Q1 2025 Peloton Interactive Inc Earnings Call
Good day and welcome to Peloton's first quarter fiscal 2025 conference call. At this time, all participants are in a list and only mode. 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: So, what draw your question? Press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. James Marsh. Senior Vice President of Investor Relations. Please go ahead.
James Marsh: Thank you, operator. Good morning and welcome to Peloton's first quarter, fiscal 2025 conference call. Join today's call or Peloton Board members and interim co-CEOs, Karen Boone and Chris Bruzzo, as well as Chief Financial Officer Liz Coddington.
Speaker Change: Our comments and responses to your questions reflect management's views out of today's own link. And we'll include statements related to our business that are forward-looking statements under federal securities law.
Speaker Change: Actually, he's also a different materialie from those contained in, were implied by these four looking statements, due to risks and uncertainties associated with our business.
Speaker Change: For discussion, the material risks and other important factors that could affect our actual results, please refer to our SEC filings, and today's Sherholder Letter, full of the wish for the found in our Best Relations website.
Speaker Change: During this call we will discuss gap and non-gap financial measures. The reconciliation of gap to non-gap financial measures is provided in today's shoulder letter. I'll now turn the call over to interim COCEL Karen Boone.
Karen Boone: Good morning and thank you for joining us today.
Karen Boone: Before we dive into today's financial results, I want to share the exciting news regarding our CEO search. As we probably saw in our separate release this morning, on behalf of the entire board, I'm thrilled to announce that after a comprehensive search, we have identified the next leader for Peloton.
Karen Boone: Peter Stern will assume the role of CEO and President on January 1, 2025.
Karen Boone: Peter's a season leader in Stratodist with over 20 years of experience operating at the intersection of hardware, software, services and content at Ford, Apple and Timewarner Table.
Karen Boone: He has a strong, fast record of innovation, operational excellence in creating significant shareholder value.
Karen Boone: As the co-founder and driving force behind Apple Fitness Plus, Peter let its growth to millions of members. And as responsible for successfully scaling over a dozen other subscription services, ranging from forward blue crews to Apple ICloud to time Warner Cable Home Security.
Karen Boone: Importantly.
Karen Boone: Peter has also been a passionate member of the Peloton community since 2016. And has a deep appreciation and respect for this business, this brand and the impact that we have a million of the people around the world every day. I truly cannot wait to officially welcome him to Peloton at the start of the calendar year.
Karen Boone: Turning to our financial results, I'm extremely pleased to share that we're reiterating our fiscal 2025 financial goals today, which include first.
Karen Boone: A lining-up posture to the current size of our business by delivering over 200 million of runway cost savings by the end of the year 25 from our cost reception plan announced in May 2024.
Karen Boone: Second, improving our unit economics across all products and failed channels.
Karen Boone: and pursuit of delivering sustainable, profitable growth and meaningful free cash flow generation. And third, continuing to make strategic investments in innovation to enable Peloton's return to top line growth in the long term.
Karen Boone: This includes product development in both software and hardware features, refining our marketing strategy to attract new audiences, as well as evolving our content offering to deliver more diversified and engaging fitness experiences.
Karen Boone: We believe these efforts will delight our current members and attract new one to our strong and loyal community.
Karen Boone: Our key one results for strong, exceeding our guidance on all key metrics, which Liz will discuss in greater detail.
Karen Boone: Progress on Confediction efforts are reflected in our profit-ability metrics.
Karen Boone: We are proud to report to Enrival, which includes 13 million of gas operating income.
Karen Boone: 11 million of free cash flow and 116 million of a just to be the dock.
Karen Boone: Our results also highlight the continued strength of our category leading connected fit as subscription business, which has over 6 million loyal members.
Karen Boone: 2.9 million connected fitness subscribers, 582,000 asked subscribers, and over 1.7 billion of annualized subscription revenue with 68% growth margin.
Karen Boone: I am thrilled to see our co-production efforts materialized in our financial performance to date, and I must say the team has done an incredible job not only to deliver, but to exceed our goals that far in reducing cost.
