7 billion of annualized run rate revenue at a 68% gross margin.

Liz Coddington: Also we have a very loyal connected fitness subscriber base with one 2% at 1.2% average net monthly churn as of Q3.

Liz Coddington: And while we firmly intend to return the business to growth, with today's announced cost reductions, we're lowering our cost base, and we see a path to positive free cash flow without requiring a significant improvement in growth to get there. We've architected a plan to achieve positive free cash flow without growth. And I also want to clarify that we have carefully reviewed these cost measures to make sure that we do still have the capability to invest in innovation so that the business can grow profitably.

Liz Coddington: And while we firmly intend to return the business to growth.

Liz Coddington: With today's announced cost reductions, we're lowering our cost base and we see a path to positive free cash flow without requiring a significant improvement and growth to get there. We've architected a plan to achieve positive free cash flow without growth.

Liz Coddington: And I also want to clarify that we have carefully reviewed the cost measures to make sure that we do still have the capability to invest in innovation. So that the business can grow profitably.

Douglas Anmuth: Thanks. And maybe just to follow up for Karen and Chris, does anything stand out in particular in terms of what you're most excited about in go-to-market initiatives when you think about rental and certified pre-owned or third-party retail or anything else?

Liz Coddington: Thanks.

Speaker Change: Just a follow up for Karen and Chris does anything anything stand out in particular in terms of what you're most excited about and go to market initiatives. When you think about rental and certified pre owned or third party retailers or anything else. Thanks.

Chris Bruzzo: Yeah, thanks for the question. This is Chris Frizzo.

Douglas Anmuth: Yes. Thanks for the question this is Chris.

Chris Bruzzo: Yeah, I mean, when we say we're excited about the growth potential for Peloton, we mean things like treadmills and Peloton for business and the innovation we're bringing to software and continued focus on international. It's, it's all those areas. So, you know, the installed home treadmill base is double that of a bike, and yet our bike demand is still greater than our tread demand. And to me, that just spells opportunity.

Chris Bruzzo: Yes.

Chris Bruzzo: When we say we are excited about the growth potential for peloton, we mean things like treadmill in telecom for business and the innovation, we're bringing to software and continued focus on international.

Chris Bruzzo: All of those areas so.

Chris Bruzzo: Treadmill is.

Chris Bruzzo: The install of home installed home treadmill basis double that of bike and yet our bike demand is still greater than our trade demand and to me that's just spells opportunity.

Chris Bruzzo: Peloton for Business, you know, we made a great announcement yesterday. We'll continue to look for those opportunities, and I think there's lots available to Peloton going forward. And some of what's happening in the product organization around software innovation is pretty exciting. There is much room to get to greater and greater personalization in the experience for our members, things like virtual coaching, helping get them to the right workouts for them.

Chris Bruzzo: Peloton for business, we made a great announcement yesterday will.

Chris Bruzzo: We will continue to look for those opportunities and I think theres lots available to peloton going forward.

Chris Bruzzo: And some of what's happening in the product organization around software innovation is pretty exciting.

Chris Bruzzo: There is much room to get to.

Chris Bruzzo: Greater and greater personalization and the experience for our members things like virtual coaching helping getting them to their rate workouts for them lots of opportunity there and we already have an incredibly sticky and engaged experience. So this is only going to make it better.

Chris Bruzzo: Lots of opportunity there, and we already have an incredibly sticky and engaging experience, so that's only going to make it better. And although we're talking about optimizing the way we spend to reach international markets, we're not any less interested in that potential. There's a lot of growth potential for us in our existing markets and even looking to efficiently expand the new market. And then, based on my background and my appreciation for what the marketing team is doing.

Chris Bruzzo: Although we're talking about optimizing the way we spend to reach international markets, we're not any less interested in that potential there's a lot of growth potential for us in our existing markets and even looking to efficiently expand to new markets.

Speaker Change: And then I guess I should finish.

Chris Bruzzo: Based on my background with my appreciation for what the marketing team is doing.

Chris Bruzzo: So Lauren, who's our newly appointed chief marketing officer, has already done some meaningful things to drive cost optimization, focus, and bring Peloton to some new audiences. All of that is starting to bear fruit, and I'm really excited about it.

Lauren: So Lauren.

Chris Bruzzo: He is our newly appointed Chief marketing Officer has done already done some meaningful things too to drive cost out of the optimization to focus to bring to bring pellets onto some new audiences all of that is.

Chris Bruzzo: Is starting to bear fruit and I'm really excited about it.

Andrew M. Boone: The only thing I would add is that Liz and her team are really looking at growth with an eye for sustainable, profitable growth. So, as we iterate on some of the initiatives and make sure that we're optimizing them to make sure that it's contributing to the bottom line, and it's just not growth for growth's sake. And Karen and I are both...

Andrew M. Boone: The only thing I would add is I think Liz and her team are really looking at growth with an eye for sustainable profitable growth. So as we iterate some of the initiatives and make sure that we're optimizing it to make sure that it's contributing to the bottom line.

