Q4 2024 Peloton Interactive Inc Earnings Call

August 22, 2024

Speaker Change: good day and welcome to pelaton's fourth quarter fiscal year two thousand and twenty four conference call

Operator: At this time, all participants are in a listen-only mode.

Operator: 24 Conference Call. At this time, all participants are in a listen-only month. After the speaker presentation, there will be a question and answer session.

Operator: After the speaker presentation, there will be a question-and-answer session.

Karen Boone: And I should probably under promise here, but I am excited to say that I do believe, you will be speaking to and hearing from the new CEO of Peloton on this call next quarter.

Speaker Change: at this time all participants aren in a listen omonlyment after the speaker presentation there will be a question-and-answer session to ask a question during the session you will me to press star one one on your telephone you will then he an automated message advising your hand is rained

Operator: To ask a question during the session, you will need to press star-one-one on your telephone.

Karen Boone: Thank you.

Operator: To ask a question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand is reached. So, withdraw your question, press star 11 again.

Operator: You will then hear an automated message advising your hand is raised.

Operator: To withdraw your question, press star-one-one again.

Operator: Please be advised that today's conference is being recorded.

Operator: This concludes today's program.

Speaker Change: so what dra to your question pressed 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 mr james marsh senior vice president head of investor relations

Operator: I would now like to hand the conference over to your speaker, Mr. James Marsh, Senior Vice, President, Head of Investor Relations.

Operator: Thank you all for participating.

James Marsh: I would now like to hand the conference over to your speaker, Mr. James Marsh, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

James Marsh: Thank you, operator. Good morning and welcome to Peloton's fourth quarter fiscal 2024 conference call. Joining today's call are Peloton board members and interim co-CEOs, Karen Boone and Chris Bruzzo, as well as Chief Financial Officer Liz Coddington.

Operator: Please go ahead, sir.

Operator: You may now disconnect.

Speaker Change: please go ahead sir

James Marsh: thank you operator good morning and welcome to pelaton's fourthquarter fiscal two thousand and twenty four conference call joining today's call are pelon board members and interim coceos karen boon and chris bruo as well as chief financial officer lives coington

Operator: Good job.

James Marsh: Our comments and responses to your questions reflect management views as of today only, and will include statements related to our business that are forward-looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.

Speaker Change: our comments in responses to your questions reflect management's views out of today only and will include statements related to our business that are forward-looking statements under federal securities law

Speaker Change: actual results may differ materially from those contained and or implied by these forward-looking statements due to risks and uncertainties associate 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 GAP and non-GAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

Speaker Change: for a discussion of the material risks and other important factors that could impact our actual results please refer to our sec filings in today's shareholder letter both of which can be found on our investor relations website

Karen Boon: 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 over the call to interim coceo karen boon

Operator: Thank you, operator.

Karen Boone: I'll now turn it over to the call to Interim Co-CEO, Karen Boone. Good morning, and thank you for joining us today. Before we discuss our Q4 results, I'd like to comment briefly on the CEO transition process, as it is certainly top of mind for us and we expect the same truth for our shareholders. The CEO search is well underway. We've had no shortage of interest, and we have been working through an impressive group of qualified candidates with the help of a leading executive search firm. Our list of candidates is narrowing. However, at this stage, we cannot speculate on the timing for when Peloton's next CEO will start.

James Marsh: Good morning, and welcome to Peloton's fourth quarter fiscal 2024 conference call. Joining today's call are Peloton board members and interim co-CEOs, Karen Boone and Chris, Bruzzo, as well as Chief Financial Officer Liz Coddington.

Operator: Yay.

James Marsh: Our comments and responses to your questions reflect management's views as of today only, and will include statements related to our business that are forward-looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking, statements due to risks and uncertainties associated with our business.

Operator: Thank you.

Karen Boon: good morning and thank you for joining us today before we discuss our q four results i'd like to come ment briefly on the ceo transition process as it is certainly top of mind for us and we expect the same ure for ourshareholders

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.

Operator: You're welcome.

Operator: Good job.

Operator: Yay.

Speaker Change: the ceo search is well underway we've had no shorter of interest and we have been working through an impressive group of qualified candidates with the help of a leading executive search firm

Speaker Change: our listof candidates is narrowing however at this stage we cannot speculate on the timing for when peldon's next ce year will start we are focused on moving quickly but our top priority finding the right leader for pelton's next chapter and look forward to making that announcement as we closed down this important process

Karen Boone: We are focused on moving quickly, but our top priority is finding the right leader for Peloton's next chapter, and look forward to making that announcement as we close down this important process. In the meantime, Chris and I, in partnership with Peloton's strong leadership teams, are continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there, and investing strategically in innovation that will deliver sustainable profitable growth over the long term. This includes software and hardware development to deliver new fitness experiences, evolve our content offerings, and refine our marketing strategy, which we'll discuss in more detail today.

Operator: Good job.

Operator: You did a great job.

Operator: Thanks, Amy.

Chris Andi: in the meantime chrisandi and partnership with pel on strong leadership team are continuing to make progress on several key strategic priorities which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there

Chris Andi: and investing strategically in innovation that will deliver sustainable profitable growth over the long term

Chris Andi: this includes softw and hardbor development to deliver new fitness experiences evolve our content offerings and refiner marketing strategy which will discuss in more detail today

James Marsh: 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.

Karen Boone: One of our most important updates since last quarter relates to our recent refinancing. In May, we completed the successful refinancing of our balance sheet, accomplishing the goals of deleveraging and extending our maturities with more flexible terms at a reasonable cost of capital. Through this holistic transaction, we decreased our debt by roughly 200 million and extended our average maturities out to 2029. Our refinancing was competitively priced and significantly oversubscribed, reflecting strong demand from investments. Masters. Overall, we're delighted with the incredible show of support received in the vote of confidence and telephone speech from the investor community.

Speaker Change: one of our most important updates since last quarter relates to our recent refinancing in may we completed the successful refinancing our balance sheet accomplishing the goals of deleveraging and extending our maturities with more flexible terms at a reasonable cost of capital

James Marsh: I'll now turn it over the call to interim co-CEO, Karen Boone.

Karen Boone: Good morning, and thank you for joining us today.

Speaker Change: through this holistic transaction we decreased our debt by roughly two hundred million and extended our average maturities out to two thousand and twenty-nine

Speaker Change: our refinancing was competitively priced and significantly oversubscribed reflecting strong demand from investors

Speaker Change: overall we' delighted with the incredible show support received and the both confidence and pelsome future from the investor community

Karen Boone: With a solid foundation now in place and an expectation to deliver meaningful sustainable cashflow on an annual basis, we are exploring how best to deploy excess cash as part of an overall capital allocation strategy to de-leggers the balance sheet over time.

Speaker Change: with a solid foundation now inplace and an expectation to deliver meaningful sustainable cash flow on an annual basis we are exploring how best to deploy excess cash as part of the overall capital allocation strategy to delever the balance sheet over time

Karen Boone: Before we discuss our Q4 results, I'd like to comment briefly on the CEO transition process, as it is certainly top of mind for us, and we expect the same is true for our shareholders.

Karen Boone: Last quarter, we talked a lot about bringing the business to solid financial footing by generating free cash flow and operating the business toward sustainable profitable growth. Our Q4 results, which Liz will discuss in greater detail, demonstrate continued progress in achieving these financial objectives, delivering a second consecutive quarter with both positive free cash flow and adjusted EBITDAQ. Something we have not achieved in the last few years. We're intentionally focusing on delivering stronger bottom line results to support our investments in software, hardware, and content to improve our member experience. We're enthusiastic about our innovative roadmap, but we'll be judicious about deploying marketing dollars until we demonstrate product market fit and continue to be cautious about marketing spend, given the uncertain consumer backdrop and ongoing macro environment.

Speaker Change: last quarter we talked a lot about bring the business to solid financial footing by generors and free cashflow and operating the business to sustainable profitable growth our q four results which lives will discuss in greater details demonstrate continued progress and achieving these financial objectives

Karen Boone: The CEO search is well underway. We've had no shortage of interest, and we have been working through an impressive group, of qualified candidates with the help of a leading executive search firm.

Karen Boone: Our list of candidates is narrowing, however, at this stage, we cannot speculate on the, timing for when Peloton's next CEO will start.

Karen Boone: We are focused on moving quickly, but our top priority is finding the right leader for, Peloton's next chapter, and look forward to making that announcement as we close down this important process.

Speaker Change: delivering a second consecutive quarter with both positive for cash flow and adjusted ebitda something we have not achieved in the last few years

Speaker Change: we're intentionally focusing on delivering stronger bottom line results to support our investments in software hardware and content to improve our member experience

Speaker Change: we'reenthusiastic about our innovative roadmap but we'll be judicious about deploying marking dollars until we demonstrate product market fitth and continue to be cautious about marketing spend given the uncertain consumer backdrop and ongoing back for environment

Karen Boone: In the meantime, Chris and I, in partnership with Peloton's strong leadership team, are, continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there, and investing strategically in innovation that will deliver sustainable, profitable growth over the long term.

Karen Boone: For now, we are optimizing our business model, planting the seeds for future growth, and will scale these investments over time to ensure we can deliver sustainable, profitable growth.

Karen Boone: This includes software and hardware development to deliver new fitness experiences, evolve, our content offerings, and refine our marketing strategy, which we'll discuss in more detail today.

Karen Boone: One of our most important updates since last quarter relates to our recent refinancing. In May, we completed the successful refinancing of our balance sheet, accomplishing the goals, of deleveraging and extending our maturities with more flexible terms at a reasonable cost of capital. Through this holistic transaction, we decreased our debt by roughly $200 million and extended, our average maturities out to 2029. Our refinancing was competitively priced and significantly oversubscribed, reflecting strong, demand from investors.

Karen Boone: Overall, we're delighted with the incredible show of support we received and the vote of confidence in Peloton's future from the investor community.

Speaker Change: for now we are optimizing our business model planting the seed for future growth and will scale these investments over time to ensure we can deliver sustainable profitable growth

Karen Boone: With a solid foundation now in place and an expectation to deliver meaningful, sustainable cash flow on an annual basis, we are exploring how best to deploy excess cash as part of an overall capital allocation strategy to deleverage the balance sheet over time. Last quarter, we talked a lot about bringing the business to solid financial footing by generating free cash flow and operating the business towards sustainable, profitable growth.

Karen Boone: One growth initiative where we continue to learn and optimize is our BIC rental program. In Q4, we launched a rental program for BIC Plus in the UK, and early results have outperformed our expectations. Globally, our BIC rental offering continues to drive incremental subscribers and replace to see a continued improvement in retention, with average net monthly paid subscription churn for rental down 110 basis points year over year in Q4. We've shared previously that the ability to use refurbished inventory is key to achieving sustainable unit economics for our original BIC rental offering in the US and Canada.

Speaker Change: one growth initiative where we continue to learn and optimize as our bi brrental program in q four we launched a rentalprogr forbi plus in the uk and early results have outperformed our expectations

Karen Boone: We're intentionally focusing on delivering stronger bottom-line results to support our investments in software, hardware, and content to improve our member experience.

Speaker Change: globally our bke rental offering continues to drive incremental subscribers and re pleased to see a continued improvement in retention with average net monthlythey pid subscription churn for rental down one hundred ten basis points year-over-year in q four

Speaker Change: we've shared previously that the ability to use refurbished inventory is key to achieving sustainable unit economics for our original bike rental offering in the u us and canada

Karen Boone: As refurbished inventory levels have come down, we no longer have sufficient inventory to support the original BIC rental program, so we cease this offering as of August 1st. Since that date, we've seen higher take rates for other offerings, catered toward cost-conscious consumers, including our BIC Plus rental program, the outright sales of refurbished original BICs, and our 0% introductory race financing offers to purchase new BICs. These alternative programs have stronger unit economics than our original BIC rental program, with more cash paid up front and a stronger retention profile.

Speaker Change: as a reurbished inventory levels have come down we no longer has sufficient inventory to support the original by rental program so we see this offering as of august first

Speaker Change: since that date we have seen higher take rates for our other offerings catertoward cost conscious consumers including our byi-plus renttal program the outright sales of referurbished original bikes and our zer percent introductory rate financing offers to purchase new bikes

Speaker Change: these alternative programs have stronger unit economics than our original bike rental program with more cash paid upfront and a stronger retention profile

Karen Boone: We also continue to explore partnerships that will expand our reach and deliver profitable growth. We continue to be pleased with our Lululemon content licensing arrangement, whereby Lululemon Studio members enjoy telephone content on their Mirror products. This partnership has delivered a great experience to these Lululemon Studio members, as evidenced by the continued low-churn profile, while delivering incremental subscription revenue with accretive growth margins for Peloton.

Speaker Change: we also continue to explore partnerships that will expand our reach and deliver profitable growth we continue to be pleased with our lou lemon content licensing rangements whereby luther limin studio members enjoy intelligent content on their meirror products

Speaker Change: this partnership has delivered a great experience to these lou-le studio members as evidenced by the continued low-term profile while delivering incremental subscription revenue with accretive gross margin for pllaton

Karen Boone: Building on the success we've seen with the content licensing thus far, last week we announced another multi-year content licensing arrangement with Google Fitbit to offer a wide portfolio of telephone classes in the U.S., the U.K., Canada, and Australia. Fitbit will distribute best-in-class telephone content to the highly engaged user race on Fitbit's app. Peloton members will also receive special offers on the Google Pixel Watch and Fitbit Charge 6 devices as part of this partnership.

Speaker Change: building on this success we've seen with the content licensing thus far last week we announced another multiyear content licensing arrangement with a google fitfit to offer wide portfolio of peleon classes in the u s the u k canada and austral guest

Speaker Change: fit will distribute best-in-class teleon content to the highly engaged user rates on fit this app helus on members will also receive special offers on the google pixel watch and tiitfit chargeed six devices as part of this partnerships

Karen Boone: Turning to our hardware business, we are focused on delivering growth-market improvements for our premium connected business products. We have been pleased with the introduction and expansion into third-party distribution channels, both in North America and on our international markets, but are doing work to optimize the economics of these channels. This effort includes evaluating certain product pricing models, discounting strategies, and the way we deploy media dollars. We expect to continue to see improvements in our connected business segment, growth margins, and fiscal 25 as a result of these efforts.

Speaker Change: turning to our hardware business we are focused on delivering gross margin improvements for our premium connected business products

Speaker Change: we've been pleased with the introduction and expansion into third-party distribution channels both in north america and on our international markets but are doing work to optimethe economics of these channels this effort includes evaluating certain product pricing models discounting strategies and the way we deployed media dollars

Speaker Change: we expect to continue to see improvements in our connected fitness segment growross margins in fiscal twenty-five as a result of these efforts

Karen Boone: We are also pleased with our continued progress in the turnaround of pre-core, which delivered strong year-over-year revenue growth in the quarter, driven in part by key product launches, including the fiscal 24 launch of next-generation cardioponcils and new strengths products. Pre-core is also improving their bottom-line performance, with strong year-of-year improvement in growth margins and reductions in operating expenses.

Speaker Change: we are also pleased with our continued progress in the turner around a precorps which delivered strong year-over-year revenue growth in the quarter driven in part by key product launches including the fiscal twenty-four launch of next-generation cardio pso and new strength products

Speaker Change: precourt is also improving their bottom line performance with strong year-over-year improvement in risk margin and reductions and operating expenses

Christopher Bruzzo: I will now pass the call over to Chris, who will provide an update on our marketing strategy and product development. Chris?

Speaker Change: i will now ask the call over to chris who will provide an update on our marketing strategy and product development

Karen Boone: We're enthusiastic about our innovative roadmap, but will be judicious about deploying marketing dollars until we demonstrate product-market fit, and continue to be cautious about marketing spend given the uncertain consumer backdrop and ongoing macro environment.

Christopher Bruzzo: Thanks, Karen. As Karen mentioned, we are focused on managing the business for sustainable, profitable growth. So I could touch on how this is manifesting in our approach to sales and marketing. In our 200 million cost restructuring plan that we announced in May, which Liz will provide an update on shortly, we included cost reductions in some areas within sales and marketing, such as lower brand and creative spend, lower retail expenses from reducing our showroom footprint, and lower headcount. However, the 200 million cost restructuring plan did not include any media spend reductions. In Q4, we delivered additional cost savings by reducing our media spend year-over-year.

Chris Andi: thank as karen mentioned we are focused on managing the business for sustainable profitable growth so i to touch on how this is manifesting in our approach to sales andthe marketing

Karen Boone: One growth initiative where we continue to learn and optimize is our bike rental program. In Q4, we launched a rental program for Bike Plus in the UK, and early results have outperformed our expectations.

Karen Boone: Globally, our bike rental offering continues to drive incremental subscribers, and we're pleased to see a continued improvement in retention, with average net monthly paid subscription churn for rental down 110 basis points year-over-year in Q4.

Karen Boone: We've shared previously that the ability to use refurbished inventory is key to achieving sustainable unit economics for our original bike rental offering in the U.S. and Canada. As our refurbished inventory levels have come down, we no longer have sufficient inventory to support the original bike rental program, so we ceased this offering as of August 1.

Liz: in our two hundred million cost restructuring plan that we announced in may which lliz will provide an update on shortly we included cost reductions in some areas within sales and marketing such as lower brand and creative spend lower retail expenses from reducing our showroom footprint and lower headcount

Karen Boone: Since that date, we have seen higher take rates for our other offerings catered toward cost-conscious consumers, including our Bike Plus rental program, the outright sales of refurbished original bikes, and our 0% introductory rate financing offers to purchase new bikes. These alternative programs have stronger unit economics than our original bike rental program, with more cash paid up front and a stronger retention profile.

Karen Boone: We also continue to explore partnerships that will expand our reach and deliver profitable growth.

Karen Boone: We continue to be pleased with our Lululemon content licensing arrangement, whereby Lululemon studio members enjoy Peloton content on their Mira products. This partnership has delivered a great experience to these Lululemon studio members, as evidenced by the continued low churn profile, while delivering incremental subscription revenue with accretive gross margins for Peloton.

Karen Boone: Building on the success we've seen with the content licensing thus far, last week we announced another multi-year content licensing arrangement with Google Fitbit, to offer a wide portfolio of Peloton classes in the U.S., the U.K., Canada, and Australia. Fitbit will distribute best-in-class Peloton content to the highly engaged user base on Fitbit's app. Peloton members will also receive special offers on the Google Pixel Watch and Fitbit, Charge 6 devices as part of this partnership.

Karen Boone: Turning to our hardware business, we are focused on delivering gross margin improvements for, our premium connected fitness products. We have been pleased with the introduction and expansion into third-party distribution, channels both in North America and on our international markets, but are doing work to optimize the economics of these channels. This effort includes evaluating certain product pricing models, discounting strategies, and, the way we deploy media dollars.

Liz: however the two hundred million cost restruuring plan did not include any media spend reductions

Speaker Change: in q four we delivered additional cost savings by reducing our media spend year-over-year we'll continue to oimize our media inestment in fiscal twenty-five to improve our efficiency

Christopher Bruzzo: We will continue to optimize our media investment in fiscal 25 to improve our efficiency, which is an important priority for us. Because while our Q4-LTP to CAC ratio of 1.5 times improved significantly compared to Q4 last year, it is still below our two to three times target range. We have more work to do. These efforts are providing additional upside to the bottom line, as we reduced total sales and marketing expense by 26 million, or 19 percent, year-over-year in Q4. We are also seeing early signals that our approach to reach men via marketing is resonating. We saw significant improvements in awareness of our strength and cycling disciplines for men in the quarter.

Lliz: which is an important priority for us because while our q four ltv to cack ratio of one point five times improved significantly compared to q four last year it is still below are two to three times target range

Karen Boone: We expect to continue to see improvements in our connected fitness segment growth margins, in fiscal 25 as a result of these efforts.

Karen Boone: We are also pleased with our continued progress in the turnaround of PreCore, which delivered, strong year-over-year revenue growth in the quarter, driven in part by key product launches, including the fiscal 24 launch of next-generation cardio consoles and new strength products.

Karen Boone: PreCore is also improving their bottom-line performance with strong year-over-year improvement, in gross margin and reductions in operating expenses.

Speaker Change: we have more work to do

Speaker Change: these efforts are providing additional upside to the bottom line as we reduce to total sales and marketing expense by twenty-six million or nineteen percent year-over-year in q four

Speaker Change: we're also seeing early signals that our approach to reach men be a marketing is resonating

Speaker Change: we saw significant improvements and awareness of our strength and cycling disciplines from men in the quarter

Karen Boone: I will now pass the call over to Chris, who will provide an update on our marketing strategy, and product development.

Christopher Bruzzo: Next, I am going to discuss the new approach we're taking to servicing the secondary market, which is when a customer elects to purchase used Calton hardware directly from a previous owner. The secondary market is an important source of subscribers for us, and continues to deliver a steady stream of paid connected fitness subscriber additions, which were up 16 percent year-over-year in Q4. We believe a meaningful share of these subscribers are incremental, and they exhibit lower net turn rates than rental subscribers. Although these secondary market sales are not from Peloton-owned channels or any of our third-party distribution partners, we want to ensure these new members receive the same high-quality onboarding experience Peloton is known for.

Karen Boone: Chris?

Speaker Change: next i'm going to discuss the new approach we're taking to servicing the secondary market which is when a customer elects to purchase use s on hardware directly from my previous owner

Chris: Thanks, Karen.

Chris: As Karen mentioned, we are focused on managing the business for sustainable, profitable growth. I would like to touch on how this is manifesting in our approach to sales and marketing.

Speaker Change: the secondary market is an important source of subscribers for us and continues to deliver a steady stream of paid connected fitness subscriber additions which were up sixteen percent year-over-year in q four

Speaker Change: we believe a meaningful share of these subscribers are incremental and they exhibit lower net churn rates than rental subscribers

Speaker Change: although these secondary market sales are not from pelaton owned channels or any of our third-party distribution partners we want to ensure that these new members received the same high- quality onboarding experienced teleon is known for

Christopher Bruzzo: With that in mind, we're initiating a new one-time $95 used equipment activation fee in the U.S. and Canada.

Speaker Change: with that in mind we're initiating a new one time ninety-five dollars used equipment activation fee in the u us and canada

Christopher Bruzzo: For Peloton bike and bike plus purchasers, we offer a virtual custom fitting so members can get the most out of their bike from ride number one. It's important to point out especially for these subscribers that they also have access to a history summary on their pre-owned hardware. We're also offering these new members discounts on accessories such as bike shoes, bike mats, and spare parts. We'll continue to lean into this important channel and find additional ways to improve the new member experience. For example, providing early education about the broad range of fitness modalities that we offer and the many series and programs our instructors provide to new members. It's also worth highlighting that this activation fee will be a source of incremental revenue and gross profit for us, helping to support our investments in improving the fitness experience for our members. Now let's move on to our tread business; growing tread remains a top priority for us, and I'd like to take a moment to provide an update on our progress. Connected fitness revenue from our treadmill portfolio grew 42% year over year in Q4 due to the reintroduction of our higher priced tread plus. In fiscal 2024, tread plus continues to deliver a best in class running experience, driving member enthusiasm as evidenced by its net promoter score of 76, the highest across all of our connected fitness products. To support our tread growth efforts, we're investing in content offerings and product features designed to enhance the walking and running experience on our platform. We launched peace targets in Q4, a new offering that enables instruction for personalized intensity levels as an alternative to treadmill speed. We are already seeing positive responses from repeat usage of peace targets among our performance runners. We also launched our half marathon training program on global running day in June. This edition expands our race training offering, which has helped over 300,000 members train for a race since the series was first launched in 2019. Under the leadership of Nick Caldwell, our product team's pace of software innovation is increasing. In Q4, we launched the capability to find friends, which enhances our platform's community building potential beyond the leaderboard. New and prospective members may now use find friends to connect with their existing network. This and other upcoming social features launching soon are designed to enhance the member experience with organic community-based motivation. Watch this space for the rollout of some highly requested social features like private groups and challenges. We expect these social features to drive member retention and organic acquisition over time. In addition to social features, we recently announced public beta testing for experimental software feature developments on our platform, including personalized plans, a strength plus app, and more game inspired workouts. Personalized plans are designed to help members create a fitness routine tailored to their specific goals and needs. We will be testing this new offering on the Peloton app. Our strength plus app allows us to test a new strength content format with instructor-led workout programs compatible in a gym setting paired with expert coaching audio guidance. And through game inspired workouts, we are testing experimental cycling experiences meant to encourage social engagement in a virtual training environment. We will test, learn, and iterate on these software development projects, and we look forward to sharing more about these and other software-based future developments expected to roll out in the upcoming quarters of fiscal 25.