Karen Boone: By key part of managing our business toward profitable growth, involves ensuring all the subscribers we acquire are profitable and ensuring we have sustainable unit economics.
Karen Boone: We manage our business through a lens of LTV to tax and have taken actions to improve the areas that are in a immediate control on both the LTV and the tax-bibs of the equation.
Karen Boone: To an hand customer LTV, we are focused on expanding connected fitness products, growth margin across all of our products, sales channels and markets, leading us to make certain pricing changes and reduce promotional activity in Q1.
Karen Boone: We are investing in marketing, product, and content initiatives to drive engagement which will improve subscriber growth and retention over the long term.
Karen Boone: We also launched the Youth Equipment Activation fee which increases the LTV for new customers who join Peloton via the secondary market.
Karen Boone: Grant will talk in more detail about what we're doing to reduce our customer acquisition cost as well.
Karen Boone: Some of the pricing changes are mentioned with specific to our international business, where we raise the price for all of our bike products in all international markets in the first quarter to expand connected fitness product growth margin.
Karen Boone: This is especially important in Germany where we transition our operations to an entirely third-party retail and distribution model.
Karen Boone: This means that while our first party website will remain live to serve as a brand awareness and product education platform, we are now directing traffic to third party retailers, namely Amazon and Fish Shop for sales and fulfillment.
Karen Boone: Germany fails without performed our internal expectations following the third party transition. We are optimistic that this channel strategy could provide a more capital efficient model to explore expansion and traditional international markets over time.
Speaker Change: Hey, connected fitness subscribers in our international markets grew 8% in Q1
Speaker Change: We remain bullish on internationalized the source for long-term growth based on the strong retention and engagement trend that mirror those in our North American business.
Speaker Change: We continue to optimize our sales channel strategy for stronger unit economics and our North American business as well.
Speaker Change: In Q1, we continue our efforts to close underperforming first party retail stores. Next month, we will test the reimagined smaller store concepts in national Tennessee to evaluate a more cost-efficient retail model.
Speaker Change: We also expanded third party and online resup case abilities ahead of the all important holidays season.
Speaker Change: On our website, we launched an exciting partnership with Truman and early October, which makes it easier for qualified US-based customers to use pre-taps, HSA, or FSA dollars to purchase Peloton products.
Speaker Change: We are also pleased to announce that for the first time the Pelton Vice-Platte will be available at Kafka this holiday season with special pricing across 300 US locations and at Kafka.com.
Speaker Change: All of these changes positioned as well to capture the seasonally strong holiday demands with healthier units economics delivering stronger, connected fitness, growth margins and free cash flow.
Speaker Change: There's so much great work being done to optimize our channel and go to market strategies, and prove our even economics, and growth margin, and re-architect our cost structure.
Speaker Change: All of this has made tell us on the worstest, sustainable and profitable business.
Speaker Change: One minute's better equipped to serve our members and grow our visits over the long-term. I will now pass the Call of Rd and Chris, who will provide an update on our innovation efforts across marketing, products, and content, where we are making thoughtful investments to direct sustainable, profitable grips.
Speaker Change: Thanks, Karen. As Karen mentioned, we're focused on improving the efficiency of our customer acquisition costs. And this requires us to be strategic with our marketing campaigns that generates demand from target growth audiences.
Speaker Change: and to be disciplined with our marketing spend.
Speaker Change: In that way, we reduced total sales and marketing expense by 64 million, or 44% year over year in Q1. Primarily driven by historically low media spend in the quarter. In fact, our Q1 was the lowest quarter of media spend since the fiscal 2020, over four years ago.
Speaker Change: We intentionally pulled back our media spend during Q1 because it is a seasonally low hardware sales period for us. As we look ahead to the holiday season, we're already ramping up media spend to support demand generation ahead of this important time for hardware sales and subscriber additions.
Speaker Change: Our Go To Market Strategy continues to evolve with a balanced approach that creates demand among new growth audiences.
Speaker Change: Coupled with improved efficiency in our short-term conversion tactics.