Andrew M. Boone: Not growth for growth's sake.

Chris Bruzzo: And Karen and I have both been remarking the last couple of days about how strong the executive team is. And that, in itself, is something to be excited about. We're here to support that team as it continues to drive these levers for growth.

Andrew M. Boone: And we're both Karen and I are both been remarketing last couple of days about how strong the executive team is here and that in itself is something to be excited about we're here to support that team as it continues to drive these levers for growth.

Speaker Change: Great. Thanks, Doug next question. Please operator.

Operator: Operator. Thank you. Our next question will come from the line of Ron Josey with Citi. Your line is open.

Operator: Thank you. Our next question that will come from the line of Ron Josey with Citi. Your line is open.

Ronald Victor Josey: Alright, thanks for taking the question. I want to ask, you know, Karen and Chris, when you're looking for a new leader here, talk to us about what you're looking for as you balance, you know, overall profitability with product innovation and growth. So any insights on, sort of, the characteristics that you're looking for. And then Liz, on the $200 million in restructuring, understood the reduction in force, but maybe talk to us a little bit more; you might be focused on that reduction and thoughts on the retail footprint and other areas that might improve overall profitability. Thank you.

Ronald Victor Josey: Alright, thanks for thanks for taking the question I wanted to ask Karen Chris When you are looking for a new leader here talk to us about what you're looking for as you balance.

Ronald Victor Josey: Overall profitability with product innovation and growth so any insights on sort of the characteristics that you're looking for and then layer on the $200 million restructuring.

Ronald Victor Josey: Understood the reduction enforced, but maybe talk just a little bit where you might be focused on debt reduction and and thoughts on the retail footprint and other other areas that might improve overall profitability. Thank you.

Andrew M. Boone: Sure, this is Karen. I'll start with the first one.

Ronald Victor Josey: Sure. This is Kurt I'll start with the first one and I think we've tried to address some of this in today's release in our opening remarks, but we do want to reiterate that Berry has done a tremendous job stabilizing the business. He came in at a very challenging time and he'd been really relentless and right sizing and aggressive build out that was.

Andrew M. Boone: And I think we tried to address some of this in today's release in our opening remarks, but just to reiterate that Barry's done a tremendous job stabilizing the business. He came in at a very challenging time, and he was really relentless in right sizing an aggressive build out that was not uncommon for many companies during the pandemic. He had to navigate a lot of curveballs thrown his way, and he's done some incredible work in re-architecting the cost structure.

Andrew M. Boone: Not uncommon for many companies during the pandemic he had to navigate a lot of curve ball thrown his way and he has done some incredible work and re architected and our cost structure and again really big highlight I want to highlight that under Barry's leadership, we achieved one of his primary goals, which was generating positive free cash flow this quarter and we do expect to do the same thing in the fourth quarter and for the <unk>.

Andrew M. Boone: And again, really big highlight, I want to highlight that under Barry's leadership, we achieved one of his primary goals, which was generating positive free cash flow this quarter. And we do expect to do the same thing in the fourth quarter and for the full year in 25. But with the business more stable, the board decided to pivot to a leader who's going to architect and lead the next phase of growth for the company. So the new leader will kind of be, you know, pretty focused on architecting, articulating, and executing a vision for growth.

Andrew M. Boone: Full year, and 25, but with the business more stable the board decided to pivot to a leader who's going to architect and lead the next phase of growth for the company. So the newly will kind of be pretty focused on architected articulating and executing.

Andrew M. Boone: For growth.

Liz Coddington: Okay, I'll take the cost restructuring question. As I said earlier, we announced a cost restructuring plan to achieve 200 million in run rate savings by the end of fiscal 25. And a significant share of those cost reductions is going to take place immediately. Roughly about half of them, or about 100 million, of those reductions are going to come from payroll. The remainder is going to come from key non-payroll areas, including things like lower spending on brand and creative marketing, savings from our reductions in retail store footprint, lower contractor spending, lower IT spending, and software spending.

Speaker Change: Okay I'll take the the cost restructuring question.

Liz Coddington: Just to give a little bit more detail, in terms of the various lines in our operating expense areas, the biggest reductions are coming from our R&D organization, but those cost reductions, as I said earlier, are still going to allow for continued investment in all of the key initiatives that we are focused on, including software content and hardware innovation. The next largest area will be marketing, where our cost reductions are really focused on things like the brand and creative, and a few other areas.

Liz Coddington: But I want to be clear that we aren't relying on significant media spend efficiency to achieve our cost reduction, although we do see additional opportunities to scale back media spend at a higher efficiency. The third area, while not mapped perfectly to lines in our P&L, is international. As Chris talked about earlier and mentioned, it's still a growth area for us, but we are planning to cut our international operating losses in half next year, or over the next 12 months, by reimagining our go-to-market approach and being much more targeted and efficient.

Liz Coddington: So as I said earlier, we announced a cost restructuring plan to achieve $200 million in run rate savings by the end of fiscal 'twenty five.