Speaker Change: pro pellon bike and by plus purchasers we offer a virtual custom fidding so members can get the most out of their bike from ride number one

Speaker Change: it' important topoint out especially for these subscribers that they also have access to a history summary on then preowned hardware

Speaker Change: we're also offering these new members discounts on accessories such as ike shoes bike math and spare parts

Speaker Change: we'll continue to lean into this important channel and find additional ways to improve the new member experience

Speaker Change: for example providing early education about the broad range of fitness moalities that we offer and the many series and programs our instructors provide to new members

Speaker Change: it's also worth highlighting that this activation fee will be a source of incremental revenue and gross profit for us helping to support our investments in improving the fitness experience for our members

Speaker Change: now let's move on to our thread business

Speaker Change: growing tread remains a top priorityfor us and i'd like to take a moment to provide an update on our progress

Speaker Change: connected fitness revenue from our treil portfolio grew forty percent year-over-year in q four due the reintroduction of our higher priced tread plus in fiscal two thousand andtwenty-four

Speaker Change: triplp continues to deliver v-in- class running experience driving member enthusiasm as eviden by its net promoter score of seventy sixts the highest across all of our connected fitness products

Speaker Change: to support our tread growth efforts we're investing in content offerings and product teachers designed to enhance the walking and running experience on our platform

Speaker Change: we losted peace targets in q four a new offering that enables instruction for personalized intensity levels as an alternative to trendl speed

Speaker Change: we are already think positive responses from repeat usage of pace targets among our performance runners

Speaker Change: we also lost our half marathon training program on global running day in june this ition expands our race training offering which has helped over three hundred thousand memnumbers train for a race since the series was first launched in two thousand and nineteen

Speaker Change: under the leadership of nicholewell our product team's pace of software innovation is increasing in q four we launched the capability to find friends which enhances our platforms community building potential beyond the leader board

Speaker Change: new and perspective members may now use buying friends to connect with their existing network this and other upcoming social features launching soon are designed to enhance the member experience with organic community-based motivation

Speaker Change: watch this pace for the rollout of some highly requested social features like private groups and challenges

Speaker Change: we expect these social features to drive member retention and organic acquisition over time

Speaker Change: in addition to social futures we recently announced public beatta testing for the experimental software feuture developments on our platform including personalized plans

Speaker Change: a strength plus app and more gam-inspired workouts

Speaker Change: personalized plans are designed to help members create a fitness routine tailo to their specific goals and needs

Speaker Change: we'll be testing this new offering on the pel on app

Speaker Change: our strength plus app allows us to test a new strg content format with instructctor led workout programs compatible in a gym-setting paired with expert coaching audio guidance

Speaker Change: yeah

Speaker Change: and through a gam inspired workouts we are testing experimental cycling experiences meant to encourage social engagement in a virtual trainding environment

Speaker Change: we will test learn and iterate on these software development projects and we look forward to sharing more about these and other software based future developments expected to ll out in the upcoming quarters of fiscal twenty-five

Christopher Bruzzo: We're confident about our new software-driven experiences, and it's exciting as we always are to innovate on software. It's our instructor-led content that is the core of our business. Looking ahead, we are using the extensive expertise of our instructors in new ways, and we'll look to complement the team with guests and potentially new instructors as we find the right voices to reach our incredibly high standards. Two recent examples of this guest instructor strategy that our members responded positively to were the return of accomplished fitness coach Irene Keimer in Germany and Christian Vandeville, a professional cyclist in the U.S.

Speaker Change: we're confident about our new software driven experiences and it's excitedas we always are to innovate on software it's our instructctor led content that is the core of our business

Speaker Change: looking ahead we are using the extensive expertise ofour instructors in new weways and we'll look to complement the team with guest and potentially new instructors as we find the right voices to reach our incredibly high standard

Speaker Change: two recent examples of this guest instructor strategy that our members responded positively to where the return of accomplished fitness coach irene kimer in germany and christian vandevville a professional cyclist in the u s

Christopher Bruzzo: There is no doubt that the connection and authenticity that our instructors bring to our members is a significant part of our competitive differentiation today, and we will work side by side with these incredible athletes to continue to evolve our content offerings and serve our members in new and innovative ways.

Speaker Change: there is no doubt that the connection and authenticity that our instructors bring to our members is a significant part of our competitive differentiation today

Speaker Change: and we will work side-byside with these incredible athletes to continue to evolve our content offerings and serve our members in new and innovative waysves

Christopher Bruzzo: In fact, on Tuesday of this week, we announced the addition of three new entertainment partners that are now accessible through our connected fitness platform: AMC Plus, Kindle, and Direct TV. We also launched a new feature called Just Guidance, which allows members to follow workout plans created by instructors while enjoying their favorite entertainment content.

Speaker Change: and back on tuesday of this ek weannounced the addition of three new entertainment partners that are now accessible through our connected for this platform amc plus kindle and direct tv

Speaker Change: we also launch a new future call just guidance which allows numbers to follow workoutplans created by instructors

Liz Coddington: And now Liz will take us through a review of financial performance. Thank you, Chris. First, I'd like to touch on how we are tracking against the cost restructuring plan we announced at our last program called back in May. We made substantial progress toward achieving our plan to deliver over $200 million in run rate cost savings by the end of fiscal 25, delivering approximately $15 million of cost savings in the quarter. Roughly 11 million of the cost savings came from payroll reductions, and the remaining 4 million came from other non-payroll savings. We remain on track to achieve the full 200 million in run rate cost savings by the end of the fiscal year.

Speaker Change: while enjoying their favorite entertainment content

Chris: In our $200 million cost restructuring plan that we announced in May, which Liz will provide, an update on shortly, we included cost reductions in some areas within sales and marketing, such as lower brand and creative spend, lower retail expenses for reducing our showroom footprint, and lower headcount.

Speaker Change: and now this will take us through a review of financial performance

Chris Andi: thank you chris

Speaker Change: first i'd like to touch on how we are tracking against the cost restructuring planund we announced at our last onning's call back in may

Chris: However, the $200 million cost restructuring plan did not include any media spend reductions.

Speaker Change: we make substantial progress toward achieving our plan to deliver over two hundred million dollars in run rate cost savings by the end of fif co twenty-five delilivereding approximately fifteen million dollars of cost savings in the quarter

Speaker Change: roughly eleven million of the cost savings came for payroll reductions and the remaining four million came from other non-payroablell savings

Speaker Change: we remain on track to achieve the full two hundred million and run rate cost savings by the end of fif the fiscal year

Chris: In Q4, we delivered additional cost savings by reducing our media spend year-over-year. We'll continue to optimize our media investment in fiscal 25 to improve our efficiency, which, is an important priority for us, because while our Q4 LTV to CAC ratio of 1.5 times improved significantly compared to Q4 last year, it is still below our 2 to 3 times target range.

Liz Coddington: We also expect to deliver additional efficiency through reductions to media spend that are not part of the restructuring plan, and we continue to look for opportunities to further reduce our operating costs and improve our working capital efficiency.

Speaker Change: we also expect to deliver additional efficiency through reduction to offsense that are notck part at the restructuring pl and we continue to look for opportunities to further reduce our operating costs and improve our working capital efficiency

Liz Coddington: Now let's spend a few minutes on our Q4 results. We ended the quarter with $2.98 million paid connected fitness subscribers, reflecting a net decrease of $75,000 in the quarter. This exceeded the high end of our guidance range, as a result of higher than expected growth additions in first-party, third-party retail, and secondary market channels. Average net monthly paid connected fitness subscription term was 1.9%, which was in line with internal expectations and up roughly 10 basis points year over year. We ended the fourth quarter with $615,000 paid app subscriptions, reflecting a net decrease of $59,000 in the quarter.

Chris: We have more work to do.

Speaker Change: now let's spend a few minutes on our q four results

Speaker Change: we ended the quarter with two point nine eight million paid connected fitness subscribers reflecting a net decrease of seventy-five thousand in the quarter

Speaker Change: this exceed the high end of our guidance range as a result of higher than expected growth additions in first party third-party retail and secondary market channels

Speaker Change: average net monthly paid connected fitness subscription churn with one point nine percent which was in line with internal expectations and up roughly ten basis points year-over-year

Speaker Change: we ended the fourth quarter with six hundred and fifteen thousand paid act subscriptions reflecting a net decrease of fifty-nine thousand in the quarter

Liz Coddington: This result exceeded the high end of our guidance range primarily from favorable average monthly paid act subscription term, which was 8.4% in the quarter. While action was down roughly 80 basis points quarter over quarter in Q4, we anticipated term to remain somewhat elevated in the quarter due to the roll off of subscribers associated with a specific corporate wellness client that did not renew their agreement. As Chris discussed earlier, we are continuing to invest in new content and features for the app, focused on enhancing our strengths, content offering, personalization, and social features. While we develop these enhancements, which we believe will result in a significant improvement in our overall app experience over time, we are reducing the amount of media spend supporting growth in paid app subscriptions for now to maximize our media efficiency.

Speaker Change: this results exceed the high end of our guidance range primarily from favorable average monthly paid ap subscription turnurn which was eight point four percent in the quarter

Speaker Change: while optionurn was doubt roughly eighty basis points quarter over quarter in q four we anticipated ch to remain somewhat elevated in the quarter due to the rolloff of subscribers associated with a specific corporate wellness clients that did not renew their agreement

Speaker Change: as chris discussed earlier we are continuing to invest in new content and features for the appps focused on enhancing ourstrengths content offering personalization and social features

Speaker Change: while we develop these enhancements which we believe will result in a significant improvement in our overall app experience over time we are reducing the amount of media spend supporting growth in paid app subscriptions for now to maximize our media efficiency

Liz Coddington: Total revenue was 644 million in the quarter comprising 212 million of connected fitness segment revenue and 431 million of subscription segment revenue. Total revenue was slightly above the high end of our 618 to 643 million guidance range and up modestly year-over-year by 0.2%. Total growth profit was 312 million in the fourth quarter, yielding a growth margin of 48.5%, which was above the high end of our guidance range. Our connected fitness segment growth margin was 8.3%, ahead of our internal expectations. This included 10.7 million of inventory write-offs for excess and returned inventory. Excluding the impact of inventory write-offs and one time CROG's item, adjusted connected fitness growth margin was 10.2%, expanding over 15% points compared to the same period a year ago.

Chris: These efforts are providing additional upside to the bottom line.

Speaker Change: total revenue was six hundred and forty four million in the quarter comprising two hundred and twelve mion of connected fthness segment revenue and four hundred and thirty one million of subscription segment revenue

Chris: As we reduced total sales and marketing expense by 26 million, or 19% year-over-year in Q4.

Chris: We're also seeing early signals that our approach to reach men via marketing is resonating.

Chris: We saw significant improvements in awareness of our strength and cycling disciplines for, men in the quarter.

Speaker Change: total revenue was slightly above the high end of our six hundred and eighteen to six hundred and forty-three million guidance range and up modestly year-over-year by zero point two percent

Speaker Change: total growgross profit was three hundred and twelve million in the fourth quarter yielding a growth margin of forty eight point five percent which was above the high end of our guidance range

Speaker Change: our connected fitness segment growth margin was eight point three percent ahead of our internal expectations

Speaker Change: this included ten point seven million of inventory rightite-off for excess and returned inventory excluding the impact of inventory rightite-offs and one time

Chris: Next, I'm going to discuss the new approach we're taking to servicing the secondary market, which is when a customer elects to purchase used Peloton hardware directly from a previous owner. The secondary market is an important source of subscribers for us and continues to deliver, a steady stream of paid connected fitness subscriber additions, which were up 16% year-over-year in Q4. We believe a meaningful share of these subscribers are incremental, and they exhibit lower net, churn rates than rental subscribers.

Chris: Although these secondary market sales are not from Peloton-owned channels or any of, our third-party distribution partners, we want to ensure these new members receive the same high-quality onboarding experience Peloton is known for. With that in mind, we're initiating a new one-time $95 used equipment activation fee, in the U.S. and Canada.

Chris: For Peloton Bike and Bike Plus purchasers, we offer a virtual custom fitting so members can get the most out of their bike from ride number one.

Speaker Change: cog's items adjusted connected fitness gross margin was ten point two percent expanding over fifteen percentage points compared to the same period a year ago

Liz Coddington: Total operating expenses, including restructuring and impairment expenses, were 375 million in the fourth quarter compared to 427 million for the period a year ago. Sales and marketing expense decreased 26 million versus the year-ago period, reflecting lower spending on media, retail showrooms, and brand and creative spend. Research and development expense decreased 2.8 million versus the year ago period, primarily driven by reductions in business operations and product development and research costs. General and administrative expense increased by 23 million versus the year-ago period, driven by an increase in stock-based compensation, primarily related to expense recognized in connection with the CEO transition, partially offset by lower depreciation and amortization expense.

Speaker Change: total operating expenses including restructuring and inpairment expenses were three hundred seventy five million in the fourth quarter compared to four hundred twenty seven million for the period a year ago

Speaker Change: sales and marketing expense decreased twenty-six million versus the year ago period reflecting lower spending on media retail showrooms and brand and creative spend

Speaker Change: research and development expense decreased two point eight million versus the year ago period primarily driven by reductions in business operations and product development and research costs

Speaker Change: general and administrative expense increased by twenty-three million versus the yearago period driven by an increase stock-bbased compensation primarily related to expense recognized in connection with the ceo transition partially offset by lower depreciation and amortization expense

24 Conference Call.

Operator: 24 Conference Call. At this time, all participants are in a listen only month. After the speaker presentation there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is reached. So, withdraw your question, press star 11 again.

Operator: At this time, all participants are in a listen only month. After the speaker presentation there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is reached.

Liz Coddington: This quarter, we recognized 7.8 million of impairment and restructuring expense, of which 8.2 million was non-cash. The non-cash charges were primarily driven by impairment losses related to connected fitness assets. The cash charges were primarily driven by 8.5 million benefits to severance and other personnel costs due to reversals and severance accruals, which were partially offset by 3.1 million relating to exit and disposal costs and professional fees. Adjusted EBITDA with 70 million in the fourth quarter, a 105 million improvement from the period a year ago. We generated 26 million in free cash flow in the quarter, the second consecutive quarter of positive free cash flow, something we haven't accomplished since the second quarter of fiscal year 2021.

Speaker Change: this quarter we recognized seven point eight million of impairment and restructuring expense of which eight point two million was noncash the noncash charges will primarily driven by impairment losses related to connected fitness assets

Operator: Please be advised that today's conference is being recorded.

James Marsh: I would now like to hand the conference over to your speaker, Mr. James Marsh, Senior Vice President, Head of Investor Relations. Please go ahead, sir. Thank you, operator.

Speaker Change: the cash charges were primarily driven by eight three point five million benefit to severance and other personnel cost due to reversals and severance accruals which were partially offset by three point one million relating to exit and disposal costs and professional fees

Operator: So, withdraw your question, press star 11 again.

James Marsh: Good morning and welcome to Peloton's fourth quarter fiscal 2024 conference call. Joining today's call are Peloton board members and interim co-CEOs, Karen Boone and Chris Bruzzo, as well as Chief Financial Officer Liz Coddington. Our comments and responses to your questions reflect management views out of today only, and will include statements related to our business that are forward-looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.

Speaker Change: adjusted ebitda was seventy million in the fourth quarter a one hundred and five million improvement from the period a year ago

Speaker Change: we generated twenty-six million a free cash flow in the quarter

Speaker Change: the second consecutive quarter of positive free cash flow something we haven't accomplished since the second quarter of fiscal year two thousand and twentyone

Liz Coddington: We ended the quarter with 698 million in unrestricted cash and cash equivalents. We also have access to a 100 million revolving credit facility, which remains undrawn to date.

Speaker Change: we ended the quarter with six hundred and ninety-eight million in unrestricted cash and cash equivalence we also have access to a one hundred million revolving credit facilities which remains undraong to date

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 sureholder letter, both of which can be found on our investor relations website. During this call, we will discuss both GAP and non-GAP financial measures. A reconciliation of GAP to non-GAP financial measures is provided in today's sureholder letter.

Chris: It's important to point out, especially for these subscribers, that they also have access to a history summary on their pre-owned hardware.

Liz Coddington: Overall, our Q4 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.

Speaker Change: overall our q four performance reflects our continued leadership in the connected fitness categor rate and the strength of our subscription business as well as the tremendous progress we have made in rearchitecting our cost structure

Liz Coddington: Next, I'd like to provide context on our financial outlook for the first quarter and fiscal year 2025. Our guidance for first quarter of fiscal 2025, ending paid connected fitness subscription, reflects an expected year-over-year decline in hardware sales based on multiple factors. From a market perspective, the first quarter is typically a seasonally low quarter for hardware sales, as consumers shift their discretionary spending toward categories like travel and sporting growth during the summer months. We also expect continued sales headwinds as a result of an uncertain macroeconomic environment. Additionally, with our focus on improving profitability, our sales outlook reflects some decisions we've made that we expect to have an impact on our hardware sales in the quarter.

Karen Boone: I'll now turn it over to the call to interim co-CEO, Karen Boone. Good morning and thank you for joining us today. Before we discuss our Q4 results, I'd like to comment briefly on the CEO transition process, as it is certainly top of mind for us and we expect the same truth for our shareholders. The CEO search is well underway. We've had no shortage of interest and we have been working through an impressive group of qualified candidates with the help of a leading executive search firm.

Operator: Please be advised that today's conference is being recorded.

Speaker Change: next i'd like to provide context on our financial outlook for the first quarter and a fiscal year of two thousand and twenty-five

James Marsh: I would now like to hand the conference over to your speaker, Mr. James Marsh, Senior Vice President, Head of Investor Relations.

Speaker Change: our guidance for first quarter fiscal two thousand and twenty-five ending paid connected fitness subscriptions reflects an expected year-over-year decline in hardware sales based on multiple factors

James Marsh: Please go ahead, sir.

James Marsh: Thank you, operator.

Speaker Change: from a market perspective the first quarter is typically a seasonally low quarter for our hardware sales as consumers shift their discretionary spending toward categories like travel and sporting growth during the summer months

James Marsh: Good morning and welcome to Peloton's fourth quarter fiscal 2024 conference call.

Karen Boone: Our list of candidates is narrowing. However, at this stage, we cannot speculate on the timing for when Peloton's next CEO will start. We are focused on moving quickly, but our top priority is finding the right leader for Peloton's next chapter, and look forward to making that announcement as we close down this important process. In the meantime, Chris and I in partnership with Peloton's strong leadership teams are continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there, and investing strategically in innovation that will deliver sustainable profitable growth over the long term. This includes software and hardware development to deliver new fitness experiences, evolve our content offerings and refine our marketing strategy, which we'll discuss in more detail today.

James Marsh: Joining today's call are Peloton board members and interim co-CEOs, Karen Boone and Chris Bruzzo, as well as Chief Financial Officer Liz Coddington.

James Marsh: Our comments and responses to your questions reflect management views out of today only, and will include statements related to our business that are forward-looking statements under federal securities law.

Speaker Change: we also expect continued salesheadwsas a relt of an uncertain macroeconomic environment

James Marsh: Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's sureholder letter, both of which can be found on our investor relations website.

Speaker Change: additionally with our focus on improving profitability our sales outlook reflects some decisions we've made that we expect to have an impact on our hardware sales in the quarter

Liz Coddington: We are reducing sales and marketing spend year over year as we continue to focus on optimizing media spend. We have also decided to run fewer promotions within the quarter compared to the same period last year. And as Karen previously mentioned, we made the decision to no longer offer a rental option for our original bike starting August 1, due to limited refurbished bike inventory available. While we are not providing specific guidance on average net monthly paid connected fitness churn, we expect our churn rate to be relatively similar to Q4 Fiscal 2024. Our first quarter paid app subscription guidance reflects an expected sequential decline in growth additions due to seasonality coupled with sequential improvement in average monthly paid app subscription churn.

Speaker Change: we are reducing sales and marketing spend year-over-year as we continue to focus on optimizing media spend we have also decided to run fuwer promotions within the quarter compared to the same period last year

Speaker Change: and at karen previously mentioned we made the decision to no longer offer a rental option for our original bike starting august first due to limited refurbished byike inventory available

James Marsh: During this call, we will discuss both GAP and non-GAP financial measures. A reconciliation of GAP to non-GAP financial measures is provided in today's sureholder letter.

Karen Boone: I'll now turn it over to the call to interim co-CEO, Karen Boone.

Karen Boon: while we are not providing specific guidance on average net monthly paid connected fitness churn we expect our sur rate to be relatively similar to q four fif goal two thousand and twenty-four

Karen Boone: Good morning and thank you for joining us today.

Karen Boon: our first quarter paid ap subscription guidance reflects an expectance sequential decline in growth additions due to seasonality coupled with sequential improvement and average monthly paid act subscription terms

Liz Coddington: We expect our churn rate to improve quarter over quarter due to stabilization in our corporate wellness paid app subscription base. Our first quarter revenue guidance reflects the impact of these hardware sales and subscription trends, combined with our business decisions to improve profitability. We expect a sequential increase in first quarter total growth margin as a result of a seasonal mix toward our subscription segment. We also expect significant year-over-year improvement in first quarter adjusted EBITDA, mainly due to lower sales and marketing expense and continued progress toward achieving our 200 million cost reduction plan. Our four-year six-goal 2025 guidance reflects the expectation that hardware sales will decline year over year, as well as an expectation that average net monthly paid connected fitness turn will continue to increase modestly year over year and follow our historical seasonal patterns.

Karen Boon: we expect our turnurn rate to improve quarter-over- quarter due to stabilization in our corporate wellness paid ap subscription base

Karen Boone: Masters. Overall, we're delighted with the incredible show of support received in the vote of confidence and telephone speech from the investor community. With a solid foundation now in place and an expectation to deliver meaningful sustainable cashflow on an annual basis, we are exploring how best to deploy excess cash as part of an overall capital allocation strategy to de-leggers the balance sheet over time. Last quarter, we talked a lot about bringing the business to solid financial footing by generating free cashflow and operating the business toward sustainable profitable growth.

Karen Boon: our first quarter revenue guidance reflects the impact of these hardware sales and subscription trends combined with our business decision to improve profitability

Karen Boon: we expect a sequential increase in first quarter total growth margin as a result of a seasonal mix toward our subscription segment

Karen Boon: we also expect significant year-over-year improvement and first quarter adjusted ebitda mainly due to lower sales and marketing expense and continued progress towards achieving our two hundred million cost reduction plan

Karen Boone: Before we discuss our Q4 results, I'd like to comment briefly on the CEO transition process, as it is certainly top of mind for us and we expect the same truth for our shareholders.