Speaker Change: Today, two-thirds of our members are women. So we see an opportunity to attract more men to politics on, to targeting and messaging that highlights the robust value of a public on membership.
Speaker Change: Further, we see an opportunity to grow our tread business, given our estimates that show the at home treadmill market is more than twice the size of the at home stationary bike market.
Speaker Change: Our goal is to build demand among core audiences and capture that demand during less frequent promotional moments.
Speaker Change: While we are still in early days, we're encouraged by the signal that suggests these marketing strategies are working.
Speaker Change: Thank you one, we saw a 9% year-over-year mixed shift in hardware sales toward men, with the highest shift in our tread portfolio.
Speaker Change: All of these efforts will enable us to expand LTV to catch year-over-year, while refining a marketing approach to better support sustainable and profitable demand growth in the long-term.
Speaker Change: While our LCK ratio improves significantly in Q1 to 1.9X
Speaker Change: who is still slightly below our target of greater than two extra in a period with historically low media events.
Speaker Change: As our media spent in promotional activity increase in Q2 to drive demand creation and conversion during the holiday shopping season, it's worth noting that many of the customers acquired during Q2 will not activate their subscription until Q3.
Speaker Change: As a result, there will be some quarterly swings in Elfighet, Cax, somewhere to what we've seen in prior years.
Speaker Change: We consistently evaluate the overall picture of LTV to cac on a full year basis to inform decisions about quarterly media investments.
Speaker Change: Now, beyond our marketing efforts, product development plays a key role in driving long-term growth as well. This includes both hardware and software innovation.
Speaker Change: Recently, we launched a number of software updates that are designed to drive higher engagement from our members by offering alternative workouts.
Speaker Change: A greater level of personalization and more social engagement on our platform.
Speaker Change: While we are encouraged by early results, all of these software updates are still in an early test phase.
Speaker Change: and we expect some of these software initiatives to be more effective than others.
Speaker Change: Our development approach prioritizes getting early versions to market sooner, so that we can test how customers respond and iterate accordingly. This allows us to be nimble, scaling investments up or down.
Speaker Change: with the results we see.
Speaker Change: String is the second most popular modell in our platform, and it continues to take share in September. We launched a public beta test for a new app offering called String Plus.
Speaker Change: in order to deliver strength training programs that are designed for use.
Speaker Change: in a gym setting. These are non-class base workouts and customizable to address a member's specific goals.
Speaker Change: We've gathered more than 70,000 signups today of people who are interested in trying strength plus. We are getting productive feedback from our test population of 5,000 that is informing our product iterations.
Speaker Change: Beyond Extended Strength offerings, our members have shown considerable interest in game-inspired fitness experiences.
Speaker Change: In fact, over 10% of our active subscribers engaged with Lane Break in Q1, our first game inspired for fitness offering.
Speaker Change: So we're currently testing our second game inspired experience in a close beta of 100 existing by plus numbers.
Speaker Change: We're building this to deliver an immersive social and competitive workout experience.
Speaker Change: We also believe at greater level of personalization will enhance the value of Peloton to our members.
Speaker Change: Among the small population of our existing members, we are testing a new software feature called personalized plans, which provides a weekly workout plan both in our app and through our connected fitness hardware based on a member's individual fitness goals.
Speaker Change: Our goals for personalized plans include both improving retention for new members who may need help getting started on our platform, as well as driving higher engagement among our existing members, to enhance the value of Peloton Brings to their workout routine.
Speaker Change: Now we know that there is extensive social engagement among our members, happening off of our connected fitness platforms. So we're making changes to enable our members to engage with one another.
Speaker Change: We recently launched private teams, a new feature where existing members can share results and compete in challenges.
Speaker Change: Team creation and adoption is pacing well and it's aligned with our expectations. Earlier results show members who joined teams.
Speaker Change: are both increasing workouts taken and connecting other members of the FI in-Friend at a faster pace than prior to joining teams.
Speaker Change: and James Marsh.
James Marsh: Okay, so beyond our exciting software initiatives.
James Marsh: We're proud to continue delighting our members with our best in class and structured lead fitness content.