Liz Coddington: And a significant share of those cost reductions are going to take place immediately.

Liz Coddington: About half of them are about $100 million of those reductions are going to come from payroll. The remainder are going to come from key non payroll areas, including things like lower spending on brand and creative marketing savings from our reductions in retail store footprint lower contractor spending lower spending add software spending.

Liz Coddington: <unk>.

Liz Coddington: Just to give a little bit more detail.

Liz Coddington: In terms of the various lines in our operating expense areas. The biggest reductions are coming from our R&D organization, but those cost reductions as I said earlier I was talking to allow for continued investment and all of the key initiatives that we are focused on including software content and hardware innovation on.

Liz Coddington: The next largest area will be marketing, where our cost reductions are really focused on things like the brand and creative.

Liz Coddington: Other areas, but I want to be clear that we aren't relying on significant media spend efficiencies to achieve our cost reduction, although we do see additional opportunities to scale back media spend at a higher efficiency.

Liz Coddington: The third area will not match perfectly to lines in our P&L as international as Chris talked about earlier and mentioned that it's still a growth area for us, but we are planning to cut our international operating losses in half the next year or over the next 12 months by re imagining our go to market approach and being much more targeted and efficient.

Liz Coddington: And so what we're going to do is we are going to stay in all of our existing markets. We have no plans to exit any of those, but we're focusing on more of a global strategies and capabilities. And then that allows us to really consolidate resources so that we can focus on just local

Liz Coddington: And so what we're going to do is we're going to.

Operator: Thank you. One moment for our next question, and that will come from the line of Aneesha Sherman with Bernstein. Your line is open. Thank you.

Liz Coddington: Stay in all of our existing markets, we have no plans to exit any of those but we're focusing on more of a global strategies and capabilities and then that allows us to really consolidate resources. So that we can focus on local execution there.

Aneesha Sherman: Got it thank you.

Aneesha Sherman: Thank you one moment for our next question.

Aneesha Sherman: And that will come from the line of a niche chairman with Bernstein. Your line is open.

Aneesha Sherman: Thank you so much. A follow-up on international, please. So a few quarters ago, you were talking about the growth potential in, you know, Germany and the UK and some of these bigger markets for FY24. Has your view changed in terms of the total upside of these markets or the kind of ROI from growing in these markets? I understand you're being more targeted and efficient, but has the total size of the pie changed in your view?

Aneesha Sherman: Thank you so much a follow up on international. Please so a few quarters ago, you were talking about the growth potential in Germany, and U K and some of these bigger markets for FY 'twenty four.

Aneesha Sherman: Has your view changed in terms of the total upside of these markets or the kind of ROI of growing in these markets and I understand youre being more targeted and efficient but has the total the total size of the pie changed in your view and then a quick follow up on marketing.

Aneesha Sherman: And then a quick follow-up on marketing. Chris and Liz, you both talked about investing in software and hardware and not as much on marketing. Ultimately, you do need to drive customer acquisition. What do you think about some of these short-term measures to conserve cash by cutting media spend and cutting sales and marketing and how they might impact acquisition in the next couple of quarters? Thank you.

Aneesha Sherman: Chris unless you both talked about investing in software and hardware and not as much on marketing.

Aneesha Sherman: Ultimately you do need to drive customer acquisition, how do you think about some of these short term measures to conserve cash by cutting media spend and cutting sales and marketing and how they might impact acquisition in the next couple of quarters. Thank you.

Liz Coddington: Okay, well, there are a few questions there. Definitely more than one.

Speaker Change: Okay, well, there's a few questions there.

Chris Bruzzo: But I will start with the question about international growth, and really, the question is about upside potential and international growth. Well, first of all, our international paid connected fitness subs actually grew 8% year over year in Q3. However, when we look at our LTV to CAC ratios associated with that growth, we are currently not hitting our target efficiency levels, and so we need to optimize our marketing investment levels to be much more efficient.

Speaker Change: It's definitely more than one.

Chris Bruzzo: But I will start with I'll start with the question about international and really the question is about upside potential in international well first of all our international paid connected fitness subs actually grew 8% year over year in Q3.

Chris Bruzzo: However, when we look at our LTV to CAC ratios associated with that growth. We are currently not hitting our target efficiency levels and so we need to optimize our marketing investment levels to be much more efficient and as we reduce our cost there to be more efficient our growth may be a bit slower, but it will be at a much better LTV to CAC level that allows.

Chris Bruzzo: And as we reduce our costs there to be more efficient, our growth may be a bit slower, but it will be at a much better LTV to CAC level that allows for profitable growth, which gets at the point that Karen was making earlier. Some of the specific changes. We talked about some of the changes that we are making on the international side in terms of optimizing and consolidating resources. But we're also going to be focusing our marketing on segments where we have the highest product market fit.

Chris Bruzzo: For profitable growth, which gets at the point that Karen was making earlier.

Chris Bruzzo: Some of the specific changes so we talked about some of the changes that we're making on the international side in terms of optimizing and consolidating resources.