Karen Boone: Our Q4 results, which Liz will discuss in greater detail, demonstrate continued progress in achieving these financial objectives, delivering a second consecutive quarter with both positive, free cashflow and adjusted EBITDAQ. Something we have not achieved in the last few years. We're intentionally focusing on delivering stronger bottom line results to support our investments in software, hardware and content to improve our member experience. We're enthusiastic about our innovative roadmap, but we'll be judicious about deploying marketing dollars until we demonstrate product market fit and continue to be cautious about marketing spend given the uncertain consumer backdrop and ongoing macro environment. For now, we are optimizing our business model planting the seeds for future growth and will scale these investments over time to ensure we can deliver sustainable profitable growth.

Speaker Change: our full year fif goal two thousand and twenty-five guidance reflects the expectation that hardware sales well declineed year-over-year as well as an expectation that average net monthly pig connected fitness churn will continue to increase modestly year-over-year and follow our historical seasonal pattern

Karen Boone: The CEO search is well underway. We've had no shortage of interest and we have been working through an impressive group of qualified candidates with the help of a leading executive search firm. Our list of candidates is narrowing.

Karen Boone: However, at this stage, we cannot speculate on the timing for when Peloton's next CEO will start. We are focused on moving quickly, but our top priority is finding the right leader for Peloton's next chapter, and look forward to making that announcement as we close down this important process.

Liz Coddington: Our four-year guidance range for paid connected fitness subscriptions reflects a broad range of outcomes. We will continue to refine our strategy over the course of the fiscal year, which may include potential changes in pricing, promotional strategies, and other levers we may pull to achieve our financial targets. Any changes in these areas may affect our growth additions for paid connected fitness subscriptions and paid app subscriptions across the fiscal year. Additionally, as we continue to improve our member experience, we seek clear opportunities to improve engagement, which could result in improvement to our average net monthly paid turn rates for both connected fitness and app.

Karen Boone: In the meantime, Chris and I in partnership with Peloton's strong leadership teams are continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there, and investing strategically in innovation that will deliver sustainable profitable growth over the long term.

Speaker Change: our full year guidance range for paid connected fitness subdescriptions reflects a broad range of outcome

Speaker Change: we will continue to refine our strategy over the course of the fiscal year which may include potential changes in pricing promotional strategies and other levers we made pull to achieve our financial targets

Speaker Change: any changes in these areas may affect our growth additions were paid connected fitness subscriptions and paid app subscriptions across the fiscal year

Karen Boone: One growth initiative where we continue to learn and optimize is our BIC rental program. In Q4, we launched a rental program for BIC plus in the UK and early results have outperformed our expectations. Globally, our BIC rental offering continues to drive incremental subscribers and replace to see a continued improvement in retention, with average net monthly paid subscription churn for rental down 110 basis points year over year in Q4. We've shared previously that the ability to use refurbished inventory is key to achieving sustainable unit economics for our original BIC rental offering in the US and Canada.

Speaker Change: additionally as we continue to improve our member experience we see clear opportunities to improve engagements which could result in improvement to our average net mostthly paid churn rates for both connected fitness and app

Liz Coddington: While we are optimistic we can improve engagement through products and content innovation and evolving our marketing strategy, the timing of when we will start to see meaningful impact from these efforts is uncertain. Our guidance for paid apps subscriptions reflects a year-over-year decline at the midpoint. We have made the decision to reduce our media spending supporting the app while we invest in innovating the product to improve the member experience and lower term. Most importantly, our focus for fiscal 2025 is on delivering our key financial results, which include revenue, growth margin, and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash low.

Speaker Change: while we are optimistic we can improve engagement through products and content innovation and evolving our marketing strategy the timing of when we will start to see meaningful impact from these efforts is uncertain

Speaker Change: our guidance for paid act subdescriptions reflects a year-over-year decline at the midpoint we have made the decision to reduce our media spending supporting the app while we invest innovating the product to improve a member experience and lower ter

Karen Boone: As a refurbished inventory levels have come down, we no longer have sufficient inventory to support the original BIC rental program, so we cease this offering as of August 1st. Since that date, we've seen higher take rates for other offerings, catered toward cost-conscious consumers, including our BIC plus rental program, the outright sales of refurbished original BICs and our 0% introductory race financing offers to purchase new BICs. These alternative programs have stronger unit economics than our original BIC rental program, with more cash paid up front and a stronger retention profile.

Speaker Change: most importantly our focus for fiscal two thousand and twenty five is on delivering our key financial results which include revenue growth margin and adjusted ebitda we are prioritizing these metrics along with delivering free cash flows

Liz Coddington: Our revenue outlook is tempered by uncertainty surrounding our ability to efficiently grow paid connected fitness and app subscribers, including an assumption that our investments in new initiatives will not deliver any upside to subscriber growth within the fiscal year, as well as an uncertain macroeconomic outlook. Growth margin is expected to improve year over year as a result of connected fitness growth margin expansion, as well as revenue mixed shift toward our subscription segment. Our adjusted EBITDA guidance of 200 to 250 million reflects continued improvements in profitability. Largely due to growth margin expansion, the operating cost savings we expect to achieve related to our previously announced cost restructuring plan and lower year-over-year media spend.

Speaker Change: our revenue outlook is tempered by uncertainties surrounding our ability to efficiently grow paid connected fitness and app subscribers including an assumptions that our investments in new initives will not deliver any upside to subscribeber growth within the fiscal year as well as an uncertain macroeconomic outlook

Chris Bruzzo: We also continue to explore partnerships that will expand our reach and deliver profitable growth. We continue to be pleased with our Lululemon content licensing arrangement, whereby Lululemon Studio members enjoy telephone content on their mirror products. This partnership has delivered a great experience to these Lululemon Studio members, as evidenced by the continued low-churn profile, while delivering incremental subscription revenue with accretive growth margins for Peloton. Building on the success we've seen with the content licensing thus far, last week we announced another multi-year content licensing arrangement with Google Fitbit to offer a wide portfolio of telephone classes in the U.S., the U.K., Canada, and Australia. Fitbit will distribute best-in-class telephone content to the highly engaged user race on Fitbit's app. Peloton members will also receive special offers on the Google Pixel Watch and Fitbit Charge 6 devices as part of this partnership.

Speaker Change: gth margin is expected to improve year-over-year as a result of connected fitness growth margin expansion as well as revenue mix shshipt toward our subscription segment

Speaker Change: our adjusted ebitda guidance of two hundred to two hundred and fifty million reflects continued improvements and profitability

Speaker Change: largely due to growth margin expansion the operating cost savings we expect to achieve related to our previously announced cost restructuring plan and lower year-over-year media spent

Liz Coddington: We also expect to deliver meaningful free cash flow on a full year basis of at least 75 million. It is worth noting that we do expect Q1 free cash low to be negative due to timing of inventory payments as we build up inventory to support the holiday season in Q2.

Speaker Change: we also expect to deliver meaningful free cash flow on a full year basis of at least seventy-five million

Speaker Change: it is worth noting that we do expect q one free cash flow to be negative due to timing of inventory payments as we build up inventory to support the holiday season in q two

Liz Coddington: Our outlook for fiscal year 2025 reflects our prioritization of improving profitability and delivering meaningful free cash flow. Our improved bottom line financials enable us to focus on innovation in a more strategic way. We remain optimistic about the investments we are making in our software and hardware innovation and also evolving our content offerings. We look forward to sharing more about new product features and fitness experiences in upcoming quarters. As we test new fitness and wellness offerings to meet our members' needs, we're allowing time to learn and iterate to ensure that our offerings have signals of strong product-market fit before we scale them.

Speaker Change: then

Speaker Change: our outlook for fiscal year two thousand and twenty-five reflects our prioritization of improving profitability and delivering meaningful free cash flows

Chris Bruzzo: Turning to our hardware business, we are focused on delivering growth-market improvements for our premium connected business products. We have been pleased with the introduction and expansion into third-party distribution channels, both in North America and on our international markets, but are doing work to optimize the economics of these channels. This effort includes evaluating certain product pricing models, discounting strategies, and the way we deploy media dollars. We expect to continue to see improvements in our connected business segment, growth margins, and fiscal 25 as a result of these efforts.

Speaker Change: our improved bottom line financials enable us to focus on innovation in a more strategic way we remain optimistic about the investments we are making and our softw and hardware innovation and also evolving our content oeratinging

Speaker Change: we look forward to sharing more about new product features and fitness experiences in upcoming quarters

Speaker Change: as we textest new fitness and volness offerings to meet our members needs were allowing time to learn and iterate to ensure that our offerings have signals of strong product market fits before we scale them as a result our outlook does not assume subscriber growth from these new initives in fyscal funthousand and twenty five

Chris Bruzzo: We are also pleased with our continued progress in the turnaround of pre-core, which delivered strong year-over-year revenue growth in the quarter, driven in part by key product launches, including the fiscal 24 launch of next-generation cardioponcils and new strengths products. Pre-core is also improving their bottom-line performance, with strong year-of-year improvement in growth margins and reductions in operating expenses.

Liz Coddington: As a result, our outlook does not assume subscriber growth from these new initiatives in fiscal 2025.

Liz Coddington: And with our cost structure better aligned to the current size of our business, and a planned path to sustainable positive free cash flow, we now have a solid foundation place that we can build upon to drive long-term, profitable growth and shareholder value.

Speaker Change: and with our cost structure better align to the current size of our business and a planned path to sustainable positive free cash flow we now have a solid foundation in place that we can build upon to drive long term profitable growth and shareholder value

Christopher Bruzzo: And now, I'd like to turn it back to Chris for some clothing remarks. Thanks, Liz. As a global leader in fitness, Peloton enables our members all over the world to unlock their power, to achieve their fitness and wellness goals, and be part of a community who shares their passions. Our fitness experiences are delivered through the world's leading fitness experts, premium hardware, and innovative software, a variety of ways to work out that include multiple content formats from instructor-led classes to CMIC, outdoor audio, gaming inspired, and entertainment. As we look forward, together with our team of talented employees, we'll continue to blaze new trails with personalized fitness delivered anywhere consumers want to work out.

Karen Boone: This includes software and hardware development to deliver new fitness experiences, evolve our content offerings and refine our marketing strategy, which we'll discuss in more detail today.

Chris Bruzzo: I will now pass the call over to Chris, who will provide an update on our marketing strategy and product development. Chris? Thanks, Karen. As Karen mentioned, we are focused on managing the business for sustainable, profitable growth. So I could touch on how this is manifesting in our approach to sales and marketing. In our 200 million cost restructuring plan that we announced in May, which Liz will provide an update on shortly, we included cost reductions in some areas within sales and marketing, such as lower brand and creative spend, lower retail expenses from reducing our showroom footprint, and lower headcount.

Chris: We're also offering these new members discounts on accessories such as bike shoes, bike mats, and spare parts.

Speaker Change: and now i'd like to turn it back to chrisp for some closing remarks thank ludes

Chrisp: as a global leader in fitness peleton enables our members all over over the world to unlock their power to achieve their fitness and wellness goals and be part of a community who shares their passion

Karen Boone: Masters.

Speaker Change: our fest experiences are delivered through the world's leading fitness experts premium hardware and innovative software a variety of ways to work out that include multiple content formats from instructctor alled classes to semic outdoor audio gaming inspired and entertainment

Chris: We'll continue to lean into this important channel and find additional ways to improve the new member experience. For example, providing early education about the broad range of fitness modalities that we offer and the many series and programs our instructors provide to new members.

Chris Bruzzo: However, the 200 million cost restructuring plan did not include any media spend reductions. In Q4, we delivered additional cost savings by reducing our media spend year-over-year. We will continue to optimize our media investment in fiscal 25 to improve our efficiency, which is an important priority for us. Because while our Q4-LTP to CAC ratio of 1.5 times improved significantly compared to Q4 last year, it is still below our two to three times target range.

Speaker Change: as we look forward together with our team of talented employees willll continue to blaze new trails with personalized fitness delivered anywhere consumers want to work out

Christopher Bruzzo: Our goal is for Peloton to be the most trusted fitness companion, whether at home, outside, or at the gym. We want to be with our millions of members through every step of their fitness and wellness journey, regardless of the destination.

Chris: It's also worth highlighting that this activation fee will be a source of incremental revenue and gross profit for us, helping to support our investments in improving the fitness experience for our members.

Speaker Change: our goal is for pellon to be the most trusted fitness companion whether at home outside or at the gym

Speaker Change: we want to be with our millions of members through every step of their fitness and wellness journey regardless of the destination

Operator: Thank you for your time this morning, and we can now open the line for Q&A. Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one call-up question. Please stand by while we compile the Q&A roster.

Chris: Now let's move on to our TRED business.

Chris: Growing TRED remains a top priority for us, and I'd like to take a moment to provide an update on our progress. Connected Fitness revenue from our treadmill portfolio grew 42% year over year in Q4 due to the reintroduction of our higher priced TRED Plus in fiscal 2024. TRED Plus continues to deliver a best-in-class running experience, driving member enthusiasm, as evidenced by its net promoter score of 76, the highest across all of our Connected Fitness products.

Chris: To support our TRED growth efforts, we're investing in content offerings and product features designed to enhance the walking and running experience on our platform. We launched pace targets in Q4, a new offering that enables instruction for personalized intensity levels as an alternative to treadmill speed. We are already seeing positive responses from repeat usage of pace targets among our performance runners.

Chris: We also launched our half marathon training program on Global Running Day in June. This addition expands our race training offering, which has helped over 300,000 members train for a race since the series was first launched in 2019.

Speaker Change: thank you for your time this morning and we can now liveopen the line for q

Chris Bruzzo: We have more work to do. These efforts are providing additional upside to the bottom line, as we reduced total sales and marketing expense by 26 million or 19 percent year-over-year in Q4. We are also seeing early signals that are approached to reach men via marketing as resonating. We saw significant improvements in awareness of our strength and cycling disciplines for men in the quarter.

Speaker Change: thank you as a reminder to ask a question please press star one one on your telephone and wait for your name to be announced to whichjo your question press ar one one again due to time restraints we ask that you please limit yourself to one question and one call up question

Speaker Change: please stand by while we comppeled the q onea roster

Douglas Anmuth: And our first question will come from the line of Douglas and Mews with JP Morgan. Your line is open.

Chris: Under the leadership of Nick Caldwell, our product team's pace of software innovation is increasing.

Speaker Change: i

Chris: In Q4, we launched the capability to Find Friends, which enhances our platform's community building potential beyond the leaderboard. New and prospective members may now use Find Friends to connect with their existing network. This and other upcoming social features launching soon are designed to enhance the member experience with organic community-based motivation.

Douglas Anmuth: and our first question will come from the line of douglas and youth with jp morgan your line is open

Chris: Watch this space for the rollout of some highly requested social features like private groups and challenges. We expect these social features to drive member retention and organic acquisition over time.

Christopher Bruzzo: Hey, it's Brian. Myelacon for Doug. Thanks for taking the question. Just to start last quarter, you had talked about the connected fitness market becoming closer to recovery. Can you just update us on the trajectory of return to growth across the industry, and maybe what you're seeing on the macro side? And more specific for Peloton, what would be the one to two key growth initiatives that you're focused on for fiscal year 25? Thank you.

Douglas Anmuth: hey brianes my ic on for ou ure taking the question just a start last quarter you had talked about the connected fitness market becoming closer to recovery can you just updateus on the trajectory of returned to growth across the industry and maybe what you' see on the macro side

Speaker Change: and more specific for pelltonine what would be the one to two key growth and issues that you're cused on visical year' twenty-five as you

Liz Coddington: Sure, so why don't I start off with kind of what we're seeing on the macro front?

Chris Bruzzo: Although these secondary market sales are not from Peloton owned channels or any of our third-party distribution partners, we want to ensure these new members receive the same high-quality onboarding experience Peloton is known for. With that in mind, we're initiating a new one-time $95 used equipment activation fee in the U.S, and Canada.

Liz Coddington: This is Liz. If we look at the overall connected fitness market, similar to what we talked about last quarter, our internal estimates that use third-party data indicate that the connected fitness category is still declining year-over-year post-COVID. We still see that those year-over-year declines have less than dramatically since fiscal 22, and that does indicate that we are getting closer to an inflection point where the category could start growing again within the next few quarters. With that, in the short-committee term, we do expect softness in connected fitness hardware demand, given the category trends, and also macroeconomic uncertainty.

Speaker Change: sure the one and i startoff with kind of what we're seeing on the macrofront this is is

Speaker Change: if we look at the overall connected fitness market similar to what we talked about last quarter our internal estimates that use third party data indicate that connect the connected inus category is still declining year-over-year post covid

Chris Bruzzo: For Peloton bike and bike plus purchasers, we offer a virtual custom fitting so members can get the most out of their bike from ride number one It's important to point out especially for these subscribers that they also have access to a history summary on their pre-owned hardware We're also offering these new members discounts on accessories such as bike shoes, bike math and spare parts We'll continue to lean into this important channel and find additional ways to improve the new member experience For example, providing early education about the broad range of fitness modalities that we offer and the many series and programs our instructors provide to new members It's also worth highlighting that this activation fee will be a source of incremental revenue and gross profit for us, helping to support our investments in improving the fitness experience for our members Now let's move on to our tread business, growing tread remains a top priority for us and I'd like to take a moment to provide an update on our progress Connected fitness revenue from our treadmill portfolio grew 42% year over year in Q4 due to the reintroduction of our higher priced tread plus in fiscal 2024 tread plus continues to deliver a best in class running experience driving member enthusiasm as evidence by its net promoter score of 76 the highest across all of our connected fitness products To support our tread growth efforts, we're investing in content offerings and product features designed to enhance the walking and running experience on our platform We lost peace targets in Q4 a new offering that enables instruction for personalized intensity levels as an alternative to treadmill speed We are already seeing positive responses from repeat usage of peace targets among our performance runners We also lost our half marathon training program on global running day in June This edition expands our race training offering which has helped over 300,000 members train for a race since the series was first launched in 2019 Under the leadership of Nick Caldwell, our product team's pace of software innovation is increasing In Q4 we launched the capability to find friends which enhances our platform's community building potential beyond the leaderboard New and prospective members may now use fine friends to connect with their existing network This and other upcoming social features launching soon are designed to enhance the member experience with organic community based motivation Watch this space for the rollout of some highly requested social features like private groups and challenges We expect these social features to drive member retention and organic acquisition over time In addition to social features, we recently announced public beta testing for experimental software feature developments on our platform including personalized plans, a strength plus app and more game inspired workouts Personalized plans are designed to help members create a fitness routine tailored to their specific goals and needs We will be testing this new offering on the Felton app Our strength plus app allows us to test a new strength content format with instructor led workout programs compatible in a gym setting paired with expert coaching audio guidance And through game inspired workouts, we are testing experimental cycling experiences meant to encourage social engagement in a virtual training environment We will test, learn, and iterate on these software development projects, and we look forward to sharing more about these and other software-based future developments expected to roll out in the upcoming quarters of fiscal 25. We're confident about our new software-driven experiences, and it's excited as we always are to innovate on software.

Speaker Change: we still see that those year-over-year declines have less than dramatically since fiscal ' twenty-two and that does indicate that we are getting closer to an inflection point where the category could start growing again within the next few excme within the next few quarters

Speaker Change: with that in the short comedium term we do expect softness and connected fitnessas hardware demand given the category trends and also macroeconomic uncertainty

Christopher Bruzzo: But over the long term, we do still really remain bullish on the growth potential for the connected fitness category, and we expect to grow our share of total fitness and wellness spending as we invest in product and content innovation, and we evolve our marketing strategy.

Speaker Change: but over the long term we do still really remain buolish on the growth potential for the connected sitness category and we expect to grow our share of total fitness and wellness spending as we invest in product and content innovation and we evol our marketing strategy

Christopher Bruzzo: Yeah, and let me build on that.

Christopher Bruzzo: This is Chris. I think some of the things to be excited about in the coming year. Certainly, a bunch of what we shared today. A lot of innovation in software and in the overall experience with members. We talked about social features. We talked about personalization. We talked about gaming. It's very exciting to see those things start to come to life. And then we have to always, always point to tread. Tread remains an incredible opportunity underdeveloped for Peloton. It's one of our highest potential growth levers. And so I think between those improvements in the experience, capitalizing on the tread opportunity, and then just becoming much more effective with our marketing investments.

Speaker Change: yeah and me to build on that that discre

Chris: In addition to social features, we recently announced public beta testing for experimental software feature developments on our platform, including personalized plans, a Strength Plus app, and more game-inspired workouts. Personalized plans are designed to help members create a fitness routine tailored to their specific goals and needs.

Speaker Change: i think some of the things to be excited about in the coming year certainly a bunch of what we shared today a lot of innovation in software and then the overall experience members we talk about social features we talk about personalization we talked aboutgaming very excited to see those things

Chris: We will be testing this new offering on the Peloton app.

Chris: Our Strength Plus app allows us to test a new strength content format with instructor-led workout programs compatible in a gym setting, paired with expert coaching audio guidance.

Chris: And through game-inspired workouts, we are testing experimental cycling experiences meant to encourage social engagement in a virtual training environment.

Chris: We will test, learn, and iterate on these software development projects, and we look forward to, sharing more about these and other software-based feature developments expected to roll out in the upcoming quarters of Fiscal 25.

Chris: We're confident about our new software-driven experiences, and as excited as we always are to innovate on software, it's our instructor-led content that is the core of our business.

Chris: Looking ahead, we're using the extensive expertise of our instructors in new ways, and we'll look to complement the team with guests and potentially new instructors as we find the right voices to reach our incredibly high standards. Two recent examples of this guest instructor strategy that our members responded positively to were the return of accomplished fitness coach Irene Keimer in Germany and Christian Vandervelde, a professional cyclist in the U.S.

Chris: There is no doubt that the connection and authenticity that our instructors bring to, our members is a significant part of our competitive differentiation today, and we will work side-by-side with these incredible athletes to continue to evolve our content offerings and serve our members in new and innovative ways.

Chris: In fact, on Tuesday of this week, we announced the addition of three new entertainment partners that are now accessible through our connected fitness platform, AMC+, Kindle, and DirecTV. We also launched a new feature called Just Guidance, which allows members to follow workout plans created by instructors while enjoying their favorite entertainment content.

Speaker Change: start to come toallife and then we have to always always point to tread tread remains

Speaker Change: incredible opportunity underdeveloped for palatine one of our highest potential growth levers

Speaker Change: and so i think between those improvements in the experience

Speaker Change: capitalizing on the the tread opportunity and then just becoming much more effected with our marketing investments and in particular targeting key audien new audiences like men and that next population sothose are some ofthe things speak excbetter about

Christopher Bruzzo: And in particular targeting key audiences, new audiences like men and the next population, those are some of the things to be excited about.

Chris: And now Liz will take us through a review of financial performance.

Operator: Great. Thank you.

Liz Coddington: Thank you, Chris.

Liz Coddington: First, I'd like to touch on how we are tracking against the cost restructuring plan, we announced at our last earnings call back in May. We made substantial progress toward achieving our plan to deliver over $200 million in run rate cost savings by the end of fiscal 25, delivering approximately $15 million of cost savings in the quarter. Roughly $11 million of the cost savings came from payroll reductions, and the remaining $4 million came from other non-payroll savings.

Speaker Change: great thank you

Speaker Change: thank you what moment our next question

Liz Coddington: We remain on track to achieve the full $200 million in run rate cost savings by the end of the fiscal year. We also expect to deliver additional efficiency through reductions to media expenses that are not part of the restructuring plan, and we continue to look for opportunities to further reduce our operating costs and improve our working capital efficiency.