James Marsh: which delivered strong engagement results in Q1 that were relatively stable year-by-year and well-abuffed pre-COVID levels.
James Marsh: Our annual All-For-One programming event included various popular musicians and a live performance from Keith Urban in studio.
James Marsh: These offer one class has generated over 26,000 live member workouts and over 900,000 workouts on demand in the first week available on the platform.
James Marsh: We also wrote out a number of new offerings to serve our members to verse interest, including strength for soccer and new programs across bar, Pilates, yoga and meditation.
James Marsh: We expanded our treadmill modalities by launching Walking Boot Camps, which are excellent lower impact workout options for members, and the latest in a series of content options for walking and hiking.
James Marsh: At the same time, we delivered more content for the performance athlete segment, adding more 75, 90, and 120 minute classes in response to member interest in those options.
James Marsh: I'm incredibly proud of the Peloton team for continuing to innovate across marketing, product, and content, while we significantly reduce cost in the business.
James Marsh: That operational excellence that we're seeing from the team has made all of this possible.
Speaker Change: and with that I'd like to hand it over to Liz who will take us through a review of our first quarter of the National Performance.
Liz Coddington: Thank you, Chris.
Liz Coddington: First, I'd like to provide an update for how we are tracking against the cost-destructuring plan we announced in May.
Liz Coddington: As of the end of Q1, we have actioned all payroll related changes that were assumed in the Restructuring Plan, which will deliver over 100 million of annualized run rate savings.
Liz Coddington: We continue to make progress and benefit from all other non-payroll related savings. Together with the payroll savings, we are still on trap to deliver over 200 million of run rate cost savings by the end of fiscal 2025.
Liz Coddington: and we are realizing some of these savings faster than we anticipated.
Liz Coddington: Also, we're delivering additional cost efficiency through reductions to media spend that were not included in our 200 million restructuring goal.
Liz Coddington: Now I'll spend a few minutes on our Q1 result.
Liz Coddington: We end of the quarter with 2.9 million paid connected fitness subscribers reflecting a net decrease of 81,000 in the quarter. This exceeded the high end of our guidance range by 10,000 subscribers.
Liz Coddington: The main driver of our subscriber out performance was slightly favorable turn versus our expectations as the result of fewer subscription pauses. This savorability was partly offset by slightly softer growth additions than we expected.
Liz Coddington: Average Net Monthly Paid Connected Fitness subscription shurn was 1.9% Slightly favorable versus expectations, and in line with the prior quarter, and an increase of roughly 40 basis points year over year.
Liz Coddington: As a reminder, our net-shroom performance from the year ago period included a one-time benefit as a result of elevated subscription un-possed in the first quarter of fiscal 2024, following elevated pavis in the fourth quarter of fiscal year 2023, and response to our original bike seat post recall.
Liz Coddington: The End
Liz Coddington: We ended the first quarter with 582,000 paid-off subscriptions.
Liz Coddington: reflecting a net decrease of 33,000 in the quarter. This result exceeded the high end of our guidance range by 12,000, from both higher additions and better than expected average monthly paid absence subscription churn, which was 7.1% in the quarter.
Liz Coddington: In the first quarter, we've continued to scale back the amount of media spend dedicated to support growth and paid off subscriptions to maximize media efficiency.
Liz Coddington: As we continue evolving our app with software enhancements such as personalized plans and private teams and developing new app offerings like our strength plus beta.
Liz Coddington: We may elect to invest more in App Media if we see signals that suggest we can accelerate growth of App subscribers efficiently
Speaker Change: Total revenue was 586 million in the first quarter, comprising 160 million of connected fitness products revenue and 426 million of subscription revenue.
Speaker Change: Connected fitness products revenue was down 12% year over year due to lower hard word demand, and subscription revenue was up 3% year over year due to content licensing revenue from Google Laman and Google Goffective.
Speaker Change: Total revenue was above the high end of our 560 million to 580 million guidance range.
Speaker Change: Primarily due to higher subscription revenue as a result of higher paid connected fitness and paid app subscribers than we expected. As well as slightly higher connected fitness products revenue.