Chris Bruzzo: But we're also going to be focusing our marketing on segments, where we have the highest product market fit.

Chris Bruzzo: So, you know, we are not going to be focusing on reaching out to every single person in all of those markets, and we believe that by honing our messaging and targeting the right audiences, we will be much more efficient and be able to ultimately grow. We're still optimistic, and we remain focused on international as a growth lever. And it's also important to know that while our growth is a bit slower than we had anticipated previously, we're really encouraged by the fact that we do see low-paid connected fitness churn internationally at rates that mirror the U.S.

Chris Bruzzo: So we are not going to be focusing on reaching out to every single everyone. In all of those markets and we believe that by honing our messaging and targeting the right audiences, we will be much more efficient and be able to ultimately grow we're still optimistic and we remain focused on international as a growth lever.

Chris Bruzzo: And it's also important to note that while our growth is a bit slower than we had anticipated previously we're really encouraged by the fact that we do see low paid connected fitness subscription churn internationally at rates that mirror the U S.

Chris Bruzzo: I also want to point out that our unaided brand awareness is still pretty low in the international markets that we serve today, aside from perhaps maybe Canada, and we see a lot of untapped potential from new countries and markets that we may enter in the future.

Chris Bruzzo: I also want to point out that our unaided brand awareness is still really a pretty low in international markets that we serve today aside from perhaps maybe Canada.

Chris Bruzzo: We see a lot of untapped potential from new countries and markets that we may enter in the future.

Liz Coddington: And I would just add, this is Chris. I would just add, that's it. It's a natural learning curve for companies as they engage in international markets to understand what works, what doesn't, and how to do it efficiently. I think you're seeing and hearing a disciplined approach here from Peloton on how to approach those markets in a way where we maximize the number of people we reach, and we do that in a way that's really efficient.

Liz Coddington: And I would just add this is Chris I would just add that's it.

Liz Coddington: The natural learning curve for companies as they engaged in international markets to understand what works what doesn't have to do it efficiently I think youre seeing and hearing a disciplined approach here from peloton.

Speaker Change: How to approach those markets in a way where we maximize the number of people we reach and we do that in a way that's really efficient and some of what <unk> just talked about in terms of the product market fit the quality of the experience and the kind of engagement and low churn and those are really great starting points, that's where the the strength.

Liz Coddington: And some of what Liz just talked about in terms of the product market fit, the quality of the experience, and the kind of engagement and low churn, those are really great starting points. That's where the strength of the company and its brand are.

Chris Bruzzo: And so from there, we know we can grow as it relates to the marketing question. I think it's important to realize that our focus is really shifting toward growing new audiences, targeting new audiences, expanding to the incredible number of people who've yet to experience or have the Peloton experience. And so it is also a great discipline, just the way we talked about, I just mentioned international, also in marketing, to bring an intense focus, a real drive to get the cost of acquisition in line with the value of bringing new customers on, and that's where our focus is.

Chris Bruzzo: The company and its brands are and so from there. We know we can we can grow.

Chris Bruzzo: As it relates to the marketing question.

Chris Bruzzo: It is important.

Chris Bruzzo: To realize that our focus is really shifting toward growing new audience targeting new audiences expanding.

Chris Bruzzo: To the incredible number of people, who have yet to experience our half the peloton experience and so it is also a great discipline just the same way we've talked about I just mentioned in international also in marketing to bring an intense focus a real drive to getting the cost of acquisition in line with.

Chris Bruzzo: The value of bringing new customers on and that's where our focus is so we agree.

Chris Bruzzo: So we agree that there is still a good, healthy investment by Peloton in marketing and marketing spending, but of course, we want the discipline of being efficient with that, and that will actually allow those dollars to return better and reach more people, and that's the ultimate goal. So there's a lot that has already been discovered as Lauren engages in the opportunity here at Peloton, and I think we're going to see lots of good return from her.

Chris Bruzzo: There is still a good healthy investment by peloton in marketing marketing spending but of course, we want the discipline of being efficient with that and that will actually allow those dollars to return better and reach more people and that's the ultimate goal.

Chris Bruzzo: So theres lots of lot of that.

Chris Bruzzo: As already been discovered as Loren engages in the the opportunity here at peloton and I think there is we're going to see lots of good return from their work.

Liz Coddington: I just wanted to add one thing, you know, when we say that we've pulled back on some of our marketing spending, we're not pulling it tremendously back in a way to really stifle growth. We're just looking at our LTV to CAC ratios and looking at the way that we can improve them and bring them back more in line with our target investment levels. And then it's not just about media spending. I keep honing in on brand and creative spending as well. That's an opportunity that Lauren saw when she got here.

Chris Bruzzo: Yes.

Speaker Change: I just wanted to add one thing when.

Liz Coddington: When we say that we pulled back on some of our marketing spending we're not pulling it tremendously back in a way to really stifle growth or just looking at our LTV to CAC ratios and looking at the way that we can improve them and bring them back more in line with our target investment levels and then it's not just about media spending I keep calling in on brand and creative spending.