Eric Sheridan: And that will come from the line of Eric Sheridan with Goldman Sachs. Your line is open. Thank you so much for taking the questions. I want to come back to some of the comments you made during the prepared remarks. We need to think about improving your LTV2CAC looking out of the next couple of years. What do you see as the key gating factors to improve LTV2CAC? And how are you thinking about which components of that are within your control versus an output of the broader either marketing or competitive environment generally. Thanks so much.

Speaker Change: and that will come from the line of eric sheridan with goldman saacks your line is open

Liz Coddington: Now let's spend a few minutes on our Q4 results. We ended the quarter with $2.98 million paid, connected fitness subscribers, reflecting a net decrease of $75,000 in the quarter. This exceeded the high end of our guidance range as a result of higher than expected, gross additions in first-party, third-party retail, and secondary market channels. Average net monthly paid connected fitness subscription churn was 1.9%, which was in, line with internal expectations, and up roughly 10 basis points year over year.

Liz Coddington: We ended the fourth quarter with 615,000 paid app subscriptions, reflecting a net decrease of $59,000 in the quarter. This result exceeded the high end of our guidance range primarily from favorable average monthly, paid app subscription churn, which was 8.4% in the quarter. While app churn was down roughly 80 basis points quarter over quarter in Q4, we anticipated, churn to remain somewhat elevated in the quarter due to the roll-off of subscribers associated with a specific corporate wellness client that did not renew their agreement.

Speaker Change: thank you so much for taking the questions on the comene someof the comments you made during the prepared remarks you think about improving your ltv to attack looking out of the next couple of years what do you see is the key gating factors to improve ltv to cack

Speaker Change: and how are you thinking about which components of better within your control versus an output of the broader either marketing or competitive environment generally thanks so much

Christopher Bruzzo: Yeah, I mean, I think this is Chris. I think you're seeing us continue to focus on that. In fact, we discussed last quarter how Lauren Weinberg just jumped into the business here at Peloton and brought us a really great item marketing spend. And we're already seeing some of the benefits of that. So, you know, we shared today that our LTV2CAC ratio for the last quarter was 1.5x. And that's sort of where we want to be, but it's good. It's good improvement. And the way we're getting there is by being more focused on efficiency and on the parts of our business that we can have.

Liz Coddington: As Chris discussed earlier, we are continuing to invest in new content and features for, the app, focused on enhancing our strengths content offering, personalization, and social features.

Speaker Change: yes i mean i think this is chris i think you're seeing us continue to focus on that in fact we discussed last quarter how

lan wbergge: lan wbergge jumped into the business here at teleon and brought a really great eite marketing spend and we're already see some of the benefits of that so you know we shared today that our lpd d calcation apfor last quarter was one point five x and that's short of where we want to be but it's good

lan wbergge: it's good improvement and the way we're getting there is by being more focused

Christopher Bruzzo: I think the most control. We talked today about shifting our focus away from app because, from a marketing standpoint, because we're visually taking the learnings from the last year and making that experience better. That creates an opportunity for us. So actually, it's both sides of the equation that are going to improve our LTV2CAC ratio. We're both seeing improvements in the financial foundation and our gross margin. That's going to help the LTV. And then we're just becoming far more effective with lower spend, fewer promotions. And that's having a positive impact on Kat.

lan wbergge: andon efficiency and on on the parts of our business that we can have i think the most control we talk today about shifting our focus away from app because from a marketing standpoint because we're busily taking the learnings from the last year and making that experience better that creates an opportunity for us so

Liz Coddington: While we develop these enhancements, which we believe will result in a significant improvement, in our overall app experience over time, we are reducing the amount of media spend supporting growth in paid app subscriptions for now to maximize our media efficiency.

Liz Coddington: Total revenue was $644 million in the quarter, comprising $212 million of connected fitness, segment revenue and $431 million of subscription segment revenue.

Liz Coddington: Total revenue was slightly above the high end of our $618 to $643 million guidance range, and up modestly year over year by 0.2%. Total gross profit was $312 million in the fourth quarter, yielding a growth margin of, 48.5%, which was above the high end of our guidance range.

Speaker Change: actually it's both sides of the equation that that are going to improve our lunic ac ratio we're both seeing improvements in the financial foundation and our gross margin

Speaker Change: that's going to help the ltv and then we're just becoming far more effective with lower spend fewer promotions

Karen Boone: And I'll just build on the LTV piece.

Karen Boone: This is Karen. One of the things we're really focused on is improving our hardware margins. So, in the connected fitness segment, hardware margins have come down significantly over the last couple of years. And we're working on restoring those. And that's going to look at, you know, both unit economics on our individual skews, but also how we're approaching different markets and different channels. So you're going to see us evaluating pricing. You're going to see us be a little less promotional, both the depth and the frequency. And we're just going to optimize that over time as well.

Karen Boon: not having a positive impact on on cat and i'll just build on the lpv piece ces is karen one of the things we're really focused on is improving our hardware margins so in the connective fitnessa segment hardborare margins have come down significantly last couple years we'reworking on restoring those and that's going to look at

Liz Coddington: Our connected fitness segment growth margin was 8.3% ahead of our internal expectations. This included $10.7 million of inventory write-offs for excess and returned inventory, excluding, the impact of inventory write-offs and one-time COGS items.

Liz Coddington: Adjusted connected fitness gross margin was 10.2%, expanding over 15 percentage points, compared to the same period a year ago.

Liz Coddington: Total operating expenses, including restructuring and impairment expenses, were $375 million, in the fourth quarter, compared to $427 million for the period a year ago. Sales and marketing expense decreased $26 million versus the year-ago period, reflecting, lower spending on media, retail showrooms, and brand and creative spend.

Liz Coddington: Research and development expense decreased $2.8 million versus the year-ago period, primarily, driven by reductions in business operations and product development and research costs.

Liz Coddington: General and administrative expense increased by $23 million versus the year-ago period, driven by an increase in stock-based compensation, primarily related to expense recognized in connection with the CEO transition, partially offset by lower depreciation and amortization expense.

Liz Coddington: This quarter, we recognized $7.8 million of impairment and restructuring expense, of which, $8.2 million was non-cash. The non-cash charges were primarily driven by impairment losses related to connected, fitness assets.

Liz Coddington: The cash charges were primarily driven by a $3.5 million benefit to severance and other, personnel costs due to reversals and severance accruals, which were partially offset by $3.1 million relating to exit and disposal costs and professional fees.

Liz Coddington: Adjusted EBITDA was $70 million in the fourth quarter, a $105 million improvement from the, period a year ago.

Liz Coddington: We generated $26 million in free cash flow in the quarter, the second consecutive quarter, of positive free cash flow, something we haven't accomplished since the second quarter of fiscal year 2021. We ended the quarter with $698 million in unrestricted cash and cash equivalents. We also have access to a $100 million revolving credit facility, which remains undrawn to, date.

Liz Coddington: Overall, our Q4 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.

Liz Coddington: Next, I'd like to provide context on our financial outlook for the first quarter and fiscal year, 2025. Our guidance for first quarter fiscal 2025 ending paid connected fitness subscriptions, reflects an expected year-over-year decline in hardware sales based on multiple factors. From a market perspective, the first quarter is typically a seasonally low quarter for, hardware sales as consumers shift their discretionary spending toward categories like travel and sporting goods during the summer months.

Karen Boon: you know both

Karen Boon: unit economics on our individual sskwes but also howwe're

Speaker Change: approaching difdifferent markets and different channelsso you're going to see us evaluating pricing you'regoing to see a little protional both death in the frequency and we're justgoing optimize over time as well yeah i hit on the ccap point one more time you know we we as we've talked about we' decreased our media spend because we are very focused on makingsure that our media is being spent efficiently and as laurerenn and her team work on evolving our messaging and improving our our channel strategy with regard to media wewill start to see that manifest in er c and so for now we pull back on marketing spend as we optimize some of that and when we see the efficiency improve we will we will lead into it and spend more our rios and

Chris Bruzzo: It's our instructor-led content that is the core of our business. Looking ahead, we are using the extensive expertise of our instructors in new ways, and we'll look to complement the team with guests and potentially new instructors, as we find the right voices to reach our incredibly high standards. Two recent examples of this guest instructor strategy that our members responded positively to, were the return of accomplished fitness coach Irene Keimer in Germany, and Christian Vandeville, a professional cyclist in the U.S.

Christopher Bruzzo: Yeah, I just want to hit on the checkpoint one more time. You know, we, as we've talked about, we've decreased our media spend because we are very focused on making sure that our media is being spent efficiently. And as Lauren and her team work on evolving our messaging and improving our channel strategy with regard to media, we'll start to see that manifest in lower tack. And so for now, we've pulled back on marketing spend as we optimize some of that. And when we see the efficiency improve, we will, we will lean into it and spend more of our LTV to catch ratios improve.

Chris Bruzzo: There is no doubt that the connection and authenticity that our instructors bring to our members is a significant part of our competitive differentiation today, and we will work side by side with these incredible athletes to continue to evolve our content offerings and serve our members in new and innovative ways.

Christopher Bruzzo: And so, you know, Lauren's really focused on efficiency and the lower funnel. And then, you know, and also improved engagement with our marketing and to drive to drive that to drive on the LTV.

Lawrence: move and so lawrence really focused on efficiency in the lower funnel and then you know and also improved engagement with with on marketing it to drive to drive that to drive it on the lcb

Chris Bruzzo: In fact, on Tuesday of this week, we announced the addition of three new entertainment partners that are now accessible through our connected fitness platform, AMC Plus, Kindle, and Direct TV. We also launched a new feature called Just Guidance, which allows members to follow workout plans created by instructors while enjoying their favorite entertainment content.

Operator: Hi. Great, thank you.

Nathan Feather: One moment for our next question. And that will come from the line of Nathan Feather with Morgan Stanley. Your line is open.

Speaker Change: greatase thank you

Speaker Change: one moment bar a next question

Nathan Feather: and that will come from the line of nathan feather with morgan anley your line is open

Christopher Bruzzo: Hey everyone, I can grab some of the progress. You know, thinking about the subscriber decline that you're looking at in system 25, you can help us think, right, the key components between the lower marketing spend, you know, the macro, stoppage of the bike rental program, etc. And then it's the bike rental program, something that you may expect to toggle on and off, depending on the level of use inventory. Thank you.

Nathan Feather: everyone and king best's in the progress

Karen Boone: Overall, we're delighted with the incredible show of support received in the vote of confidence and telephone speech from the investor community.

Liz Coddington: And now Liz will take us through a review of financial performance. Thank you, Chris. First, I'd like to touch on how we are tracking against the cost restructuring plan we announced at our last program called Back in May. We made substantial progress toward achieving our plan to deliver over $200 million in run rate cost savings by the end of fiscal 25, delivering approximately $15 million of cost savings in the quarter. Roughly 11 million of the cost savings came from payroll reductions, and the remaining 4 million came from other non-payroll savings.

Speaker Change: you know thinking about the subscriberor decline that you're looking at in fiscal twenty five if can help a stan rag the key components between philllower marketing spend you know the macroststoppage of the birental program etca and then is the bike rental program something that you may expect to talkgg on an off depending onthe level of used on the

Karen Boone: Last quarter, we talked a lot about bringing the business to solid financial footing by generating free cashflow and operating the business toward sustainable profitable growth.

Karen Boone: When I start with just some of the overall subscriber trends, because I do think that harkens back to where we were coming out of the pandemic. We saw sales slowdown, and it's easier now to see what was happening. But I do think there was that pull forward. So I think we've come, we believe that we're coming out of it, but we don't quite know if we're all the way out of it. So there's that, and there's the macro that is hard to discern. So there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward.

Atoy: atoy thank you

Speaker Change: what do i start with just some of the overall subscriber trendds because i do think that hararkken back to where we were coming out of the pandemic

Liz Coddington: We also expect continued sales headwinds as a result of an uncertain macroeconomic environment.

Speaker Change: we saw slate sale slowdown

Speaker Change: and 'seasier to feel what is happening but i do think there was that pullleforward so i think we've come we believe that

Liz Coddington: We remain on track to achieve the full 200 million in run rate cost savings by the end of the fiscal year. We also expect to deliver additional efficiency through reductions to media spend that are not part of the restructuring plan, and we continue to look for opportunities to further reduce our operating costs and improve our working capital efficiency.

Speaker Change: we're coming out of it but we don't quite know if if we're all the way out of it so there's that and there's the macro that is hard to discern so there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward

Karen Boone: So that's certainly one of the things going on.

Karen Boone: Yeah, for sure, that's two on the macro front, but you know, again, some of it is decisions that we have made that we are going to focus on sustainable, profitable growth. And we're not going to spend inefficiently to acquire unprofitable subscribers. And so we have pulled back, and that's a decision that we made to reduce our marketing spend there.

Speaker Change: so that's certainly one of the things going on

Liz Coddington: Additionally, with our focus on improving profitability, our sales outlook reflects, some decisions we've made that we expect to have an impact on our hardware sales in the quarter. We are reducing sales and marketing spend year-over-year as we continue to focus on, optimizing media spend. We have also decided to run fewer promotions within the quarter compared to the same period, last year.

Speaker Change: yeah for sure that's two on the macrofront but you know again some of it is decisions that we have made that we are going to focus on sustainable profitable growth and we're not going to spend and efficiently to acquire profitable subscribers and so we have pulled back and up a decision that we made to to reduce our marketing spend there the other thing i do want to point out you mentioned rental and that is a factor you know as we looked at our bbykefrontal program for the original bike

Karen Boone: The other thing I do want to point out, you mentioned rental, and that is a factor. You know, as we looked at our bike rental program for the original bike. You know, we've talked about this in the past that the economics are great when we have refurbished inventory, but our challenge when we are having to supply that program with new inventory. And as our inventory has come down, we determined the right thing to do financially for us was to see that program, and that will have some impact. Although we are starting to see some benefits with more people taking bike plus, it will have some impact intentionally as we, you know, as we were using the refurbished inventory just for refurbished sales right now.

Liz Coddington: And as Karen previously mentioned, we made the decision to no longer offer a rental option, for our original bike starting August 1st due to limited refurbished bike inventory available.

Liz Coddington: While we are not providing specific guidance on average net monthly paid connected fitness, churn, we expect our churn rate to be relatively similar to Q4 fiscal 2024.

Liz Coddington: Our first quarter paid app subscription guidance reflects an expected sequential decline in, due to seasonality coupled with sequential improvement in average monthly paid app subscription churn.

Liz Coddington: We expect our churn rate to improve quarter-over-quarter due to stabilization in our corporate wellness, paid app subscription base.

Liz Coddington: Our first quarter revenue guidance reflects the impact of these hardware sales and subscription, trends combined with our business decisions to improve profitability.

Liz Coddington: We expect a sequential increase in first quarter total growth margin as a result of, a seasonal mix toward our subscription segment.

Liz Coddington: We also expect significant year-over-year improvement in first quarter adjusted EBITDA, mainly due to lower sales and marketing expense and continued progress toward achieving our, $200 million cost reduction plan.

Liz Coddington: Our full-year fiscal 2025 guidance reflects the expectation that hardware sales will decline, year-over-year, as well as an expectation that average net monthly paid connected fitness churn will continue to increase modestly year-over-year and follow our historical seasonal pattern.

Liz Coddington: Our full-year guidance range for paid connected fitness subscriptions reflects a broad range, of outcomes.

Speaker Change: we've talked about this in the past that it that the economics are

Speaker Change: are great when we have refurbished to inventory but are challenged when we are having to supply that program with new inventory

Liz Coddington: We ended the fourth quarter with $615,000 paid app subscriptions, reflecting a net decrease of $59,000 in the quarter. This result exceeded the high end of our guidance range primarily from favorable average monthly paid act subscription term, which was 8.4% in the quarter. While action was down roughly 80 basis points quarter over quarter in Q4, we anticipated term to remain somewhat elevated in the quarter, due to the roll off of subscribers associated with a specific corporate wellness client that did not renew their agreement.

Speaker Change: and as our inventory has come down we determined theright thing to do financially for us was to just to see that program and that will have you know some of some impact although we are starting to see some benefits with more people taking by plus

Speaker Change: but it will have some impact intentionally as we as we we re using the refurbisheded inventory just for refurbished sales right now

Karen Boone: So, and your question about toggling rental on and off, at this point, we don't see that happening because our return rates are still quite low. I'm in the way that we replenish the inventory for our refurbished program is primarily through people who return their bikes through the 30-day home trial. And since that's a low, we don't expect to have a huge amount of inventory, so our plan for now is to just use that to supply the refurbished original bike program and then not to return to rental. But we may at some point decide to change our minds on that, but that's where we are for now.

Speaker Change: so and your question about toglinging regle on and off at this point we don't see that happening because

Speaker Change: our return rates are still quite low i' in the way that we replenish that inventory for our fbish program is primarily through people who return their bikes through the thirty day home tri and by then s's thelo wedon't pect to have a huge amount of inventory so our plan for now is to just

Karen Boone: We're intentionally focusing on delivering stronger bottom line results to support our investments in software, hardware and content to improve our member experience.

Liz Coddington: As Chris discussed earlier, we are continuing to invest in new content and features for the app, focused on enhancing our strengths content offering personalization and social features. While we develop these enhancements, which we believe will result in a significant improvement in our overall app experience over time, we are reducing the amount of media spend supporting growth in paid app subscriptions for now to maximize our media efficiency. Total revenue was 644 million in the quarter comprising 212 million of connected fitness segment revenue and 431 million of subscription segment revenue.

Karen Boone: We're enthusiastic about our innovative roadmap, but we'll be judicious about deploying marketing dollars until we demonstrate product market fit and continue to be cautious about marketing spend given the uncertain consumer backdrop and ongoing macro environment. For now, we are optimizing our business model planting the seeds for future growth and will scale these investments over time to ensure we can deliver sustainable profitable growth.

Speaker Change: use that to supply the refurbished original bi program and then not to return to rental but we we may at some point the ide to change our mindson that but that's whereweare now we do still plan to keep the vite plus program up for rental in place the economics work quite well for us there both with refurbished and new inventory is that we have no plans to eliminate that program at any point itat that time

Karen Boone: We do still plan to keep the bike plus program for rental in place. The economics work quite well for us. They're both with refurbished and new inventory, as that we have no plans to eliminate that program at any point at this time.

Operator: Very helpful. Thank you.

Ron Josie: One moment for our next question. And that will come from the line of Ron Josie with City. Your line is open. I'm sure taking a question. Two, please.

Speaker Change: yeah

Speaker Change: very helpful thank you

Speaker Change: one moment for our next question

Liz Coddington: Total revenue was slightly above the high end of our 618 to 643 million guidance range and up modestly year-over-year by 0.2%. Total growth profit was 312 million in the fourth quarter, yielding a growth margin of 48.5%, which was above the high end of our guidance range. Our connected fitness segment growth margin was 8.3%, ahead of our internal expectations. This included 10.7 million of inventory write-offs for excess and returned inventory. Excluding the impact of inventory write-offs and one time CROG's item, adjusted connected fitness growth margin was 10.2%, expanding over 15% points compared to the same period a year ago.

ron joie: and that will come from the line of ron joie was cityitt your line is open

Karen Boone: Maybe a bigger picture and guidance talks about potential change in pricing overall. Want to see if there's any changes as you think about subscription pricing or is it just hardware, meaning subscriptions around tiered as new products come out like the strength app or credit option and any insights on pricing for subs. It's question one, and then I want to understand a little bit more your comments on churn picked up year-to-year in the quarter. Understand, see now the year. I think you also said expected remain high going forward. So any insights on what's keeping that churn as high as it is relative to historicals would be helpful.

Ron Josey: i think for taking a question two ple make maybe bigger picture and guidance talks about potential change in pricing overall want to see if there's any changes as do you think about subscription pricing it or it just hardware meaning subscriptions around here even a products amount like the strength that or or tredit option any insights on pricing for subs its' question one and then and in ways i want to understand little bit moreof your comments on churn picked up everyover year in the quarter understand seasonality here i think you also have expected to remain high going forward so any insights on on what's

Liz Coddington: Thank you.

Speaker Change: 're keeping that churn as high as it is relative historical would be helpful thank you

Liz Coddington: Sure, so I'll take the sub one. We are looking at all of the pricing across the business. There are no plans right now to increase our subscription price.

Speaker Change: sure on take the subone we are looking at all of the pricing across the business there are no plans right now to increase our subscription price we do think it's a great value and as we do deliver more value with some of these experiences we're talking about something we might considerin the future but at this point we don't have any pllians for that on the carbor pricing front it's easier to think about what we might do in certain markets especially where the penetration of third party such as international

Liz Coddington: Total operating expenses, including restructuring and impairment expenses, were 375 million in the fourth quarter compared to 427 million for the period a year ago. Sales and marketing expense decreased 26 million versus the year ago period, reflecting lower spending on media, retail showrooms, and brand and creative spend. Research and development expense decreased 2.8 million versus the year ago period, primarily driven by reductions in business operations and product development and research costs. General and administrative expense increased by 23 million versus the year ago period, driven by an increase in stock-based compensation, primarily related to expense recognized in connection with the CEO transition, partially offset by lower depreciation and amortization expense.

Liz Coddington: We do think it's a great value, and as we do deliver more value with some of these experiences, we're talking about something we might consider in the future. But this, at this point, we don't have any plans for that on the hardware pricing front. It's easier to think about what we might do in certain markets, especially where the penetration of third party such as international is more significant. There's certain markets where we're entirely third party distributors, and so the margins there need to be a little bit higher to support those. So again, that reflects our looking at the unit economics across all products and across all channels. Right now, the subscription margins are quite good.

Speaker Change: is is more significant certain markets where we're entirely third party distributors and so the margins there need to be a little bit higher to support those so again that reflects our looking at the unit economics across all products and across all channels right now the subscription margins are quite good it's the hardw margins that are little more challengge sodoesnt mean that we won't ever entertain a subscription price increase but it's not something that we're planning for any time in the immediate preachures

Liz Coddington: It's the hardware margins that are one more challenge.

Liz Coddington: So doesn't mean that we won't ever entertain a subscription price increase, but it's not something that we're planning for any time in the immediate future.

Liz Coddington: Sure, and then I'll take the churn question. So at a high level, our business continues to benefit from really strong retention rates. We still have a relatively low turn. It was around 1.9% in Q4, and I did mention that it will likely be in the around the 1.9% range 41. Which is an uptick year over year.

Speaker Change: sure and then i'll take the churn question so at a high level our business continues to benefit from really strong retention rates we still have a relatively low turn it was around one point nine percent in q four and i did mention that it will like to be in the around the one point nine percent range for q one which is an uptick ularyear over year

Liz Coddington: In Q1 of last year, we benefited from a number of members unpausing their subscriptions, following an elevated pause rate as a result of the seat post recall that we had in Q4 of fiscal 2023. When we compare year-over-year churn rates, this creates a headwind for us this year because last year we had that one-time benefit. That's about half of the year-over-year increase in churn is coming from that. We're also seeing a slight impact from worsening churn rates, and then we do see some mixed shift into our higher term populations, namely our secondary market subscribers, which we've talked about. They do have a slightly higher turn rates than those who purchase outright from us via first party or third party channels.

Speaker Change: in q one of last year we benefited from not a number of members un pausing their subscriptions following an elevated pause rate as a result of the seat post recall that we had in q four a fifiscal two thousand and twenty three

Speaker Change: when we compare year-over-year turnurn rates this creates a headwind for us this year because of last year we had that onetime benefit

Liz Coddington: We generated 26 million in free cash flow in the quarter, the second consecutive quarter of positive free cash flow, something we haven't accomplished since the second quarter of fiscal year 2021. We ended the quarter with 698 million in unrestricted cash and cash equivalents. We also have access to a 100 million revolving credit facility, which remains undrawn to date.