Liz Coddington: Well, that's an opportunity that Lawrence all when she got here, we need to make sure that when we look at our marketing spend that we are putting the right balance of working and non working dollars.

Chris Bruzzo: We need to make sure that when we look at our marketing spend, we are putting the right balance of working and non-working dollars into a more optimized way to work. And I just want to make sure that that comes through. That's really what we're focused on there as opposed to pulling back on spending. And it's important to note, as Liz mentioned there, the amount of marketing adjustment that she just referenced a minute ago includes our fixed costs and includes headcount.

Chris Bruzzo: A more optimized way to work and I just want to make sure that that comes through that's really what we're focused on there as opposed to pulling back on spending.

Chris Bruzzo: It is important to note.

Chris Bruzzo: Liz mentioned there were.

Chris Bruzzo: The amount of marketing adjustment that you just referenced a minute ago includes our fixed costs includes head count and we've made some really tough decisions.

Chris Bruzzo: We're going through that restructure plan today and so some of those reductions in.

Chris Bruzzo: And costs related to marketing are about or about head count or about fixed costs. So you shouldnt necessarily think of it all is a reduction in media spending that's just not going to be the case.

Chris Bruzzo: And we've made some really tough decisions. And we're going through that restructuring plan today. And so some of those reductions in costs related to marketing are about headcount or about fixed costs. So you shouldn't necessarily think of it all as a reduction in media spending. That's just not true. Thank you for your question. One moment for our next question.

Chris Bruzzo: Great.

Speaker Change: Thank you for your question. Thank you next question. Please.

Chris Bruzzo: One moment for our next question.

Operator: And that will come from the line of Michael Graham with Canaccord Genuity. Your line is open. Thank you.

Chris Bruzzo: And that will come from the line of Michael Graham with Canaccord Genuity. Your line is open.

Michael Patrick Graham: Thank you and really helpful set of communications here I just wanted to ask about.

Michael Patrick Graham: The trick with the relaunch of <unk> plus.

Michael Patrick Graham: Just maybe talk about the market size for tread and how incremental you think the subscribers theyre going to be to the business.

Michael Graham: Sure, so, as we've said previously, we estimate the tread market to be roughly 2X, the at-home treadmill market to be roughly 2X that of the bike. And as we said also, it's a much smaller share of our Connected Fitness hardware sales compared to the bike. So for us, we see a large opportunity market-wise and then a large opportunity for us.

Michael Patrick Graham: Sure so.

Michael Graham: As we've said previously we estimate the tread market to be roughly two X are the at home treadmill market to be roughly two access of bike and as we said also it's a much smaller share of our connected fitness hardware sales compared to the bike so for US we see a large opportunity market life and then a large opportunity for US we also see that our.

Chris Bruzzo: We also see that our current Tread and Tread Plus sales still skew towards existing members. And so, what you're gonna see us try to do is really take steps to focus marketing efforts on educating potential customers about our product and connecting running with the Peloton brand. And the goal of these efforts is to explain to these potential customers what Peloton can offer them in terms of its tread and running offerings. So a great example of that is the fact that we launched the New York Roadrunner Scenic Collection on Tread and Tread Plus, and that allows members to run the New York Marathon course using metadata and auto-inclines with the course's gradient, which is really a pretty amazing experience, and we believe the first of its kind to be able to be offered.

Chris Bruzzo: Current tried and tried plus cells still skew towards existing members.

Chris Bruzzo: And so what you're going to see us try to do is really take steps to focus marketing efforts on educating potential customers about our tread and connecting running with the peloton brand.

Chris Bruzzo: And the goal of these efforts is to explain to these potential customers how peloton what telephone can offer them in terms of in terms of trends and running offerings. So a great example of that is the fact that we launched that New York Road runners. The net collection on tried and true path and that allows members to run the New York Marathon course, do you think that is.

Chris Bruzzo: Data and auto and clients with of course is great and which is really you know a pretty amazing experience and we believe the first of its kind to be able to be offered.

Chris Bruzzo: And then again, when we talk about tread and opportunity for us, we do see a significant opportunity for us to improve awareness of tread. For us, the unaided awareness is roughly about 24% in the US, and that's like our bike unaided awareness is about double that, so lots of opportunity for us.

Chris Bruzzo: And then again when I when we talk about trials and opportunity for US we do see a significant opportunity for us to improve awareness of tread.

Chris Bruzzo: For us that unaided awareness is roughly about 24% in the U S.

Chris Bruzzo: And that's like our bike unaided awareness is about double that so lots of opportunity for us.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you one moment for our next question.

Operator: 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.

Chris Bruzzo: 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 question.

Andrew M. Boone: Can you talk about your learnings from the App strategy over the last year and what we should we expect this to evolve going forward.

Operator: Sure.