Speaker Change: that's about half of the year over year increase inchurn is coming from that we're also seeing a slight impact from worsening churn rates and then we do see some mix shift into our higher term population namely our secondary markeket subscribers which we've talked about they do have a slightly higher turnurn rights than those who purchase out right from us the first party or third party channels and then also slightly at the higher term r that we do see from our bikefrrental program

Liz Coddington: And then also a slight as a higher turn rate that we do see from our bike rental program.

Operator: That's helpful. Thank you.

Orion: One moment for our next question. And that will come from the line of our pain coach, Orion, with UBS. Your line is open. Hi, thanks for taking my question, and you addressed some parts of this already. Could you go back to your kind of underlying assumption for connected thickness ups for 2025 and maybe kind of dissect how much of that decline is increasing churn versus addition of new subscribers. And then just some housekeeping questions in terms of two four. Could you clarify a contribution from Little Deal. Thank you.

Speaker Change: that's helpful that to you

Speaker Change: a moment for our next question

Arpen Coachureirion: and that will come from the line of our pen coachureirion with ubbs your line is open

Arpen Coachureirion: hi thanks for to king my question and you address some parts of this already could you go back to your kind of underlying assumption for connected takingness subps for two thousand and twenty-five and maybe kind of dissect how much of that decline is

Speaker Change: increasing churn versus addition of new subscribers and then just on how 've been question terms of q four could you clarify contribution from little deal thank you

Liz Coddington: So I missed the last part of your question. Q4 from what was that? From Lulu Dio, Lululemon Dio. Oh, Lululemon, of sure. So we don't actually share externally any information about the revenue that we get from our Lululemon Dio. We've shared it somewhat in the past. It's remained pretty constant and consistent. We aren't seeing any, you know, we're seeing really good retention rates from the Lululemon Dio. Lululemon members. And so, you know, so we're pleased with that.

Speaker Change: so i missed the last part of your question q four from what with that

Lulu Deal: from luludeal lemonue

Liz Coddington: We also expect continued sales headwinds as a result of an uncertain macroeconomic environment. Additionally, with our focus on improving profitability, our sales outlook reflects some decisions we've made that we expect to have an impact on our hardware sales in the quarter. We are reducing sales and marketing spend year over year as we continue to focus on optimizing media spend. We have also decided to run fewer promotions within the quarter compared to the same period last year.

Speaker Change: a little limment of sure so we don't actually share externally any information about the revenue that we get from our leule them in deal we've shared

Speaker Change: somewhat in the past ' remained pretty constant and consistent we aren't seeing any we're seeing the really good retention rates from belov elemon members and so you so we're pleased with that

Liz Coddington: Your question about underlying subs for 2025, you know, it's really hard to break out the factors into in a way that we can piece and parse them for you of how much is this and how much is macro, how much are certain different things. But I do want to really just kind of circle back to the fact that there are some macroeconomic factors at play. There's still some COVID impact at play that we are, you know, we believe is really tapering off this year, and hopefully by next year will be won't be a factor for us anymore.

Speaker Change: your question about underlying subs for two thousand and twenty five you know it's really hard to break out the factors into in a way that we can petece and parse them for you how much is this and how much is how muchis macro how much should certain different things but i do want to really just kind of

Karen Boone: We've shared previously that the ability to use refurbished inventory is key to achieving sustainable unit economics for our original BIC rental offering in the US and Canada. As a refurbished inventory levels have come down, we no longer have sufficient inventory to support the original BIC rental program, so we cease this offering as of August 1st.

Liz Coddington: And as Karen previously mentioned, we made the decision to no longer offer a rental option for our original bike starting August 1, due to limited refurbished bike inventory available. While we are not providing specific guidance on average net monthly paid connected fitness churn, we expect our churn rate to be relatively similar to Q4 fiscal 2024. Our first quarter paid app subscription guidance, reflects an expected sequential decline in growth additions due to seasonality coupled with sequential improvement and average monthly paid app subscription churn.

Speaker Change: circle back to the fact

Karen Boone: Since that date, we've seen higher take rates for other offerings, catered toward cost-conscious consumers, including our BIC plus rental program, the outright sales of refurbished original BICs and our 0% introductory race financing offers to purchase new BICs. These alternative programs have stronger unit economics than our original BIC rental program, with more cash paid up front and a stronger retention profile.

Speaker Change: that there are some macroeconomic factors at play there's still some covid impact at play that we are know we believe is really taepering off this year and hopefully by next year will be won't be a factor for us anymore

Liz Coddington: But, you know, some of the things are really related to decisions that we are making about the business on that where we're we reduce the and we also are leaving you look at our guidance for fiscal 25 for subscribers. It does, it does suggest that we are going to be declining in subscribers, and the range is pretty broad. And the reason for that is that as we evolve our strategy over the course of the fiscal year, we may make changes to pricing. Karen alluded to some things that we're thinking about there. We're evolving our promotional strategies, and then we may also pull other levers to achieve our financial targets.

Speaker Change: but some of the things are really related to decisions that we are making about the business

Karen Boon: that where we re she we reduce the and we also are leaving you look at our guidance for fiscal twenty five for subscribersit does it does suggest that we are going to be declining and subscriers in the range is pretty broad and the reason for that is that as we evolved our strategy over the course of the fiscal year we may make changes to pricing karen alluded to some things that we're thinking about there we're evolving our promotional strategies and that we may also pull other levers to achieve our financial targets

Liz Coddington: We will continue to refine our strategy over the course of the fiscal year, which may include potential changes in pricing, promotional strategies, and other levers we may pull to achieve our financial targets.

Liz Coddington: Any changes in these areas may affect our gross additions for paid connected fitness subscriptions and paid app subscriptions across the fiscal year.

Liz Coddington: And so all of those things may affect how our growth additions flow in. We also see a lot of opportunities through some of the things that Chris was talking about, not only to potentially drive subscriber growth, but also just to improve engagement, which can, I could also result in an improvement in our turn rate. And so examples of where we expect to see that could be our beta test and some of the new product and content offerings, and then also just as we evolve our member marketing strategy. However, you know, we need to learn how our members are going to respond to these offerings, and the timing of when we might see some of the impact from those efforts on churn is uncertain.

Chris Andi: and so all of those things may affect how our growth editions flow in we also see a lot of opportunities through some of the things that chris was talking about not only to potentially drive subscriber growth but also just to improve engagement which can could also result in an improvement in our churn rate and so examples of where we expect to see that could be our bta tests

Liz Coddington: Additionally, as we continue to improve our member experience, we see clear opportunities, to improve engagement, which could result in improvement to our average net monthly paid churn rates for both connected fitness and apps.

Liz Coddington: While we are optimistic we can improve engagement through product and content innovation and evolving our marketing strategy, the timing of when we will start to see meaningful impact from these efforts is uncertain.

Liz Coddington: Our guidance for paid app subscriptions reflects a year-over-year decline at the midpoint. We have made the decision to reduce our media spending supporting the app while we invest in, innovating the product to improve the member experience and lower churn.

Chris Andi: so some of the new product and content offerings and then also just as we evolve our member marketing strategy however you know we need to learn how members are going to respond to these offerings and the timing of when we might see some of the impact from those efforts on churn is uncertain

Liz Coddington: Most importantly, our focus for fiscal 2025 is on delivering our key financial results, which include revenue, gross margin, and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash flow.

Liz Coddington: Our four-year six-goal 2025 guidance reflects the expectation that hardware sales will decline year over year, as well as an expectation that average net monthly paid connected fitness turn will continue to increase modestly year over year and follow our historical seasonal patterns. Our four-year guidance range for paid connected fitness subscriptions reflects a broad range of outcomes. We will continue to refine our strategy over the course of the fiscal year, which may include potential changes in pricing, promotional strategies, and other levers we may pull to achieve our financial targets.

Liz Coddington: So it's really hard for me to parse out how those different things are going to manifest over the fiscal year, but we really do feel good about the range that we provided.

Chris Andi: so it's really hard for me to pararsce out how those different things are going to manifest over the fiscal year but we really do feel good about the range that we provided and you know and it does suggest that in fiscal twenty five our ability to aggress subscribers remains unlikely although we're going to work on improving that over the course of the years weve got

Liz Coddington: And, you know, we, and it does suggest that in fiscal 25, our ability to grow subscribers remains unlikely, although we're going to work on improving that over the course of the year as we go.

Karen Boone: We also continue to explore partnerships that will expand our reach and deliver profitable growth.

Operator: Thank you very much. One moment for our next question.

Speaker Change: thank you very much

Lee Horowitz: And that will come from the line of Lee Horowitz, the Deutsche Bank; your line is open. Great. Thanks so much. You know, 2025 is clear to come a year where you write the cost structure and get the business to a healthy, profitable base.

Speaker Change: one moment for our next question

Speaker Change: and that will come from the line of lee hohorowicks ge a bank your line is open

Liz Coddington: Any changes in these areas may affect our growth additions for paid connected fitness subscriptions and paid app subscriptions across the fiscal year. Additionally, as we continue to improve our member experience, we seek clear opportunities to improve engagement, which could result in improvement to our average net monthly paid turn rates for both connected fitness and app. While we are optimistic we can improve engagement through products and content innovation and evolving our marketing strategy, the timing of when we will start to see meaningful impact from these efforts is uncertain.

Speaker Change: great thanks so much two thousand andtwenty five clde coming a year where you writize the cost structure and get the business to healthy profitable base

Karen Boone: But looking forward, how do you think about how much white space is actually left in the connected business market for Peloton to attack and how made that view on sort of the, you know, the ability to attack the overall market informed the attributes you're looking for in your next CEO. And then maybe one on gross margin, can you help us unpack sort of the meaningful connected fitness gross margin improvements that you were looking for in 2025 a bit more. How are you planning to affect that outcome of 2025, and how much more room do you think there is to sort of right size that cost structure on product gross margins going forward, sort of absent any benefits you may get.

Speaker Change: but looking forward howdo you think about how much of white space is actually left in the connected fitiness mark for pelon to attack and and how made that view on sort of the the ability to attack re overall market informmed the attributes you are looking for in your next

Liz Coddington: Gross margin is expected to improve year-over-year as a result of connected fitness gross margin expansion, as well as revenue mixed shift toward our subscription segment.

Speaker Change: and then maybeyou one to grossmarin can you was unpack sort of the meaningful connected fitness

Speaker Change: gross margin improvements that you were looking for two thousand and twenty five a bit more how are you planing to effect that outcome twothousandand y five and how much more room do you think there is to sort of right size that cost structure on product gross margins going forward so of absent any benefits you may get from mix

Liz Coddington: Our guidance for paid apps subscriptions reflects a year over year decline at the midpoint. We have made the decision to reduce our media spending supporting the app while we invest in innovating the product to improve the member experience and lower term. Most importantly, our focus for fiscal 2025 is on delivering our key financial results, which include revenue, growth margin, and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash low.

Karen Boone: Okay, there's a lot there.

Christopher Bruzzo: Let's start with what we're the white space and what we're excited about. I say there are still a lot of people who think about us as a bike and/or cardio company. So I think that is white space. I think we have 16 modalities, but not everyone knows all the modalities we have. We're really excited about tread and running both from the, you know, selling more tread, but also the content, the experiences and run clubs and social features that we're thinking about. We're really bullish on strength. I think there's so much of a movement toward strength.

Speaker Change: okay there was a lot there so let's start working what we're the white space and what we're excited about i'd say

Speaker Change: there are still a lot of people who think about as about as a bike

Speaker Change: and or cardio company so i think that is white space i think we have sixteen modalities but not everyone knows all the modalities we have we're really excited about tread and running both from the you know selling more treads but also the content the experiences and run clubs andyou know social features that we're thinking about ' really bullish hun strength i think there's so much of a movement toward strength i think people understand the sence behind life ' important it is the number two modality for us but i still think lot of people come the card and then understand the stgth ' not yet known for strength

Liz Coddington: Our revenue outlook is tempered by uncertainty surrounding our ability to efficiently grow, paid connected fitness and app subscribers, including an assumption that our investments in new initiatives will not deliver any upside to subscriber growth within the fiscal year, as well as an uncertain macroeconomic outlook. Growth margin is expected to improve year over year as a result of connected fitness growth margin expansion, as well as revenue mixed shift toward our subscription segment.

Christopher Bruzzo: I think people understand the science behind it and why it's important. It is the number two modality for us, but I still think there's a lot of people who come for the cardio and then understand the strength. We're not yet known for strength. So I think you'll see what the beta test for having with other things were, you know, planning to make sure that's better understood and more well known. I think you'll see that as more of a white space for us in the future with new members and even kind of going deeper with our existing members.

Liz Coddington: Our adjusted EBITDA guidance of 200 to 250 million reflects continued improvements in profitability. Largely due to growth margin expansion, the operating cost savings we expect to achieve related to our previously announced cost restructuring plan and lower year over year media spend. We also expect to deliver meaningful free cash low on a full year basis of at least 75 million. It is worth noting that we do expect Q1 free cash low to be negative due to timing of inventory payments as we build up inventory to support the holiday season in Q2.

Speaker Change: so i think you'll see what the beatta test for having with other things were

Speaker Change: you know planning to make sure that's better understood and more well known i think you'll see that as more of a light space for usand the future with new members and even kind of going de th our existing members and theni think there's more we can do just with broadening you know beyond just fitness over time these are things that will test and you know data and make sure they're working before we scal themand invest a lot of money behind them buti think there's an incredible amount of white space over time for us both in the u s and in our international markets with international specifically we' very focused on reducing the loss of there and are good to mat market strgysoit's more capital light

Christopher Bruzzo: And then I'm going to think there's more we can do just with broadening, you know, beyond just fitness over time. These are things that will test and, you know, beta, and make sure they're working before we scale them and invest a lot of money behind them. But I think there's an incredible amount of white space over time for us both in the US and in our international markets, with international specifically. We're very focused on reducing the losses there and our go to that market strategy. So it's more capital light. But as we kind of optimize the current markets, we'll be able to go into additional markets.

Liz Coddington: Our outlook for fiscal year 2025 reflects our prioritization of improving profitability and delivering meaningful free cash low. Our improved bottom line financials enable us to focus on innovation in a more strategic way. We remain optimistic about the investments we are making in our software and hardware innovation and also evolving our content offerings. We look forward to sharing more about new product features and fitness experiences in upcoming quarters. As we test new fitness and wellness offerings to meet our members' needs, we're allowing time to learn and iterate to ensure that our offerings have signals of strong product market fit before we scale them.

Karen Boone: So I do believe there's a lot of white space over time. Yeah. And, you know, the things that Karen's talking about strength, tread, even our efforts to become more focused in marketing where we build up demand, you know, before we try to deliver it via promotions, etc. All these things are made possible because we're putting the company on solid financial footing. So we're, we say in our remarks, we're planting the seeds here for growth. And some of these seeds will take some time. We've been able to do a lot of things that we've been able to do.

Speaker Change: but as we kind of optimize the current marketswe'll be able to go into additional marketts so i do believethere's a lot of white space over times yeah and you know the things that here in talking about

Speaker Change: strength tread even our efforts to become more focused in marketing where we build up demand you know before we

Speaker Change: we try to deliver it be a promotions etc all these things are made possible because we're putting the company on sol this financial footing

Speaker Change: so we're we say in our remarks we're planting the seeds here for growth and some of these seasons will take some time we've got to change that perception that it's only about the bike that it's actually also about ain that strain our second most popular way of exercising

Liz Coddington: As a result, our outlook does not assume subscriber growth from these new initiatives in fiscal 2025. And with our cost structure better aligned to the current size of our business, and a planned path to sustainable positive free cash flow, we now have a solid foundation place that we can build upon to drive long-term, profitable growth and shareholder value.

Speaker Change: with paline andit's also about running and we're doing some very cool stuff around a pace targets and running running content so those are efforts that have we're very excited about and we think create lotsof white for paleston but they'll take come to develop

Liz Coddington: Our adjusted EBITDA guidance of $200 to $250 million reflects continued improvements in profitability, largely due to gross margin expansion, the operating cost savings we expect to achieve related to our previously announced cost restructuring plan, and lower year-over-year media spend.

Liz Coddington: So, first of all, we are expecting substantial improvement in our connected growth margins within this growth margins in fiscal 25. One of the reasons for that are the fact that we are not expecting to have the inventory right off the reserves that have been challenged within the past. We've much more or much more right size than our inventory. And we're going to continue to lean on making that more and more efficient over time so that we can reduce our table on hand and just have a much more efficient supply chain going forward. We also talked about the fact that we are focused on hardware pricing and also on reducing the amount of promotional activity that we have in the year.

Speaker Change: on the margin front so first of all we are expecting substantial improvement in our connected growross mar the business gross margins in fiscal twenty-five

Chris Bruzzo: And now, I'd like to turn it back to Chris for some clothing remarks. Thanks, Liz. As a global leader and fitness, Peloton enables our members all over the world to unlock their power, to achieve their fitness and wellness goals, and be part of a community who shares their passions. Our fitness experiences are delivered through the world's leading fitness experts, premium hardware and innovative software, a variety of ways to work out that include multiple content formats from instructor-led classes to CMIC, outdoor audio, gaming inspired, and entertainment.

Karen Boone: We continue to be pleased with our Lululemon content licensing arrangement, whereby Lululemon Studio members enjoy telephone content on their mirror products. This partnership has delivered a great experience to these Lululemon Studio members, as evidenced by the continued low-churn profile, while delivering incremental subscription revenue with accretive growth margins for Peloton.

Speaker Change: know the reasons for that are the fact that we are not expecting to have the inventory right often reserves that had we've been challenged within the pastwe've much more or much more brightsize than our inventory and we're going to continue to rean on making that more and more efficient over time so that we can you know we can reduce our date on hand and just have a much more efficient supply chain going forward

Liz Coddington: We also expect to deliver meaningful free cash flow on a full-year basis of at least $75 million.

Speaker Change: we also talked about the fact that we are at we are focused on hardware pricing and also on reducing the amount of promotionalactivity that we have in the nego bas directly effect our growgth margins

Liz Coddington: Those things directly affect our growth margins.

Liz Coddington: And then in terms of how high can it get, I'm not going to throw out a specific target for you, but our goal would be to get our connected fitness margins back into the low, at least the low double digits range and then continue to, yeah, and then continue to improve it over time. Another thing, you know, it's worth pointing out is that some of our marketing messaging in the past has really been focused on promotions. And we are moving away from that to really focus on the full value proposition of what you get with Peloton and your overall membership as part of our messaging. The goal there is again to make it less about promotions and more about the value of Peloton over time.

Karen Boone: Peloton members will also receive special offers on the Google Pixel Watch and Fitbit Charge 6 devices as part of this partnership.

Chris Bruzzo: As we look forward, together with our team of talented employees, we'll continue to play new trails with personalized fitness delivered anywhere consumers want to work out. Our goal is for Peloton to be the most trusted fitness companion, whether at home, outside or at the gym. We want to be with our millions of members through every step of their fitness and wellness journey, regardless of the destination.

Speaker Change: and then no in terms ofhow high can get i'm not going to throwout a specific target for but our alwould be to get are connected fitness margins back into the low at least the low double digits range and then continue to and and then continue to improve it

Liz Coddington: It is worth noting that we do expect Q1 free cash flow to be negative due to timing of inventory payments as we build up inventory to support the holiday season in Q2.

Liz Coddington: Our outlook for fiscal year 2025 reflects our prioritization of improving profitability, and delivering meaningful free cash flow.

Liz Coddington: Our improved bottom line financials enable us to focus on innovation in a more strategic way.

Speaker Change: over time another thing you know it's worth pointing out is that some of our marketing messaging in the past has really been focused on promotions

Speaker Change: and we are moving away from that to really focus on the full value proposition of what you get with peon and your' overall membership as part of as part of our messaging and the goal there is again to make it less about

Speaker Change: promotions and more about the value of peiton over time

Operator: Very helpful.

Operator: Thank you. A one moment.

Shweta Khajuria: We feel we have time for one final question, and that will come from the line of Shweta Khajuria with Wolf Research. Your line is open. Thanks for taking my question.

Speaker Change: very helpful thank you

Speaker Change: from one moment we do have time for one final question and that will come from the line of sshta knjia with wolf research your line is open

Brian Myelacon: And our first question will come from the line of Douglas and Mews with JP Morgan. Your line is open. Hey, it's Brian. Myelacon for Doug. Thanks for taking the question. Just to start last quarter, you had talked about the connected fitness market becoming closer to recovery. Can you just update us on the trajectory of return to growth across the industry, and maybe what you're seeing on the macro side? And more specific for Peloton, what would be the one to two key growth initiatives that you're focused on for fiscal year 25? Thank you.

Karen Boone: I'm not sure if you addressed what you're looking for in the next video. If you could please comment on that, that'd be great.

sshta knjia: thanks for tellking my question i'm not ofbutyou addressed what you're looking for in the next year if you could please comment on that that'll be great and then the second thing

Karen Boone: And then the second thing is of the unit that you are talking about, as the new CEO comes in, how could the strategy change potentially, because it may depend on him or her a little bit as well.

Speaker Change: is of these initiatives that you are

Karen Boone: Turning to our hardware business, we are focused on delivering growth-market improvements for our premium connected business products.

Speaker Change: talking about as the new ceo comes in how good the strategy change potentially because it may defend on him or her a little bit as well and as it stands now which if you were to put it in a spectrum which one which

Karen Boone: And as it stands now, which, if you were to put it in a spectrum, which one do you, which doc to strategies do you think will have the most impact in the near to midterms? Thanks a ton.

Karen Boone: We have been pleased with the introduction and expansion into third-party distribution channels, both in North America and on our international markets, but are doing work to optimize the economics of these channels. This effort includes evaluating certain product pricing models, discounting strategies, and the way we deploy media dollars.

Liz Coddington: Sure, so why don't I start off with kind of what we're seeing on the macro front? This is Liz. If we look at the overall connected fitness market, similar to what we talked about last quarter, our internal estimates that use third-party data indicate that connected fitness category is still declining year-over-year post-COVID. We still see that those year-over-year declines have less than dramatically since fiscal 22, and that does indicate that we are getting closer to an inflection point where the category could start growing again within the next few quarters.

Karen Boone: We expect to continue to see improvements in our connected business segment, growth margins, and fiscal 25 as a result of these efforts.

Speaker Change: top two strategies do you think we'll have the most impact in the near-to miure and s time

Karen Boone: Sure, so I'll take the CEO question. As I said in my prepared remarks, this is a very high priority for us. We've been very focused on it. We are far along in the process. We've done a lot of vetting, a lot of conversations, and we've narrowed it down to some very highly qualified candidates that said we're not done until we're done, because we're pretty far along from candidates. We're not going to go through the specific profiles, but I would say we're just really excited about the process and the interest that there has been and the quality of the candidates we're talking to.

Liz Coddington: We remain optimistic about the investments we are making in our software and hardware innovation, and also evolving our content offerings.

Speaker Change: ch i'll take the ceo question as i said in my prepared remarks this is a very high priority for us we've been very focused on it we are far along in the process

Karen Boone: Pre-core is also improving their bottom-line performance, with strong year-of-year improvement in growth margins and reductions in operating expenses.

Speaker Change: we've done a lot of vetting a lot of conversations

Speaker Change: and we' narred down to some very highly qualified candidates that said we're not done until we're done because we're pretty far canadas we're notgoing to go through the specific profiles but i would say we're just really excited about the process and the interest that there has been and the qualityofthe candis were talkingto soi'm not going to give specifics on what we're looking for again we have some very specific folks in mind at this point but that person

Liz Coddington: With that, in the short-committee term, we do expect softness in connected fitness hardware demand, given the category trends, and also macroeconomic uncertainty. But over the long term, we do still really remain bullish on the growth potential for the connected fitness category, and we expect to grow our share of total fitness and wellness spending as we invest in product and content innovation, and we evolve our marketing strategy.

Christopher Bruzzo: So I'm not going to give specifics on what we're looking for. Again, we have some very specific folks in mind at this point, but that person will absolutely opine and weigh out on the strategy. I think some of the things we're doing right now are intentional, something like a subscription price increase. That is a one-way door. We probably wouldn't go through without a new CEO as an example, but the things we're doing now and the things we're focused on in the very near term, all the things we're talking about today are what I would consider sort of no-brainers.

Speaker Change: will absolutely and and the strategy i think some of the things were doing right now are intentionally something like subscription price increase that is one way door we probably wouldn't go through without a new as an examplebutthe things were doing now andthe things were fousedon the very near termall the things are talking about today are what i would consider sort of no brainers wewere being more judicious with our spend both on marketing which we talked about but really up and down the pianoand we're making sure that our unit economics and our margins make sense and that can f you know those things fund c and futuregrowth in the future and we're planting the fees with what we think are some really exciting content and offerings for all of our members new members and existing bers ike so i think we'refocused on that and i think the new

Chris Bruzzo: Yeah, and let me build on that. This is Chris. I think some of the things to be excited about in the coming year. Certainly a bunch of what we shared today. A lot of innovation in software and in the overall experience with members. We talked about social features. We talked about personalization. We talked about gaming. It's very exciting to see those things start to come to life. And then we have to always always point to tread.

Chris Bruzzo: I will now pass the call over to Chris, who will provide an update on our marketing strategy and product development.

Chris Bruzzo: Chris?

Chris Bruzzo: Thanks, Karen.

Chris Bruzzo: As Karen mentioned, we are focused on managing the business for sustainable, profitable growth.

Christopher Bruzzo: We're being more judicious with our spend, both on marketing, which we've talked about, but really up and down the P&L, and we're making sure that our unit economics and our margins make sense, and that can, you know, those things fund CAC and future growth in the future, and we're planting the seeds with what we think are some really exciting content and offerings for all of our members, new members, and existing members alike. So I think we're focused on that, and I think the new CEO coming in will pick right back up, but we won't miss a beat.

Chris Bruzzo: Tread remains an incredible opportunity underdeveloped for Peloton. It's one of our highest potential growth levers. And so I think between those improvements in the experience, capitalizing on the tread opportunity and then just becoming much more effective with our marketing investments. And in particular targeting key audiences, new audiences like men and the next population, those are some of the things to be excited about. Great. Thank you. One moment for our next question.

Karen Boone: Totally.

Karen Boone: And Karen and I like to talk about preparing the way for the next leader and making some of the smart moves now that we can make to create the best possible environment. So getting the company on solid financial footing, planting seeds for growth, these are that becoming more effective in how we're using our resources, especially in marketing and in creating demand and in helping Palestine become known for things like strength and tread and running. These are the important things. So we see that as preparing the environment, and we think that that's just going to create a great runway for the next leader.

Speaker Change: o coming in will pick right back up and we won't missiabe

Speaker Change: totally in

Karen Boon: karen i like to talk about preparing the way for the the next leader and

Karen Boon: making some of the smart moves now that we can make

Speaker Change: to create the best possible environment so

Speaker Change: getting the any on solall financial fothey planting

Speaker Change: seeds for growth these are the learning becoming more effective in how we're using our resources especially in marketing and in creating demand and in helping calls on become known for for things like strength and tread and running these are the important thing so we see that in preparing environment and we think that that's just going to create a great runway for the next year

Chris Bruzzo: So I could touch on how this is manifesting in our approach to sales and marketing. In our 200 million cost restructuring plan that we announced in May, which Liz will provide an update on shortly, we included cost reductions in some areas within sales and marketing, such as lower brand and creative spend, lower retail expenses from reducing our showroom footprint, and lower headcount.

Karen Boone: Thank you.

Karen Boone: I would now like to turn the call over to Karen Boone for closing remarks. Okay, thank you for the time today. I do want to stress that the entire board is highly focused on the CEO's search, and we do hope to have some news to share there in the very near term. In the meantime, Chris and I, and the entire leadership team, are highly focused on what we can control. We're executing against our restructuring plan, and we're delivering those expenses. And we talked a lot about media efficiency today, but I do want to stress that we're looking at further optimizing our spend up and down the P&L, including on Harbor gross margins and ensuring our unit economics work in all of our markets and all of our channels.

Speaker Change: thank you

Speaker Change: thank you i would now like to turn the call over to karen boon for closing remarks

Eric Sheridan: Thanks so much. Yeah, I mean, I think this is Chris. I think you're seeing us continue to focus on that. In fact, we discussed last quarter how Lauren Weinberg just jumped into the business here at Peloton and brought us a really great item marketing spend. And we're already seeing some of the benefits of that. So, you know, we shared today that our LTV2CAC ratio for the last quarter was 1.5X. And that's sort of where we want to be, but it's good.

Karen Boon: okay thank you for the time today i do want to stress that the entire board is highly focused on the ceo search and we do hope to have some news to share there in the verynear term in the meantime christand i and the entire leadership team are highly focused on what we can control

Chris Bruzzo: However, the 200 million cost restructuring plan did not include any media spend reductions.

Christ: we're executing against our receptction plan and we're delivering those expense reductions

Speaker Change #100: and we tal to a lot about media efficiency today but i do want to stress that we're looking at further optimizing our spend up and down the pl including on harbor grossk margins and ensuring our unit economics work and all of our markets and in all of our channels

Eric Sheridan: It's good improvement. And the way we're getting there is by being more focused on efficiency and on on the parts of our business that we can have. I think the most control. We talked today about shifting our focus away from app because from a marketing standpoint, because we're visually taking the learnings from the last year and making that experience better. That creates an opportunity for us. So actually, it's both sides of the equation that that are going to improve our LTV2CAC ratio.

Karen Boone: And we're also very focused on working capital efficiency to deliver the inventory reductions. And importantly, we are making investments for future growth where we will test and learn before scaling the spend. We're excited about the opportunity to tread the work we're doing to lean into strength both with content and delivery formats and with new community features and additional experiences on the come for both existing and new members. I do want to thank our amazing instructors and the many talented employees who bring the magic of Peloton to our millions of members day in and day out.

Liz Coddington: We look forward to sharing more about new product features and fitness experiences in upcoming quarters. As we test new fitness and wellness offerings to meet our members' needs, we're allowing, time to learn and iterate to ensure that our offerings have signals of strong product-market fit before we scale them.

Speaker Change #100: and we're also very focused on working capital efficiency to deliver the inventory reductions

Speaker Change #100: and importantly we are making investments for future growth where we will test and learn before saling the standend

Liz Coddington: As a result, our outlook does not assume subscriber growth from these new initiatives in fiscal, 2025.

Liz Coddington: And with our cost structure better aligned to the current size of our business and a, planned path to sustainable positive free cash flow, we now have a solid foundation in place that we can build upon to drive long-term profitable growth and shareholder value.

Chris: And now, I'd like to turn it back to Chris for some closing remarks.

Chris: Thanks, Liz.

Chris: As a global leader in fitness, Peloton enables our members all over the world to unlock their, power to achieve their fitness and wellness goals and be part of a community who shares their passion.

Operator: Thank you.

Speaker Change #101: we're excited about the opportunity with tread the work we're doing to lean into strength both with content and delivery formats and with new community features and additional experiences on the come for both existing and new members

Chris: Our fitness experiences are delivered through the world's leading fitness experts, premium, hardware and innovative software, a variety of ways to work out that include multiple content formats from instructor-led classes to scenic outdoor audio, gaming-inspired, and entertainment.

Operator: As a reminder, to ask a question, please press star 11 on your telephone and wait for your, name to be announced.

Chris: As we look forward, together with our team of talented employees, we'll continue to blaze, new trails with personalized fitness delivered anywhere consumers want to work out.

Operator: To withdraw your question, press star 11 again.

Chris: Our goal is for Peloton to be the most trusted fitness companion, whether at home, outside, or at the gym.

Chris: We want to be with our millions of members through every step of their fitness and wellness, journey, regardless of the destination.

Operator: Due to time restraints, we ask that you please limit yourself to one question and one follow-up, question.

Chris: Thank you for your time this morning, and we can now open the line for Q&A.

Operator: Please stand by while we compile the Q&A roster.

Operator: And our first question will come from the line of Douglas Anmuth with J.P. Morgan.

Eric Sheridan: We're both seeing improvements in the financial foundation and our gross margin. That's going to help the LTV. And then we're just becoming far more effective with lower spend fewer promotions. And that's having a positive impact on Kat. And I'll just build on the LTV piece. This is Karen. One of the things we're really focused on is improving our hardware margins. So in the connected fitness segment, hardware margins have come down significantly over the last couple of years.

Operator: Your line is open.

Speaker Change #102: i do want to thank our amazing instructors and the many talented employees who bring the magic of appellaton to our millions of members day in and day out and i should probably under promise here but i am excited to say that i do believe you will be speaking to and hearing from the new ceo of pelon on this call next quarter

Operator: Hey, it's Brian Smiley, on for Doug.

Operator: And I should probably under-promise here, but I am excited to say that I do believe you will be speaking to and hearing from the new CEO of Peloton on this call next quarter. Thank you.

Operator: Thanks for taking the question.

Operator: Just to start, last quarter, you had talked about the connected fitness market becoming, closer to recovery.

Operator: Can you just update us on the trajectory of return to growth across the industry and maybe, what you're seeing on the macro side?

Operator: And more specific for Peloton, what would be the one to two key growth initiatives that, you're focused on for fiscal year 25?

Operator: Thank you.

Operator: Sure.

Operator: So, why don't I start off with kind of what we're seeing on the macro front?

Operator: This is Liz.

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

Operator: If we look at the overall connected fitness market, similar to what we talked about last, quarter, our internal estimates that use third-party data indicate that the connected fitness category is still declining year over year post-COVID. We still see that those year over year declines have lessened dramatically since fiscal 22. And that does indicate that we are getting closer to an inflection point where the category, could start growing again within the next few quarters.

Speaker Change #101: thank you

Operator: With that, in the short to medium term, we do expect softness in connected fitness hardware, demand given the category trends and also macroeconomic uncertainty.

Operator: But over the long term, we do still really remain bullish on the growth potential for, the connected fitness category.

Operator: And we expect to grow our share of total fitness and wellness spending as we invest in product, and content innovation and we evolve our marketing strategy.

Speaker Change #103: this concludes today's program thank you all for participating you may now disconnect

Operator: Yeah, let me build on that.

Operator: This is Chris.

Operator: Thank you.

Operator: I think some of the things to be excited about, in the coming year, certainly a bunch of what we shared today, a lot of innovation in software and in the overall experience for members.

Operator: Thank you.

Operator: Thank you so much for taking the questions.

Operator: We talked about social features, we talked about personalization, we talked about gaming.

Eric Sheridan: And we're working on restoring those. And that's going to look at, you know, both unit economics on our individual skews, but also how we're approaching different markets and different channels. So you're going to see us evaluating pricing. You're going to see us be a little less promotional, both the depth and the frequency. And we're just going to optimize that over time as well. Yeah, I just want to hit on the checkpoint one more time.

Operator: One moment for our next question.

Operator: I want to come back to some of the comments, you made during the prepared remarks.

Operator: It's very exciting to see those things start to come to life.

Operator: And that will come from the line of Eric Sheridan with Goldman Sachs.

Operator: When you think about improving your LTV to CAC looking out over the next couple of years, what do you see as the key gating factors to improve LTV to CAC?

Operator: And then we have to always point to TRED.

Operator: Your line is open.

Operator: And how are you thinking about which components of that are within your control versus an output of the broader either marketing or competitive environment generally?

Operator: TRED remains an incredible opportunity, underdeveloped for Peloton. It's one of our highest potential growth levers.

Operator: Thanks so much.

Operator: And so I think, you know, between those improvements in the experience, capitalizing on the TRED, opportunity, and then just becoming much more effective with our marketing investments, and in particular, targeting key audiences, new audiences, like men and the Latinx population.

Speaker Change #104: it refer you had not me

Operator: Yeah, I mean, I think this is Chris.

Karen Boone: I do want to thank our amazing instructors and the many talented employees who bring, the magic of Peloton to our millions of members day in and day out.

Operator: Those are some of the things to be excited about.

Operator: I think you're seeing us continue to focus on that.

Operator: Great.

Operator: In fact, we discussed last quarter how Lauren Weinberg just jumped into the business here at Peloton, and brought a really great eye to marketing spend. And we're already seeing some of the benefits of that.

Operator: So, you know, we shared today that our LTV to CAC ratio for the last quarter was one point five X.

Operator: And that's short of where we want to be.

Operator: But it's good.

Operator: It's good improvement.

Operator: And the way we're getting there is by being more focused on efficiency and on on the parts, of our business that we can have, I think, the most control.

Operator: We talked today about shifting our focus away from that because from a marketing standpoint, because we're busily taking the learnings from the last year and making that experience better, that creates an opportunity for us.

Operator: So actually, it's both sides of the equation that that are going to improve our LTV to CAC ratio.

Operator: We're both seeing improvements in the financial foundation and our gross margin. That's going to help the LTV.

Operator: And then we're just becoming far more effective with lower spend, fewer promotions, not having a positive impact on on cap.

Operator: And I'll just build on the LTV piece.

Operator: This is Karen.

Operator: One of the things we're really focused on is improving our hardware margins. So in the connected fitness segment, hardware margins have come down significantly over the last couple of years. And we're working on restoring those.

Operator: And that's going to look at, you know, both unit economics on our individual SKUs, but also how we're approaching different markets and different channels.

Operator: So you're going to see us evaluating pricing.

Operator: You're going to see us be a little less promotional, both the depth and the frequency.

Chris Bruzzo: In Q4, we delivered additional cost savings by reducing our media spend year-over-year. We will continue to optimize our media investment in fiscal 25 to improve our efficiency, which is an important priority for us.

Eric Sheridan: You know, we, as we've talked about, we've decreased our media spend because we are very focused on making sure that our media is being spent efficiently. And as Lauren and her team work on evolving our messaging and improving our channel strategy with regard to media, we'll start to see that manifest in lower tack. And so for now, we've pulled back on marketing spend as we optimize some of that. And when we see the efficiency improve, we will, we will lean into it and spend more of our LTV to catch ratios improve.

Operator: And we're just going to optimize that over time as well.

Operator: Yeah, I just want to hit on the CAC point one more time.

Operator: You know, we we as we've talked about, we've decreased our media spend because we are very focused, on making sure that our media is being spent efficiently. And as Lauren and her team work on evolving our messaging and improving our channel strategy with regard to media, we'll start to see that manifest in lower CAC.

Operator: And so for now, we've pulled back on marketing spend as we optimize some of that. And when we see the efficiency improve, we will we will lean into it and spend more of our LTV to CAC ratios improve.

Operator: And so Lauren's really focused on efficiency in the lower funnel.

Operator: And then, you know, and also improved engagement with with our marketing and to drive to drive that to drive on the LTV.

Operator: Hi.

Operator: Great.

Operator: Thank you.

Operator: One moment for our next question.

Operator: And that will come from the line of Nathan Feather with Morgan Stanley.

Operator: Your line is open.

Operator: Hey, everyone, and congrats on the progress.

Operator: You know, thinking about the subscriber decline that, you're looking at in fiscal 25, you know, can you help us think, right, the key components between the lower marketing spend, you know, the macro stoppage of the bike rental program, etc.

Operator: And then is the bike rental program something that you may expect to toggle on and off depending on the level of used inventory?

Operator: Thank you.

Operator: Why don't I start with just some of the overall subscriber trends, because I do think that harkens back to where we were coming out of the pandemic.

Operator: We saw sales slow down, and it's easier now to see what was happening, but I do think there was that pull forward. So I think we've, you know, we believe that we're coming out of it, but we don't quite know if we're all the way out of it.

Operator: So there's that, and there's the macro that is hard to discern.

Operator: So there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward.

Chris Bruzzo: Because while our Q4-LTP to CAC ratio of 1.5 times improved significantly compared to Q4 last year, it is still below our two to three times target range.

Operator: So that's certainly one of the things going on.

Operator: Yeah, for sure.

Operator: That's true on the macro front.

Operator: But, you know, again, some of it is decisions that we have made that we are going to focus on sustainable, profitable growth, and we're not going to spend inefficiently to acquire unprofitable subscribers.

Chris Bruzzo: We have more work to do.

Operator: And so we have pulled back, and that's a decision that we made to reduce our marketing spend there.

Operator: The other thing I do want to point out, you mentioned rental, and that is a factor, you know, as we looked at our bike rental program for the original bike.

Operator: You know, we've talked about this in the past, that the economics are great when we have refurbished inventory, but are challenged when we are having to supply that program with new inventory.

Operator: And as our inventory has come down, we determined the right thing to do financially for us was to cease that program, and that will have, you know, some impact, although we are starting to see some benefits with more people taking Bike Plus, but it will have some impact intentionally as we, you know, as we're using the refurbished inventory just for refurbished sales right now.

Operator: So, and your question about toggling rental on and off, at this point we don't see that happening because our return rates are still quite low, and the way that we replenish the inventory for our refurbished program is primarily through people who return their bikes through the 30-day home trial.

Operator: And since that's so low, we don't expect to have a huge amount of inventory, so our plan for now is to just use that to supply the refurbished original bike program, and then not to return to rental, but we may at some point decide to change our minds on that, but that's where we are for now.

Operator: We do still plan to keep the Bike Plus program for rental in place. The economics work quite, well for us there, both with refurbished and new inventory, and so we have no plans to eliminate that program at any point at this time.

Eric Sheridan: And so, you know, Lauren's really focused on efficiency and the lower funnel. And then, you know, and also improved engagement with with our marketing and to drive to drive that to drive on the LTV. Hi. Great, thank you. One moment for our next question.

Operator: Very helpful.

Operator: Thank you.

Operator: One moment for our next question.

Operator: And that will come from the line of Ron Josie with Citi.

Operator: Your line is open.

Operator: All right, thanks for taking the question.

Operator: Two, please.

Operator: Maybe a bigger picture, and guidance, talks about potential change in pricing overall.

Operator: I wanted to see if there's any changes as you think about subscription pricing, or is it just hardware?

Operator: Meaning subscriptions around tiers, isn't there a product come out, like the Strength app or Treaded option, any impact on pricing for subs is question one.

Operator: And then, Liz, I want to understand a little bit more your comments on churn picked up year over year in the quarter.

Operator: Understand seasonality here, though, I think you also said expected to remain high going forward.

Operator: So, any insights on what's keeping that churn as high as it is relative to historicals would be helpful.

Operator: Thank you.

Operator: Sure.

Operator: So, I'll take the sub one.

Operator: We are looking at all of the pricing across the business.

Operator: There are no plans right now to increase our subscription price. We do think it's a great value. And as we do deliver more value with some of these experiences we're talking about, something we might consider in the future.

Operator: But at this point, we don't have any plans for that.

Operator: On the hardware pricing front, it's easier, to think about what we might do in certain markets, especially where the penetration of third-party, such as international, is more significant.

Operator: There are certain markets where we're entirely third-party distributors, and so the margins there need to be a little bit higher to support those.

Chris Bruzzo: And that will come from the line of Nathan Feather with Morgan Stanley. Your line is open. Hey everyone, I can grab some of the progress. You know, thinking about the subscriber decline that you're looking at in system 25, you can help us think, right, the key components between the lower marketing spend, you know, the macro, stoppage of the bike rental program, etc. And then it's the bike rental program, something that you may expect to toggle on and off, depending on the level of use inventory. Thank you.

Operator: So, again, that reflects our looking at the unit economics across all products and across all, channels.

Operator: Right now, the subscription margins are quite good.

Operator: It's the hardware margins that are a little more challenged.

Operator: So, it doesn't mean that we won't ever entertain a subscription price increase, but it's not something that we're planning for any time in the immediate future.

Operator: Sure.

Operator: And then I'll take the churn question.

Operator: So, at a high level, our business continues, to benefit from really strong retention rates. We still have a relatively low churn. It was around 1.9% in Q4, and I did mention that it will likely be in around the 1.9% range for Q1, which is an uptick year-over-year.

Operator: In Q1 of last year, we benefited from a number of members unpausing their subscriptions following an elevated pause rate as a result of the seat post recall that we had in Q4 of fiscal 2023.

Operator: When we compare year-over-year churn rates, this creates a headwind for us this year because of last year we had that one-time benefit. That's about half of the year-over-year increase in churn is coming from that.

Operator: We're also seeing a slight impact from worsening churn rates, and then we do see some mixed shift, into our higher churn populations, namely our secondary market subscribers, which we've talked about. They do have a slightly higher churn rate than those who purchase outright from us via first-party or third-party channels, and then also a slightly higher churn rate that we do see from our bike rental program.

Operator: That's helpful.

Operator: Thank you.

Operator: One moment for our next question.

Operator: And that will come from the line of Arpene Kocharayan with UBS.

Operator: Your line is open.

Operator: Hi.

Operator: Thanks for taking my question, and you addressed some parts of this already.

Operator: Could, you go back to your kind of underlying assumption for connected fitness subs for 2025 and maybe kind of dissect how much of that decline is increasing churn versus addition of new subscribers?

Operator: And then just somehow a sweeping question in terms of Q4, could you clarify a contribution from Lolo Deal?

Operator: Thank you.

Operator: Sorry, I missed the last part of your question.

Operator: Q4 from what was that?

Operator: From Lululemon deal.

Operator: Oh, Lululemon.

Operator: Oh, sure.

Operator: So we don't actually share externally any information about the, revenue that we get from our Lululemon deal.

Operator: We've shared it somewhat in the past.

Operator: It's remained pretty constant and consistent.

Operator: We're seeing really good retention rates from the Lululemon members.

Operator: And so, you know, so we're pleased with that.

Operator: Your question about underlying, subs for 2025, you know, it's really hard to break out the factors into in a way that we can piece and parse them for you of how much is this and how much is how much is macro, how much are certain different things.

Chris Bruzzo: When I start with just some of the overall subscriber trends, because I do think that harkens back to where we were coming out of the pandemic. We saw sales slowdown, and it's easier now to see what was happening, but I do think there was that pull forward. So I think we've come, we believe that we're coming out of it, but we don't quite know if we're all the way out of it.

Operator: But I do want to really just kind of circle back to the fact that there are some macroeconomic factors at play.

Operator: There's still some COVID at play that we are, you know, we believe is really tapering off this year and hopefully by next year will be won't be a factor for us anymore.

Operator: But, you know, some of the things are really related to decisions that we are making about the business that where we're where we do.

Operator: And we also are leaving.

Operator: If you look at our guidance for fiscal 25 for subscribers, it does it does suggest that we are going to be declining in subscribers and the range is pretty broad. And the reason for that is that as we evolve our strategy over the course of the fiscal year, we may make changes to pricing.

Operator: Karen alluded to some things that we're thinking about there.

Operator: We're evolving our promotional strategies and then we may also pull other levers to achieve our financial targets.

Operator: And so all of those things may affect how our growth additions flow in.