Andrew M. Boone: So, um, in terms of our app strategy, I think we have had a lot of different learnings. Yeah, so first of all, if we, you know, in Q3, our paid app subs underperformed our forecast. We saw lower additions because of softer trial demand than we had expected, and we also had underperformance in our Peloton for Business channel. And that was really related to the timing of deals and when we expected them to happen.

Andrew M. Boone: So and.

Andrew M. Boone: In terms of our App strategy I think we had we have had a lot of different learnings.

Andrew M. Boone:

Andrew M. Boone: Yeah. So first of all if we.

Andrew M. Boone: In Q3, our apps are paid up subs underperformed our forecast we saw lower additions because of softer trial demand than we had expected and we also had underperformance in our peloton business channel and that was really related to the timing of deals and when we expected that to happen and then also where.

Liz Coddington: And then also, where previously in Q2, we had seen lower churn than we were expecting, in Q3, we saw slightly higher churn because we saw some of the subscription cohorts whose legacy pricing expired; we saw higher churn from them. But one key learning that we did have was the fact that we were seeing more subscribers select the app plus tier. And so as a result of that, despite the subscriber decline, we did see our app revenue increase quarter over quarter. And we've been talking a lot about media spend.

Liz Coddington: It previously in Q2, we had seen lower churn than we were expecting in Q3, we saw slightly higher churn because we saw.

Liz Coddington: Some of the subscription cohorts is legacy pricing expired, we saw higher churn from pattern, but one key learning that we did have is the fact that we are seeing more subscribers.

Liz Coddington: Select the App plus tier and so as a result of that despite the subscriber decline we did see our app revenue increased quarter over quarter.

Liz Coddington: And we've been talking a lot about media spend.

Liz Coddington: But while we are improving our app LTV to CAC, we're still below our investment targets, and so we are actively evaluating our app tiering strategy. That includes looking at pricing, looking at our tier structure, and in order to have a disciplined investment framework, we have scaled back marketing spend for apps until we establish a better product-market fit, and we see that we can grow our app more efficiently. Let me talk just really briefly about the subscriber acquisition funnel.

Liz Coddington: While we are improving our LTV to CAC.

Liz Coddington: Well below our investment targets and so we have to we are actively evaluating our app sharing strategy that includes like looking at pricing looking at our tier structure and you know in order to have a disciplined investment framework and we are scaled back marketing spend per app until we establish a better pocket product market fit and we see that we can grow our.

Liz Coddington: At more efficiently for.

Liz Coddington: So let me talk just really briefly about the subscriber acquisition funnel. So we're looking at ways to improve that we see an opportunity to improve our conversion from app download to trial and then also from Ben from trial to conversion.

Liz Coddington: So we're looking at ways to improve that. We see an opportunity to improve our conversion from app download to trial and then also from trial to conversion. And one example of an improvement we recently made was removing the free tier or making it less visible, which moved us in the right direction.

Liz Coddington: And then you know one one example every improvement we recently made with removing the free tier or making it less visible which moved us in the right direction.

Liz Coddington: And we still believe in the app. The app is an important part of our Peloton fitness experience and platform. We're continuing to invest in app product innovation. We have lots of exciting offerings along the way that Nick's team is working on, but we're not ready to share them yet. And we do expect it to be an iterative process as we continue to learn. I also wanna point out that beyond just our paid app sub-base, the subscribers that just pay for the app, it's an important part of our connected fitness subscription offering as well. And on average, we do see the majority of our connected fitness subscribers also use our app on a monthly basis.

Liz Coddington: And then.

Liz Coddington: We still believe in the App. The App is an important part of our peloton fitness experience and platform, we're continuing to invest in our product innovation, we have lots of exciting offerings along the on the way that next team is working on but we're not ready to share them, yet and we do expect it to be an iterative process as we continue to learn.

Liz Coddington: I also want to point out that beyond just our paid apps our base of subscribers that just pay for the App. It's an important part of our connected fitness subscription offering as well and on average we do see the majority of our connected fitness subscribers also use our app on a monthly basis.

Chris Bruzzo: It's another great area where the company is showing discipline and learning. So as we're making these adjustments to tiering strategies and pricing, as we're watching members who had the legacy app actually upgrade, as we're adjusting what the experience is like for groups based on what we're learning, of course, that means we have to optimize our acquisition funnel. This is a digital product, and we have a lot of signals as to what's working from an acquisition standpoint and what isn't.

Liz Coddington: Yeah.

Liz Coddington: Another great area of.

Chris Bruzzo: Where the company is showing discipline and learning so as we're making these adjustments two tiered strategy and pricing as we are.

Chris Bruzzo: As we're watching members who had the legacy.

Chris Bruzzo: Actually upgrade.

Chris Bruzzo: As we're adjusting what the experience is like for groups based on what we're learning of course that means we have to.

Chris Bruzzo: Optimize our acquisition funnel and this is a digital product and we can tell we have a lot of signals as to what's working from an acquisition standpoint, and what isn't and so that just becomes like a constant process of optimizing so.