Operator: We also see a lot of opportunities through some of the things that Chris was talking about, not only to potentially drive subscriber growth, but also to improve engagement, which can could also result in an improvement in our churn rate.

Operator: And so examples of where we expect to see that could be our beta test and some of the new product and content offerings.

Operator: And then also just as we evolve our member marketing strategy.

Operator: However, you know, we need to learn how our members are going to respond to these offerings and the timing of when we might see some of the impact from those efforts on churn is uncertain.

Operator: So it's really hard for me to parse out how those different things are going to manifest over the fiscal year.

Operator: But we really do feel good about the range that we provided.

Operator: And, you know, and it does suggest that in fiscal 25, our ability to grow subscribers remains unlikely, although we're going to work on improving that over the course of the year as we go.

Operator: Thank you very much.

Operator: One moment for our next question.

Operator: And that will come from the line of Lee Horowitz, Deutsche Bank.

Operator: Your line is open.

Operator: Great.

Operator: Thanks so much.

Chris Bruzzo: So there's that, and there's the macro that is hard to discern. So there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward. So that's certainly one of the things going on. Yeah, for sure, that's two on the macro front, but you know, again, some of it is decisions that we have made that we are going to focus on sustainable profitable growth. And we're not going to spend inefficiently to acquire unprofitable subscribers.

Operator: You know, 2025 is come a year where you write the cost structure and get the business to healthy, profitable base.

Operator: But looking forward, how do you think about how much white space is actually left in the, connected fitness market for Peloton to attack?

Operator: And how made that view on sort of the ability to attack the overall market inform the attributes you're looking for in your next CEO?

Operator: And then maybe one on gross margin.

Operator: Can you help us unpack sort of the meaningful connected fitness, gross margin improvements that you are looking for in 2025 a bit more?

Operator: How are you planning to affect that outcome in 2025?

Operator: And how much more room do you think there is to sort of right size that cost structure on product gross margins going forward, sort of absent any benefits you may get?

Operator: from MIPS.

Operator: OK, there's a lot there.

Operator: Let's start with the white space and what we're excited about.

Operator: I'd say there are still a lot of people, who think about us as a bike and or cardio company.

Operator: So I think that is white space.

Operator: I think we have 16 modalities, but not everyone, knows all the modalities we have.

Operator: We're really excited about tread and running, both from selling more treads, but also the content, the experiences, and run clubs, and social features that we're thinking about.

Operator: We're really bullish on strength.

Operator: I think there's so much of a movement towards strength. I think people understand the science behind it, and why it's important.

Operator: It is the number two modality for us, but I still think there's a lot of people who come for the cardio and then understand the strength.

Operator: We're not yet known for strength.

Operator: So I think you'll see with the beta test we're having, with other things we're planning to make sure that's better understood and more well-known, I think you'll see that as more of a white space for us in the future with new members and even going deeper with our existing members.

Operator: And then I think there's more we can do just, with broadening beyond just fitness over time.

Operator: These are things that we'll test and beta, and make sure they're working before we scale them and invest a lot of money behind them.

Operator: But I think there's an incredible amount, of white space over time for us, both in the US and in our international markets.

Operator: With international specifically, we're, very focused on reducing the losses there and our go-to-market strategy, so it's more capital light.

Operator: But as we kind of optimize the current markets, we'll be able to go into additional markets.

Operator: So I do believe there's a lot of white space over time.

Operator: Yeah, and the things that Karen's talking about, strength, tread, even our efforts to become more focused in marketing where we build up demand before we try to deliver it via promotions, et cetera, all these things are made possible because we're putting the company on solid financial footing.

Operator: So we say in our remarks, we're planting, the seeds here for growth.

Operator: And some of these seeds will take some time.

Operator: We've got to change that perception, that it's only about the bike, that it's actually also about strength.

Chris Bruzzo: These efforts are providing additional upside to the bottom line, as we reduced total sales and marketing expense by 26 million or 19 percent year-over-year in Q4.

Chris Bruzzo: And so we have pulled back and that's a decision that we made to reduce our marketing spend there. The other thing I do want to point out, you mentioned rental, and that is a factor, you know, as we looked at our bike rental program for the original bike. You know, we've talked about this in the past that the economics are great when we have refurbished inventory, but our challenge when we are having to supply that program with new inventory.

Operator: In fact, strength is our second most popular way, of exercising with Peloton.

Operator: It's also about running, and we're doing, some very cool stuff around pace targets and running content.

Operator: So those are efforts that we're very excited about, and we think create lots of white space for Peloton, but they'll take time to develop.

Operator: On the margin front, so first of all, we are expecting substantial improvement in our connected fitness growth margins in fiscal 25. Some of the reasons for that are the fact, that we are not expecting to have the inventory write-offs and reserves that we've been challenged with in the past.

Operator: We have much more or much more right size, in our inventory, and we're gonna continue to lean on making that more and more efficient over time so that we can reduce our date on hand and just have a much more efficient supply chain going forward.

Operator: We also talked about the fact that we are focused, on hardware pricing and also on reducing the amount of promotional activity that we have in the year. Those things directly affect our growth margins.

Chris Bruzzo: We are also seeing early signals that are approached to reach men via marketing as resonating.

Operator: And then in terms of how high can it get, I'm not gonna throw out a specific target for you, but our goal would be to get our connected fitness margins back into the low, at least the low double digits range and then continue to, yeah, and then continue to improve it over time.

Operator: Another thing, you know, it's worth pointing out, is that some of our marketing messaging in the past has really been focused on promotions.

Operator: And we are moving away from that to really focus, on the full value proposition of what you get with Peloton and your overall membership as part of our messaging. And the goal there is again, to make it less, about promotions and more about the value of Peloton over time.

Operator: And one moment, we do have time for one final question, and that will come from the line, of Shweta Khajuria with Wolf Research.

Operator: Your line is open.

Operator: Thanks for taking my question, I'm not sure if you addressed what you're looking for in, the next CEO, if you could please comment on that, that'd be great.

Operator: And then the second thing is, of these new initiatives that you are talking about, as, the new CEO comes in, how could the strategy change potentially, because that it may depend on him or her a little bit as well.

Operator: And as it stands now, which, if you were to put it in a spectrum, which one do you, which, top two strategies do you think will have the most impact in the near to midterm?

Operator: Thanks a ton.

Chris Bruzzo: We saw significant improvements in awareness of our strength and cycling disciplines for men in the quarter.

Operator: Sure.

Operator: So I'll take the CEO question.

Operator: As I said in my prepared remarks, this is a very high priority for us.

Operator: We've been very focused on it.

Operator: We are far along in the process.

Operator: We've done a lot of vetting, a lot of conversations, and we've narrowed it down to some very highly, qualified candidates.

Operator: That said, we're not done until we're done.

Operator: Because we're pretty far along with the candidates, we're not going to go through the specific, profiles, but I would say we're just really excited about the process and the interest that there has been, and the quality of the candidates we're talking to.

Operator: So I'm not going to give specifics on what we're looking for.

Operator: Again, we have some very specific folks in mind at this point.

Operator: But that person will absolutely opine and weigh in on the strategy.

Chris Bruzzo: Next, I'm going to discuss the new approach we're taking to servicing the secondary market, which is when a customer elects to purchase used Calton hardware directly from a previous owner. The secondary market is an important source of subscribers for us, and continues to deliver a steady stream of paid connected fitness subscriber additions, which were up 16 percent year-over-year in Q4. We believe a meaningful share of these subscribers are incremental, and they exhibit lower net turn rates than rental subscribers. Although these secondary market sales are not from Peloton owned channels or any of our third-party distribution partners, we want to ensure these new members receive the same high-quality onboarding experience Peloton is known for.

Chris Bruzzo: And as our inventory has come down, we determined the right thing to do financially for us was to see that program and that will have some impact. Although we are starting to see some benefits with more people taking bike plus, but it will have some impact intentionally as we, you know, as we were using the refurbished inventory just for refurbished sales right now. So and your question about toggling rental on and off at this point, we don't see that happening because our return rates are still quite low.

Operator: I think some of the things we're doing right now are intentionally something like a subscription, price increase.

Operator: That is a one-way door we probably wouldn't go through without a new CEO, as an example.

Operator: But the things we're doing now and the things we're focused on in the very near term, all, the things we're talking about today, are what I would consider sort of no-brainers.

Operator: We're being more judicious with our spend, both on marketing, which we've talked about, but really up and down the P&L.

Operator: And we're making sure that our unit economics and our margins make sense, and those things, fund CAC and future growth in the future.

Operator: And we're planting the seeds with what we think are some really exciting content and, offerings for all of our members, new members and existing members alike.

Operator: So I think we're focused on that, and I think the new CEO coming in will pick right back, up and we won't miss a beat.

Operator: And Karen and I like to talk about preparing the way for the next leader and making some, of the smart moves now that we can make to create the best possible environment.

Operator: So getting the company on solid financial footing, planting seeds for growth, becoming, more effective in how we're using our resources, especially in marketing and in creating demand and in helping Peloton become known for things like strength and tread and running.

Operator: These are the important things.

Operator: So we see that as preparing the environment, and we think that that's just going to create, a great runway for the next leader.

Operator: Thank you.

Operator: I would now like to turn the call over to Karen Boone for closing remarks.

Chris Bruzzo: With that in mind, we're initiating a new one-time $95 used equipment activation fee in the U.S, and Canada.

Karen Boone: Okay, thank you for the time today.

Karen Boone: I do want to stress that the entire board is highly focused on the CEO search, and we, do hope to have some news to share there in the very near term.

Karen Boone: In the meantime, Chris and I and the entire leadership team are highly focused on what, we can control. We're executing against our restructuring plan, and we're delivering those expense reductions.

Karen Boone: And we talked a lot about media efficiency today, but I do want to stress that we're, looking at further optimizing our spend up and down the P&L, including on hardware growth margins, and ensuring our unit economics work in all of our markets and in all of our channels.

Karen Boone: And we're also very focused on working capital efficiency to deliver the inventory reductions.

Karen Boone: And importantly, we are making investments for future growth, where we will test and, learn before scaling the spend.

Karen Boone: We're excited about the opportunity with TREAD, the work we're doing to lean into strength, both with content and delivery formats, and with new community features and additional experiences on the come for both existing and new members.

Chris Bruzzo: We're confident about our new software-driven experiences, and it's excited as we always are to innovate on software.

Chris Bruzzo: I'm in the way that we replenish the inventory for our refurbished program is primarily through people who return their bikes through the 30 day home trial. And since that's a low, we don't expect to have a huge amount of inventory, so our plan for now is to just use that to supply the refurbished original bike program and then not to return to rental, but we may at some point decide to change our minds on that, but that's where we are for now.

Chris Bruzzo: It's our instructor-led content that is the core of our business.

Chris Bruzzo: Looking ahead, we are using the extensive expertise of our instructors in new ways, and we'll look to complement the team with guests and potentially new instructors, as we find the right voices to reach our incredibly high standards. Two recent examples of this guest instructor strategy that our members responded positively to, were the return of accomplished fitness coach Irene Keimer in Germany, and Christian Vandeville, a professional cyclist in the U.S.

Chris Bruzzo: We do still plan to keep the bike plus program for rental in place. The economics work quite well for us. They're both with refurbished and new inventory as that we have no plans to eliminate that program at any point at this time. Very helpful. Thank you.

Ron Josy: One moment for our next question. And that will come from the line of Ron Josie with city. Your line is open. I'm sure taking a question. Two, please. Maybe a bigger picture and guidance talks about potential change in pricing overall. Want to see if there's any changes as you think about subscription pricing or is it just hardware, meaning subscriptions around tiered as new products come out like the strength app or credit option and any insights on pricing for subs.

Chris Bruzzo: We also launched a new feature called Just Guidance, which allows members to follow workout plans created by instructors while enjoying their favorite entertainment content.

Liz Coddington: And now Liz will take us through a review of financial performance.

Liz Coddington: Thank you, Chris.

Ron Josy: It's question one and then and then I want to understand a little bit more your comments on churn picked up year-to-year in the quarter understand see now the year. I think you also said expected remain high going forward. So any insights on what's keeping that churn as high as it is relative to historicals would be helpful. Thank you.

Liz Coddington: First, I'd like to touch on how we are tracking against the cost restructuring plan we announced at our last program called Back in May. We made substantial progress toward achieving our plan to deliver over $200 million in run rate cost savings by the end of fiscal 25, delivering approximately $15 million of cost savings in the quarter. Roughly 11 million of the cost savings came from payroll reductions, and the remaining 4 million came from other non-payroll savings.

Karen Boone: Sure, so I'll take the sub one. We are looking at all of the pricing across the business. There are no plans right now to increase our subscription price. We do think it's a great value and as we do deliver more value with some of these experiences we're talking about something we might consider in the future. But this at this point we don't have any plans for that on the hardware pricing front.

Karen Boone: It's easier to think about what we might do in certain markets, especially where the penetration of third party such as international is is more significant. There's certain markets where we're entirely third party distributors and so the margins there need to be a little bit higher to support those so again that that reflects are looking at the unit economics across all products and across all channels right now the subscription margins are quite good. It's the hardware margins that are one more challenge. So doesn't mean that we won't ever entertain a subscription price increase but it's not something that we're planning for any time in the immediate future.

Liz Coddington: Sure, and then I'll take the churn question. So at a high level our business continues to benefit from really strong retention rates. We still have a relatively low turn. It was around 1.9% in Q4 and I did mention that it will likely be in the around the 1.9% range 41. Which is an uptick year over year. In Q1 of last year we benefited from a number of members unpausing their subscriptions, following an elevated pause rate as a result of the seat post recall that we had in Q4 of fiscal 2023.

Liz Coddington: Average net monthly paid connected fitness subscription term was 1.9%, which was in line with internal expectations, and up roughly 10 basis points year over year.

Liz Coddington: While action was down roughly 80 basis points quarter over quarter in Q4, we anticipated term to remain somewhat elevated in the quarter, due to the roll off of subscribers associated with a specific corporate wellness client that did not renew their agreement.

Liz Coddington: Total revenue was 644 million in the quarter comprising 212 million of connected fitness segment revenue and 431 million of subscription segment revenue.

Liz Coddington: When we compare year over year churn rates, this creates a headwind for us this year because of last year we had that one time benefit. That's about half of the year over year increase in churn is coming from that. We're also seeing a slight impact from worsening churn rates and then we do see some mixed shift into our higher term populations, namely our secondary market subscribers, which we've talked about they do have a slightly higher turn rates and those who purchase outright from us via first party or third party channels. And then also a slight as a higher turn rate that we do see from our bike rental program. That's helpful. Thank you.

Operator: One moment for our next question.

Ryan Coach: And that will come from the line of our pain coach Orion with UBS. Your line is open. Hi, thanks for taking my question and you addressed some parts of this already.

Liz Coddington: Our connected fitness segment growth margin was 8.3%, ahead of our internal expectations. This included 10.7 million of inventory write-offs for excess and returned inventory. Excluding the impact of inventory write-offs and one time CROG's item, adjusted connected fitness growth margin was 10.2%, expanding over 15% points compared to the same period a year ago.

Liz Coddington: Could you go back to your kind of underlying assumption for connected thickness ups for 2025 and maybe kind of dissect how much of that decline is increasing churn versus addition of new subscribers. And then just some housekeeping question in terms of two four. Could you clarify a contribution from little deal. Thank you. So I missed the last part of your question. Q4 from what was that? From Lulu Dio, Lulemon Dio. Oh, Lulemon, of sure.

Liz Coddington: General and administrative expense increased by 23 million versus the year ago period, driven by an increase in stock-based compensation, primarily related to expense recognized in connection with the CEO transition, partially offset by lower depreciation and amortization expense.

Liz Coddington: The cash charges were primarily driven by 8.5 million benefits to severance and other personnel costs due to reversals and severance accruals, which were partially offset by 3.1 million relating to exit and disposal costs and professional fees.

Liz Coddington: So we don't actually share externally any information about the revenue that we get from our Lulemon Dio. We've shared it somewhat in the past. It's remained pretty constant and consistent. We aren't seeing any, you know, we're seeing really good retention rates from the Lulemon Dio. Lulemon members. And so, you know, so we're pleased with that.

Liz Coddington: Adjusted EBITDA with 70 million in the fourth quarter, a 105 million improvement from the period a year ago.

Liz Coddington: Your question about underlying subs for 2025, you know, it's, it's really hard to break out the factors into in a way that we can piece and parse them for you of how much is this and how much is macro, how much are certain different things. But I do want to really just kind of circle back to the fact that there are some macroeconomic factors of play. There's still some COVID impact at play that we are, you know, we believe is really tapering off this year and hopefully by next year will be won't be a factor for us anymore.

Liz Coddington: But, you know, some of the things are really related to decisions that we are making about the business on that where we're we reduce the and we also are leaving you look at our guidance for fiscal 25 for subscribers. It does, it does suggest that we are going to be declining in subscribers and the range is pretty broad. And the reason for that is that as we evolve our strategy over the course of the fiscal year, we may make changes to pricing, Karen alluded to some things that we're thinking about there.

Liz Coddington: We're evolving our promotional strategies and then we may also pull other levers to achieve our financial targets. And so all of those things may affect how our growth additions flow in. We also see a lot of opportunities through some of the things that Chris was talking about, not only to potentially drive subscriber growth, but also just to improve engagement, which can I could also result in an improvement in our turn rate.

Liz Coddington: And so examples of where we expect to see that could be our beta test and some of the new product and content offerings and then also just as we evolve our member marketing strategy. However, you know, we need to learn how our members are going to respond to these offerings and the timing of when we might see some of the impact from those efforts on churn is uncertain. So it's really hard for me to parse out how those different things are going to manifest over the fiscal year, but we really do feel good about the range that we provided. And, you know, we and it does suggest that in fiscal 25, our ability to grow subscribers remains unlikely, although we're going to work on improving that over the course of the year as we go.

Operator: Thank you very much. One moment for our next question.

Lee Horowitz: And that will come from the line of Lee Horowitz, the Deutsche Bank, your line is open. Great. Thanks so much. You know, 2025 is clear to come a year where you write the cost structure and get the business to healthy profitable base. But looking forward, how do you think about how much white space is actually left in the connected business market for peloton to attack and how made that view on sort of the, you know, the ability to attack the overall market informed the attributes you're looking for in your next CEO.

Lee Horowitz: And then maybe one on gross margin, can you help us unpack sort of the meaningful connected fitness gross margin improvements that you were looking for in 2025 a bit more. How are you planning to affect that outcome of 2025 and how much more room do you think there is to sort of right size that cost structure on product gross margins going forward sort of absent any benefits you may get. Okay, there's a lot there.

Chris Bruzzo: Let's start with what we're the white space and what we're excited about. I say there are still a lot of people who think about us as a bike and or cardio company. So I think that is white space. I think we have 16 modalities, but not everyone knows all the modalities we have. We're really excited about tread and running both from the, you know, selling more tread, but also the content, the experiences and run clubs and social features that we're thinking about.

Chris Bruzzo: We're really bullish on strength. I think there's so much of a movement toward strength. I think people understand the science behind it and why it's important. It is the number two modality for us, but I still still think there's a lot of people who come for the cardio and then understand the strength. We're not yet known for strength. So I think you'll see what the beta test for having with other things were, you know, planning to make sure that's better understood and more well known.

Chris Bruzzo: I think you'll see that as more of a white space for us in the future with new members and even kind of going deeper with our existing members. And then I'm going to think there's more we can do just with broadening, you know, beyond just fitness over time. These are things that will test and, you know, beta and make sure they're working before we scale them and invest a lot of money behind them.

Chris Bruzzo: But I think there's an incredible amount of white space over time for us both in the US and in our international markets with international specifically. We're very focused on reducing the losses there and our go to that market strategy. So it's more capital light. But as we kind of optimize the current markets, we'll be able to go into additional markets.

Liz Coddington: Next, I'd like to provide context on our financial outlook for the first quarter and fiscal year 2025.

Liz Coddington: [inaudible] So, first of all, we are expecting substantial improvement in our connected growth margins within this growth margins in fiscal 25. One of the reasons for that are the fact that we are not expecting to have the inventory right off the reserves that have been challenged within the past. We've much more or much more right size than our inventory. And we're going to continue to lean on making that more and more efficient over time so that we can reduce our table on hand and just have a much more efficient supply chain going forward.

Liz Coddington: Our guidance for first quarter of fiscal 2025, ending paid connected fitness subscription, reflects an expected year over year decline in hardware sales based on multiple factors. From a market perspective, the first quarter is typically a seasonally low quarter for hardware sales, as consumers shift their discretionary spending toward categories like travel and sporting growth during the summer months.

Liz Coddington: We also expect continued sales headwinds as a result of an uncertain macroeconomic environment.

Liz Coddington: We also talked about the fact that we are focused on hardware pricing and also on reducing the amount of promotional activity that we have in the year. Those things directly affect our growth margins. And then in terms of how high can it get, I'm not going to throw out a specific target for you, but our goal would be to get our connected fitness margins back into the low, at least the low double digits range and then continue to, yeah, and then and then continue to improve it over time.

Liz Coddington: Additionally, with our focus on improving profitability, our sales outlook reflects some decisions we've made that we expect to have an impact on our hardware sales in the quarter.

Liz Coddington: Another thing, you know, it's worth pointing out is that some of our marketing messaging in the past has really been focused on promotions. And we are moving away from that to really focus on the full value proposition of what you get with Peloton and your overall membership as part of as part of our messaging and the goal there is again to make it less about promotions and more about the value of Peloton over time. Very helpful. Thank you. A one moment.

Shweta Khajuria: We feel have time for one final question, and that will come from the line of Shweta Khajuria with Wolf Research.

Shweta Khajuria: Your line is open. Thanks for taking my question.

Karen Boone: I'm not sure if you addressed what you're looking for in the next video, if you could please comment on that, that'd be great. And then the second thing is of the unit that you are talking about, as the new CEO comes in, how could the strategy change potentially, because it may depend on him or her a little bit as well. And as it stands now, which, if you were to put it in a spectrum, which one do you, which doc to strategies do you think will have the most impact in the near to midterms? Thanks a ton.

Chris Bruzzo: So I'm not going to give specifics on what we're looking for. Again, we have some very specific folks in mind at this point, but that person will absolutely opine and weigh out on the strategy. I think some of the things we're doing right now are intentionally, something like a subscription price increase. That is a one-way door. We probably wouldn't go through without a new CEO as an example, but the things we're doing now and the things we're focused on in the very near term, all the things we're talking about today are what I would consider sort of no-brainers.

Liz Coddington: While we are not providing specific guidance on average net monthly paid connected fitness churn, we expect our churn rate to be relatively similar to Q4 fiscal 2024.

Liz Coddington: Our first quarter paid app subscription guidance, reflects an expected sequential decline in growth additions due to seasonality coupled with sequential improvement and average monthly paid app subscription churn. We expect our churn rate to improve quarter over quarter due to stabilization in our corporate wellness paid app subscription base.

Liz Coddington: Our first quarter revenue guidance reflects the impact of these hardware sales and subscription trends, combined with our business decisions to improve profitability.

Chris Bruzzo: We're being more judicious with our spend, both on marketing, which we've talked about, but really up and down the P&L, and we're making sure that our unit economics and our margins make sense, and that can, you know, those things fund CAC and future growth in the future, and we're planting the seeds with what we think are some really exciting content and offerings for all of our members, new members, and existing members alike. So I think we're focused on that, and I think the new CEO coming in will pick right back up, but we won't miss a beat. Totally.