Chris Bruzzo: And so that just becomes like a constant process of optimizing. So you'll continue to see us do that, whether it's the product, how it's targeted, and the way we're driving it. Great. Sheree, we have time for one more question, please.

Chris Bruzzo: So youll continue to see us do that whether it's the product.

Sheree: It's targeted in the way, we're driving acquisition.

Chris Bruzzo: Great.

Operator: Thank you. And that question will come from the line of Jonathan Komp with Baird. Your line is open.

Sheree: One more question please.

Operator: Thank you and that question will come from the line of Jonathan Komp with Baird. Your line is open.

Jonathan Robert Komp: Yeah, hi, good morning. Thanks, everyone.

Jonathan Robert Komp: Yes, hi, good morning, thanks, everyone a bit of a follow up I'll toss it out to the group, but could you maybe just spend a little time, maybe diagnose seemed a little better.

Jonathan Robert Komp: In your view some of the challenges in returning to growth overall and I guess my question really is.

Jonathan Robert Komp: The spending that you are doing in maintaining or you're spending on the right things. How do you know that are you really just beholden to some of the industry trends that are still an overhang just any more thoughts there would be helpful.

Jonathan Robert Komp: Yes, do you want to start we should start by talking about the connected fitness marketplace.

Jonathan Robert Komp: I think that's really important in.

Operator: A bit of a follow-up, I'll toss it out to the group, but could you maybe just spend a little time maybe diagnosing a little better, in your view, some of the challenges in returning to growth overall? And I guess the question really is, you know, the spending that you are doing and maintaining, are you spending on the right things? How do you know that? Are you really just beholden to some of the industry trends that are still an overhang? Just any more thoughts there would be helpful.

Jonathan Robert Komp: There was significant growth leading into the pandemic and then the extraordinary experience that everybody had during that time, especially for companies like ours.

Operator: Where the in home experience was so relevant during that time and we are still.

Operator: Dealing with the whiplash the normalizing that occurred post COVID-19.

Operator: And that was particularly true again for those products and experiences that we're focused on an in home, but I think we're excited to see this connected fitness marketplace, where we are the dominant market share leader in that space.

Chris Bruzzo: Yeah, if you want to start, we should start by talking about the Connected Fitness Marketplace. I think that's really important.

Chris Bruzzo: And, and You know, there was significant growth leading into the pandemic and then the extraordinary experience that everybody had during that time, especially for companies like ours, where the in-home experience was so relevant during that time. And we are still, you know, dealing with the whiplash, the normalizing that occurred post-COVID, and that was particularly true, again, for those products and experiences that were focused on the home. But I think we're excited to see this connected fitness marketplace, where we're the dominant market share leader in that space, normalize.

Speaker Change: Normalizing and we can see it.

Chris Bruzzo: As we look to the future we can see it reaching.

Chris Bruzzo: An inflection point.

Chris Bruzzo: Ken.

Chris Bruzzo: Reaching that kind of stable place of regular growth and so that's the starting point is the marketplace that we're in contracting or is it growing.

Chris Bruzzo: And we can see it, as we look to the future, it reaching an inflection point, and again, maybe reaching that kind of stable place of regular growth. And so that's the starting point: is the marketplace that we're in contracting, or is it growing? And so we can see good signs that that market is reaching that inflection point, and it's going to return to growth. But the larger question of do we know if we're investing in the right things, I think that's, in fact, really what the restructuring was focused on.

Chris Bruzzo: And so we can see good signs that.

Chris Bruzzo: That market is.

Chris Bruzzo: Is reaching that inflection point is going to return to growth.

Chris Bruzzo: And so this is a sizable cut in our operating cost base, but besides the size of that, that impact, it's also where we made those cuts. And we're intentionally going into those places where we know we can focus more. And so you're hearing me say again and again on this call, there's an opportunity for us to bring discipline, discipline to the way we approach international markets, discipline to the way we handle marketing spending, discipline to where we invest in innovation and in future growth. So that is absolutely a primary focus here at Peloton.

Chris Bruzzo: But the larger question of do we know if we're investing on the right thing I think thats in fact really what the restriction of big part of what the restructure was focused on and so this is this is a sizeable.

Chris Bruzzo: A cut in our operating cost base, but it's but besides the size of that impact. It's also where we made those choices and.

Chris Bruzzo: Intentionally going into those places, where we know we can focus more and so you're hearing me say again and again on this call. There is an opportunity for us to bring discipline discipline to the way we approach international markets disciplined the way, we we handle marketing spending.

Chris Bruzzo: Disciplined to where we invest in innovation and in this in and future growth. So.

Chris Bruzzo: Anything you want to add?

Speaker Change: That is absolutely our primary focus here.

Liz Coddington: Yeah, the only thing I want to add is, aside from the disciplined investments and our strategy, we are going to continue to learn, test, and iterate. We are going to measure on a regular basis how we're tracking against the goals that we set. And we'll be able to course correct as we get there. And, you know, one of the key things about the cost reduction program that we implemented today is that we feel, you know, confident about where we are in terms of generating that positive free cash flow.