Karen Boone: And Karen and I like to talk about preparing the way for the next leader and making some of the smart moves now that we can make to create the best possible environment. So getting the company on solid financial footing, planting seeds for growth, these are that becoming more effective in how we're using our resources, especially in marketing and in creating demand and in helping Palestine become known for things like strength and tread and running, these are the important things. So we see that as preparing the environment and we think that that's just going to create a great runway for the next leader. Thank you.

Karen Boone: I would now like to turn the call over to Karen Boone for closing remarks. Okay, thank you for the time today. I do want to stress that the entire board is highly focused on the CEO's search and we do hope to have some news to share there in the very near term. In the meantime, Chris and I and the entire leadership team are highly focused on what we can control. We're executing against our restructuring plan and we're delivering those expense And we talked a lot about media efficiency today, but I do want to stress that we're looking at further optimizing our spend up and down the P&L, including on Harbor Gross margins and ensuring our unit economics work and all of our markets and all of our channels.

Liz Coddington: We expect a sequential increase in first quarter total growth margin as a result of a seasonal mix toward our subscription segment.

Liz Coddington: We also expect significant year over year improvement and first quarter adjusted EBITDA mainly due to lower sales and marketing expense and continued progress toward achieving our 200 million cost reduction plan.

Liz Coddington: Any changes in these areas may affect our growth additions for paid connected fitness subscriptions and paid app subscriptions across the fiscal year.

Liz Coddington: Additionally, as we continue to improve our member experience, we seek clear opportunities to improve engagement, which could result in improvement to our average net monthly paid turn rates for both connected fitness and app.

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

Liz Coddington: Most importantly, our focus for fiscal 2025 is on delivering our key financial results, which include revenue, growth margin, and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash low.

Liz Coddington: We also expect to deliver meaningful free cash low on a full year basis of at least 75 million.

Liz Coddington: It is worth noting that we do expect Q1 free cash low to be negative due to timing of inventory payments as we build up inventory to support the holiday season in Q2.

Liz Coddington: Our outlook for fiscal year 2025 reflects our prioritization of improving profitability and delivering meaningful free cash low.

Liz Coddington: Our improved bottom line financials enable us to focus on innovation in a more strategic way.

Liz Coddington: We remain optimistic about the investments we are making in our software and hardware innovation and also evolving our content offerings.

Liz Coddington: We look forward to sharing more about new product features and fitness experiences in upcoming quarters. As we test new fitness and wellness offerings to meet our members' needs, we're allowing time to learn and iterate to ensure that our offerings have signals of strong product market fit before we scale them.

Liz Coddington: As a result, our outlook does not assume subscriber growth from these new initiatives in fiscal 2025.

Chris Bruzzo: And now, I'd like to turn it back to Chris for some clothing remarks.

Chris Bruzzo: Thanks, Liz.

Chris Bruzzo: As a global leader and fitness, Peloton enables our members all over the world to unlock their power, to achieve their fitness and wellness goals, and be part of a community who shares their passions.

Chris Bruzzo: Our fitness experiences are delivered through the world's leading fitness experts, premium hardware and innovative software, a variety of ways to work out that include multiple content formats from instructor-led classes to CMIC, outdoor audio, gaming inspired, and entertainment.

Chris Bruzzo: As we look forward, together with our team of talented employees, we'll continue to play new trails with personalized fitness delivered anywhere consumers want to work out.

Chris Bruzzo: Our goal is for Peloton to be the most trusted fitness companion, whether at home, outside or at the gym.

Chris Bruzzo: We want to be with our millions of members through every step of their fitness and wellness journey, regardless of the destination.

Operator: Thank you for your time this morning, and we can now open the line for Q&A.

Operator: Thank you.

Operator: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced.

Operator: To withdraw your question, press star 11 again.

Operator: Due to time restraints, we ask that you please limit yourself to one question and one call-up question.

Operator: Please stand by while we compile the Q&A roster.

Douglas Anmuth: And our first question will come from the line of Douglas and Mews with JP Morgan.

Douglas Anmuth: Your line is open.

Brian: Hey, it's Brian.

Brian: Myelacon for Doug.

Brian: Thanks for taking the question.

Brian: Just to start last quarter, you had talked about the connected fitness market becoming closer to recovery.

Brian: Can you just update us on the trajectory of return to growth across the industry, and maybe what you're seeing on the macro side?

Brian: And more specific for Peloton, what would be the one to two key growth initiatives that you're focused on for fiscal year 25?

Brian: Thank you.

Liz Coddington: Sure, so why don't I start off with kind of what we're seeing on the macro front?

Liz Coddington: This is Liz.

Liz Coddington: If we look at the overall connected fitness market, similar to what we talked about last quarter, our internal estimates that use third-party data indicate that connected fitness category is still declining year-over-year post-COVID. We still see that those year-over-year declines have less than dramatically since fiscal 22, and that does indicate that we are getting closer to an inflection point where the category could start growing again within the next few quarters.

Liz Coddington: With that, in the short-committee term, we do expect softness in connected fitness hardware demand, given the category trends, and also macroeconomic uncertainty.

Liz Coddington: But over the long term, we do still really remain bullish on the growth potential for the connected fitness category, and we expect to grow our share of total fitness and wellness spending as we invest in product and content innovation, and we evolve our marketing strategy.

Chris Bruzzo: Yeah, and let me build on that.

Chris Bruzzo: This is Chris.

Chris Bruzzo: I think some of the things to be excited about in the coming year.

Chris Bruzzo: Certainly a bunch of what we shared today.

Chris Bruzzo: A lot of innovation in software and in the overall experience with members.

Chris Bruzzo: We talked about social features.

Chris Bruzzo: We talked about personalization.

Chris Bruzzo: We talked about gaming.

Chris Bruzzo: It's very exciting to see those things start to come to life.

Chris Bruzzo: And then we have to always always point to tread.

Chris Bruzzo: And in particular targeting key audiences, new audiences like men and the next population, those are some of the things to be excited about.

Chris Bruzzo: Great.

Chris Bruzzo: Thank you.

Operator: One moment for our next question.

Eric Sheridan: And that will come from the line of Eric Sheridan with Goldman Sachs.

Eric Sheridan: Your line is open.

Eric Sheridan: Thank you so much for taking the questions.

Eric Sheridan: I want to come back to some of the comments you made during the prepared remarks.

Eric Sheridan: We need to think about improving your LTV2CAC looking out of the next couple of years.

Eric Sheridan: What do you see as the key gating factors to improve LTV2CAC?

Eric Sheridan: And how are you thinking about which components of that are within your control versus an output of the broader either marketing or competitive environment generally.

Eric Sheridan: Thanks so much.

Chris Bruzzo: Yeah, I mean, I think this is Chris.

Chris Bruzzo: I think you're seeing us continue to focus on that.

Chris Bruzzo: In fact, we discussed last quarter how Lauren Weinberg just jumped into the business here at Peloton and brought us a really great item marketing spend. And we're already seeing some of the benefits of that.

Chris Bruzzo: So, you know, we shared today that our LTV2CAC ratio for the last quarter was 1.5X.

Chris Bruzzo: And that's sort of where we want to be, but it's good.

Chris Bruzzo: It's good improvement.

Chris Bruzzo: And the way we're getting there is by being more focused on efficiency and on on the parts of our business that we can have.

Chris Bruzzo: I think the most control.

Chris Bruzzo: We talked today about shifting our focus away from app because from a marketing standpoint, because we're visually taking the learnings from the last year and making that experience better.

Chris Bruzzo: That creates an opportunity for us.

Chris Bruzzo: So actually, it's both sides of the equation that that are going to improve our LTV2CAC ratio.

Chris Bruzzo: We're both seeing improvements in the financial foundation and our gross margin. That's going to help the LTV.

Chris Bruzzo: And then we're just becoming far more effective with lower spend fewer promotions.

Chris Bruzzo: And that's having a positive impact on Kat.

Karen Boone: And I'll just build on the LTV piece.

Karen Boone: This is Karen.

Karen Boone: One of the things we're really focused on is improving our hardware margins. So in the connected fitness segment, hardware margins have come down significantly over the last couple of years. And we're working on restoring those.

Karen Boone: And that's going to look at, you know, both unit economics on our individual skews, but also how we're approaching different markets and different channels.

Karen Boone: So you're going to see us evaluating pricing.

Karen Boone: You're going to see us be a little less promotional, both the depth and the frequency.

Karen Boone: And we're just going to optimize that over time as well.

Karen Boone: Yeah, I just want to hit on the checkpoint one more time.

Karen Boone: You know, we, as we've talked about, we've decreased our media spend because we are very focused on making sure that our media is being spent efficiently.

Karen Boone: And as Lauren and her team work on evolving our messaging and improving our channel strategy with regard to media, we'll start to see that manifest in lower tack.

Karen Boone: And so for now, we've pulled back on marketing spend as we optimize some of that. And when we see the efficiency improve, we will, we will lean into it and spend more of our LTV to catch ratios improve.

Karen Boone: And so, you know, Lauren's really focused on efficiency and the lower funnel.

Karen Boone: And then, you know, and also improved engagement with with our marketing and to drive to drive that to drive on the LTV.

Operator: Hi.

Nathan Feather: Great, thank you.

Nathan Feather: One moment for our next question.

Nathan Feather: And that will come from the line of Nathan Feather with Morgan Stanley.

Nathan Feather: Your line is open.

Nathan Feather: Hey everyone, I can grab some of the progress.

Nathan Feather: You know, thinking about the subscriber decline that you're looking at in system 25, you can help us think, right, the key components between the lower marketing spend, you know, the macro, stoppage of the bike rental program, etc.

Nathan Feather: And then it's the bike rental program, something that you may expect to toggle on and off, depending on the level of use inventory.

Nathan Feather: Thank you.

Liz Coddington: When I start with just some of the overall subscriber trends, because I do think that harkens back to where we were coming out of the pandemic.

Liz Coddington: We saw sales slowdown, and it's easier now to see what was happening, but I do think there was that pull forward. So I think we've come, we believe that we're coming out of it, but we don't quite know if we're all the way out of it.

Liz Coddington: So there's that, and there's the macro that is hard to discern.

Liz Coddington: So there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward.

Liz Coddington: So that's certainly one of the things going on.

Liz Coddington: Yeah, for sure, that's two on the macro front, but you know, again, some of it is decisions that we have made that we are going to focus on sustainable profitable growth.

Liz Coddington: And we're not going to spend inefficiently to acquire unprofitable subscribers. And so we have pulled back and that's a decision that we made to reduce our marketing spend there.

Liz Coddington: The other thing I do want to point out, you mentioned rental, and that is a factor, you know, as we looked at our bike rental program for the original bike.

Liz Coddington: You know, we've talked about this in the past that the economics are great when we have refurbished inventory, but our challenge when we are having to supply that program with new inventory.

Liz Coddington: And as our inventory has come down, we determined the right thing to do financially for us was to see that program and that will have some impact.

Liz Coddington: Although we are starting to see some benefits with more people taking bike plus, but it will have some impact intentionally as we, you know, as we were using the refurbished inventory just for refurbished sales right now.

Liz Coddington: So and your question about toggling rental on and off at this point, we don't see that happening because our return rates are still quite low.

Liz Coddington: I'm in the way that we replenish the inventory for our refurbished program is primarily through people who return their bikes through the 30 day home trial.

Liz Coddington: And since that's a low, we don't expect to have a huge amount of inventory, so our plan for now is to just use that to supply the refurbished original bike program and then not to return to rental, but we may at some point decide to change our minds on that, but that's where we are for now.

Liz Coddington: We do still plan to keep the bike plus program for rental in place.

Liz Coddington: The economics work quite well for us.

Liz Coddington: They're both with refurbished and new inventory as that we have no plans to eliminate that program at any point at this time.

Liz Coddington: Very helpful.

Liz Coddington: Thank you.

Operator: One moment for our next question.

Ron Josy: And that will come from the line of Ron Josie with city.

Ron Josy: Your line is open.

Ron Josy: I'm sure taking a question.

Ron Josy: Two, please.

Ron Josy: Maybe a bigger picture and guidance talks about potential change in pricing overall.

Ron Josy: Want to see if there's any changes as you think about subscription pricing or is it just hardware, meaning subscriptions around tiered as new products come out like the strength app or credit option and any insights on pricing for subs.

Ron Josy: It's question one and then and then I want to understand a little bit more your comments on churn picked up year-to-year in the quarter understand see now the year.

Ron Josy: I think you also said expected remain high going forward.

Ron Josy: So any insights on what's keeping that churn as high as it is relative to historicals would be helpful.

Ron Josy: Thank you.

Karen Boone: Sure, so I'll take the sub one.

Karen Boone: We are looking at all of the pricing across the business.

Karen Boone: There are no plans right now to increase our subscription price. We do think it's a great value and as we do deliver more value with some of these experiences we're talking about something we might consider in the future.

Karen Boone: But this at this point we don't have any plans for that on the hardware pricing front.

Karen Boone: It's easier to think about what we might do in certain markets, especially where the penetration of third party such as international is is more significant.

Karen Boone: There's certain markets where we're entirely third party distributors and so the margins there need to be a little bit higher to support those so again that that reflects are looking at the unit economics across all products and across all channels right now the subscription margins are quite good.

Karen Boone: It's the hardware margins that are one more challenge.

Karen Boone: So doesn't mean that we won't ever entertain a subscription price increase but it's not something that we're planning for any time in the immediate future.

Liz Coddington: Sure, and then I'll take the churn question.

Liz Coddington: So at a high level our business continues to benefit from really strong retention rates. We still have a relatively low turn. It was around 1.9% in Q4 and I did mention that it will likely be in the around the 1.9% range 41.

Liz Coddington: Which is an uptick year over year.

Liz Coddington: In Q1 of last year we benefited from a number of members unpausing their subscriptions, following an elevated pause rate as a result of the seat post recall that we had in Q4 of fiscal 2023.

Liz Coddington: We're also seeing a slight impact from worsening churn rates and then we do see some mixed shift into our higher term populations, namely our secondary market subscribers, which we've talked about they do have a slightly higher turn rates and those who purchase outright from us via first party or third party channels.

Liz Coddington: And then also a slight as a higher turn rate that we do see from our bike rental program.

Liz Coddington: That's helpful.

Liz Coddington: Thank you.

Operator: One moment for our next question.

Shweta Khajuria: And that will come from the line of our pain coach Orion with UBS.

Shweta Khajuria: Your line is open.

Shweta Khajuria: Hi, thanks for taking my question and you addressed some parts of this already.

Shweta Khajuria: Could you go back to your kind of underlying assumption for connected thickness ups for 2025 and maybe kind of dissect how much of that decline is increasing churn versus addition of new subscribers.

Shweta Khajuria: And then just some housekeeping question in terms of two four.

Shweta Khajuria: Could you clarify a contribution from little deal.

Shweta Khajuria: Thank you.

Shweta Khajuria: So I missed the last part of your question.

Liz Coddington: Q4 from what was that?

Liz Coddington: From Lulu Dio, Lulemon Dio.

Liz Coddington: Oh, Lulemon, of sure.

Liz Coddington: So we don't actually share externally any information about the revenue that we get from our Lulemon Dio.

Liz Coddington: We've shared it somewhat in the past.

Liz Coddington: It's remained pretty constant and consistent.

Liz Coddington: We aren't seeing any, you know, we're seeing really good retention rates from the Lulemon Dio.

Liz Coddington: Lulemon members.

Liz Coddington: And so, you know, so we're pleased with that.

Liz Coddington: But I do want to really just kind of circle back to the fact that there are some macroeconomic factors of play.

Liz Coddington: There's still some COVID impact at play that we are, you know, we believe is really tapering off this year and hopefully by next year will be won't be a factor for us anymore.

Liz Coddington: It does, it does suggest that we are going to be declining in subscribers and the range is pretty broad. And the reason for that is that as we evolve our strategy over the course of the fiscal year, we may make changes to pricing, Karen alluded to some things that we're thinking about there.

Liz Coddington: We're evolving our promotional strategies and then we may also pull other levers to achieve our financial targets.

Liz Coddington: And so all of those things may affect how our growth additions flow in.

Liz Coddington: We also see a lot of opportunities through some of the things that Chris was talking about, not only to potentially drive subscriber growth, but also just to improve engagement, which can I could also result in an improvement in our turn rate.

Liz Coddington: However, you know, we need to learn how our members are going to respond to these offerings and the timing of when we might see some of the impact from those efforts on churn is uncertain.

Liz Coddington: So it's really hard for me to parse out how those different things are going to manifest over the fiscal year, but we really do feel good about the range that we provided.

Liz Coddington: And, you know, we and it does suggest that in fiscal 25, our ability to grow subscribers remains unlikely, although we're going to work on improving that over the course of the year as we go.

Liz Coddington: Thank you very much.

Operator: One moment for our next question.

Lee Horowitz: And that will come from the line of Lee Horowitz, the Deutsche Bank, your line is open.

Lee Horowitz: Great.

Lee Horowitz: Thanks so much.

Lee Horowitz: You know, 2025 is clear to come a year where you write the cost structure and get the business to healthy profitable base.

Lee Horowitz: But looking forward, how do you think about how much white space is actually left in the connected business market for peloton to attack and how made that view on sort of the, you know, the ability to attack the overall market informed the attributes you're looking for in your next CEO.

Lee Horowitz: And then maybe one on gross margin, can you help us unpack sort of the meaningful connected fitness gross margin improvements that you were looking for in 2025 a bit more.

Lee Horowitz: How are you planning to affect that outcome of 2025 and how much more room do you think there is to sort of right size that cost structure on product gross margins going forward sort of absent any benefits you may get.

Lee Horowitz: Okay, there's a lot there.

Karen Boone: Let's start with what we're the white space and what we're excited about.

Karen Boone: I say there are still a lot of people who think about us as a bike and or cardio company.

Karen Boone: So I think that is white space.

Karen Boone: I think we have 16 modalities, but not everyone knows all the modalities we have.

Karen Boone: We're really excited about tread and running both from the, you know, selling more tread, but also the content, the experiences and run clubs and social features that we're thinking about.

Karen Boone: We're really bullish on strength.

Karen Boone: I think there's so much of a movement toward strength.

Karen Boone: I think people understand the science behind it and why it's important.

Karen Boone: It is the number two modality for us, but I still still think there's a lot of people who come for the cardio and then understand the strength.

Karen Boone: We're not yet known for strength.

Karen Boone: So I think you'll see what the beta test for having with other things were, you know, planning to make sure that's better understood and more well known.

Karen Boone: I think you'll see that as more of a white space for us in the future with new members and even kind of going deeper with our existing members.

Karen Boone: And then I'm going to think there's more we can do just with broadening, you know, beyond just fitness over time.

Karen Boone: These are things that will test and, you know, beta and make sure they're working before we scale them and invest a lot of money behind them.

Karen Boone: But I think there's an incredible amount of white space over time for us both in the US and in our international markets with international specifically.

Karen Boone: We're very focused on reducing the losses there and our go to that market strategy.

Karen Boone: So it's more capital light.

Karen Boone: But as we kind of optimize the current markets, we'll be able to go into additional markets.

Liz Coddington: [inaudible] So, first of all, we are expecting substantial improvement in our connected growth margins within this growth margins in fiscal 25.

Liz Coddington: One of the reasons for that are the fact that we are not expecting to have the inventory right off the reserves that have been challenged within the past.

Liz Coddington: We've much more or much more right size than our inventory.

Liz Coddington: And we're going to continue to lean on making that more and more efficient over time so that we can reduce our table on hand and just have a much more efficient supply chain going forward.

Liz Coddington: Another thing, you know, it's worth pointing out is that some of our marketing messaging in the past has really been focused on promotions.

Liz Coddington: And we are moving away from that to really focus on the full value proposition of what you get with Peloton and your overall membership as part of as part of our messaging and the goal there is again to make it less about promotions and more about the value of Peloton over time.

Liz Coddington: Very helpful.

Liz Coddington: Thank you.

Operator: A one moment.

Operator: We feel have time for one final question, and that will come from the line of Shweta Khajuria with Wolf Research.

Operator: Your line is open.

Operator: Thanks for taking my question.

Operator: I'm not sure if you addressed what you're looking for in the next video, if you could please comment on that, that'd be great.

Operator: And then the second thing is of the unit that you are talking about, as the new CEO comes in, how could the strategy change potentially, because it may depend on him or her a little bit as well.

Operator: And as it stands now, which, if you were to put it in a spectrum, which one do you, which doc to strategies do you think will have the most impact in the near to midterms?

Operator: Thanks a ton.

Operator: Sure, so I'll take the CEO question.

Operator: As I said in my prepared remarks, this is a very high priority for us.

Operator: We've been very focused on it.

Operator: We are far along in the process.

Operator: We've done a lot of vetting, a lot of conversations, and we've narrowed it down to some very highly qualified candidates that said we're not done until we're done, because we're pretty far along from candidates.

Operator: We're not going to go through the specific profiles, but I would say we're just really excited about the process and the interest that there has been and the quality of the candidates we're talking to.

Operator: So I'm not going to give specifics on what we're looking for.

Operator: Again, we have some very specific folks in mind at this point, but that person will absolutely opine and weigh out on the strategy.

Operator: I think some of the things we're doing right now are intentionally, something like a subscription price increase.

Operator: That is a one-way door.

Operator: We probably wouldn't go through without a new CEO as an example, but the things we're doing now and the things we're focused on in the very near term, all the things we're talking about today are what I would consider sort of no-brainers.

Operator: We're being more judicious with our spend, both on marketing, which we've talked about, but really up and down the P&L, and we're making sure that our unit economics and our margins make sense, and that can, you know, those things fund CAC and future growth in the future, and we're planting the seeds with what we think are some really exciting content and offerings for all of our members, new members, and existing members alike.

Operator: So I think we're focused on that, and I think the new CEO coming in will pick right back up, but we won't miss a beat.

Operator: Totally.

Operator: And Karen and I like to talk about preparing the way for the next leader and making some of the smart moves now that we can make to create the best possible environment.

Operator: So getting the company on solid financial footing, planting seeds for growth, these are that becoming more effective in how we're using our resources, especially in marketing and in creating demand and in helping Palestine become known for things like strength and tread and running, these are the important things.

Operator: So we see that as preparing the environment and we think that that's just going to create a great runway for the next leader.

Operator: Thank you.

Karen Boone: I would now like to turn the call over to Karen Boone for closing remarks.

Karen Boone: Okay, thank you for the time today.

Karen Boone: I do want to stress that the entire board is highly focused on the CEO's search and we do hope to have some news to share there in the very near term.

Karen Boone: In the meantime, Chris and I and the entire leadership team are highly focused on what we can control.

Karen Boone: We're executing against our restructuring plan and we're delivering those expense And we talked a lot about media efficiency today, but I do want to stress that we're looking at further optimizing our spend up and down the P&L, including on Harbor Gross margins and ensuring our unit economics work and all of our markets and all of our channels.

Karen Boone: And we're also very focused on working capital efficiency to deliver the inventory reductions.

Karen Boone: And importantly, we are making investments for future growth where we will test and learn before scaling the spend.

Karen Boone: We're excited about the opportunity to tread the work we're doing to lean into strength both with content and delivery formats and with new community features and additional experiences on the come for both existing and new members.

Karen Boone: I do want to thank our amazing instructors and the many talented employees who bring the magic of Peloton to our millions of members day in and day out.

Karen Boone: And I should probably under promise here, but I am excited to say that I do believe you will be speaking to and hearing from the new CEO of Peloton on this call next quarter.

Operator: Thank you.

Operator: This concludes today's program.

Operator: Thank you all for participating.

Operator: You may now disconnect.

Operator: Thank you.

Q4 2024 Peloton Interactive Inc Earnings Call

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