Speaker Change: Anything you want to Atlas Yeah, the only thing I do want to add as you know aside from the disciplined investments in our strategy. You know we are going to continue to learn and test and iterate, we are going to measure on a regular basis, how we're tracking against the goals that we set and we'll be able to course correct as we get there.

Liz Coddington: And one of the key things about the cost reduction program that we've implemented today is that we feel confident.

Liz Coddington: Confident about where we are in terms of generating that positive free cash flow and that gives us the confidence that we can continue to work on different types of innovation and find the right ways to deliver a best in class connected fitness experience to a much broader audience over time I think it's really clear that you know.

Liz Coddington: And that gives us the confidence that we can continue to work on different types of innovation and find the right ways to deliver a best-in-class connected fitness experience to a much broader audience over time. I think it's really clear that, you know, we do see a long-term potential backed by a secular trend of people who are increasingly valuing fitness and wellness in their lives. And that's a trend that, you know, that is clear, and it's something that we can use to Peloton's advantage because we are, you know, we believe we are the leader in the connected fitness space. And that's really not going away.

Liz Coddington: We do see long term potential backed by a secular trend of people, who are increasingly valuing fitness and wellness in their lives.

Liz Coddington: And that's a trend that you know that it's clear and it's something that we can use to peloton has advantage. Because we are you know we are we believe we are the leader in the connected fitness space and that's really not going away.

Liz Coddington: I just wanted to double down on what Louis said the trends in health and wellness exercise and fitness they have such benefits to health and too and they are great indicators of a.

Chris Bruzzo: I just want to double down on what Liz said, that the trends in health and wellness, exercise, and fitness, they have such benefits for health, and they're great indicators of, and predictors of, health and longevity. So people are more and more focused on that. It's not going away.

Chris Bruzzo: Predictors of health and longevity. So people are more and more focused on that it's not going away people are getting more educated about it we have a bigger role to play in that conversation as a business and as a brand and we just have a really good mouse trap. We have premium hardware. We have interactive software, we have incredible music are engaging and motivating and struck.

Chris Bruzzo: People are getting more educated about it. We have a bigger role to play in that conversation as a business and as a brand. And we just have a really good mousetrap.

Chris Bruzzo: We have premium hardware. We have interactive software. We have incredible music, and engaging and motivating instructors. And we have this community that interacts with each other. They compete alongside each other on the leaderboard.

Chris Bruzzo: <unk> and we have this this community that interacts with each other they compete alongside each other with the leader Board. It's just again, a really good product market fit and offerings for people. There are people are going back to the office, but not every day.

Chris Bruzzo: It's just, again, a really good product market fit and offering for people. There are, you know, people going back to the office, but not every day. Some people are going to stay working from home. And so, at Home Fitness, you know, the connected fitness market, we are the leader for a reason, because I do think we have the best experience. And so bringing that to more and more people over time is, I think, what we really see as what's going to happen.

Chris Bruzzo: People are going to stay working from home and so at home fitness.

Chris Bruzzo: Fitness market, we are the leader for a reason because I do think we have the best experience and so bringing that more and more people over time I think is what we really see as what's going to happen.

Chris Bruzzo: Yes.

Chris Bruzzo: Great.

Speaker Change: Great. Thank you.

Chris Bruzzo: Yeah.

Chris Bruzzo: Yeah.

Andrew M. Boone: Thank you. I would now like to turn the call over to Karen Boone for any closing remarks.

Chris Bruzzo: Thank you I would now like to turn the call over to Karen Boone for any closing remarks.

Andrew M. Boone: Great. Thank you.

Andrew M. Boone: So I want to close by just reminding everyone that today is a really hard day. Change is always hard, and there's a lot of it to digest today. The restructuring we announced is especially difficult because it's impacting so much of our team. But it's a really critical and necessary step to meeting our objectives around cash flow generation and making sure the business is on solid ground and footing for the years ahead.

Andrew M. Boone: So I want to close with just reminding everyone that today is a really hard day changes always hard and Theres a lot of it to digest today, the restructuring, we announced is especially difficult because it's impacting so much of our team, but it's a really critical and necessary step to meeting our objectives around cash flow generation and making sure the business is on.

Andrew M. Boone: Solid ground in funding for the years ahead.

Andrew M. Boone: Through all the changes over the last several years, our mission has remained constant, to connect the world through fitness, empowering people to be the best version of themselves anywhere, anytime. It has been and continues to be important and meaningful work, and we're so grateful to all the individuals who have contributed along the way.

Andrew M. Boone: Through all the changes over the last several years. Our mission has remained constant to connect the world through fitness empowering people to be the best version of themselves anywhere anytime. It has been and continues to be important and meaningful work and we're so grateful to all the individuals who contribute it along the way.

Operator: This concludes today's program. Thank you all for participating. You may now disconnect.

Speaker Change: Thank you for your time.

Operator: This concludes today's program. Thank you all for participating you may now disconnect.

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