Speaker Change: As a reminder, Q1 is a seasonally lower period for hardware sales, which is reflected in the revenue next of 27% connected fitness and 73% subscription for the quarter.
Speaker Change: Total gross profit was 304 million in the first quarter, an increase of 18 million or 6% year over year.
Speaker Change: Total growth margin was 51.8% and 180 basis points above guidance due to favorable connected fitness products segment growth margin and revenue mixed shift towards our subscription segment.
Speaker Change: Connected to fitness product growth margin was 9.2%. I had of internal expectations and up to 600 basis points year over year.
Speaker Change: Primarily driven by product mixed shifts toward higher margin pre-core and vibrantal products, reduced personnel-related expenses and lower wear-having costs, partly offset by higher expenses associated with our standard warranty reserves.
Speaker Change: Subscription Growth Margin was 67.8% in line with internal expectations and up 40 basis points year over year.
Speaker Change: Co-operating expenses, including restructuring and impairment expenses, or 291 million in the first quarter.
Speaker Change: A 126 million or 30% reduction year over year. Reflecting the progress we've made thus far toward rights-vising our cost structure. We are tracking ahead of our cost savings targets across all expense buckets.
Speaker Change: General and Administrative Expresses were 120 million, a decrease of 32 million or 21% year over year. Primarily driven by lower payroll, stock-based compensation, and professional service fees.
Speaker Change: We are pleased with the progress we've made on reducing DNA expense thus far, but we recognize the need to reduce DNA of a percentage of revenue over time and see opportunities to do so.
Speaker Change: Bill and marketing expenses were 82 million, a decrease of 64 million or 44% year over year. Primarily from lower spending on media, payroll and stock-based compensation.
Speaker Change: As Chris mentioned, we intentionally reduced Q1 media spend 57% year over year. However, we have already begun ramping our media spending this quarter in preparation for the holiday season.
Speaker Change: and while we still expect media spend to be down year over year in Q2, we expect less of a reduction compared to Q1.
Speaker Change: Research and Development Expenses were 59 million, a decrease of 20 million or 26% year over year, primarily driven by reductions in payroll, stock-based compensation and product development costs.
Speaker Change: This quarter, we recognize eight million of impairment and restructuring expense of which five million was non-cash. The non-cash charges were primarily related to asset write-downs in relation to retail showroom exit.
Speaker Change: The cash charges consisted of 3 million in exit and disposal costs and professional fees, offset by a 0.5 million net benefit from lower severance and other personnel costs.
Speaker Change: We also recognized 24 million of supplier settlements due to our cruel in the first quarter related to settlement of a dispute with a third-party supplier.
Speaker Change: Ajective Epidale with 116 million in the first quarter, which was 56 million about the high end of our guidance range, and a 107 million improvement year over year.
Speaker Change: Our first quarter adjusted EBITDA out performance included roughly 15 million of timing savings within the fiscal year.
Speaker Change: We generated 11 million of free cash flow in the quarter outperforming internal expectations and delivering our third consecutive quarter of positive free cash flow.
Speaker Change: We ended the quarter with 722 million in unrestricted cash and cash equivalent.
Speaker Change: Overall, our first quarter performance reflects the progress we've made in re-architecting our cost structure, while maintaining our leadership position within the connected fitness category and the strength of our highly-retentive, high-growth margin subscription business.
Speaker Change: Next, I'd like to provide context on our financial outlook for the second quarter and fiscal year 2025.
Speaker Change: Our guidance for Q2 FY25 ending paid connected fitness subscriptions of 2.84 to 2.86 million reflects as sequential decrease of 50,000 subscribers at the midpoint. We expect our average net monthly paid connected fitness turn rates to slightly improve the crunchily into two.
Speaker Change: RQQFY25 ending paid app subscription outlook of 560,000 to 580,000 reflects a sequential decrease of 12,000 subscribers at the midpoint. As a result of a decision to limit app media spend.
Speaker Change: Revenue guidance of 640 million to 660 million reflects a sequential increase of 64 million at the midpoint. As a result of these subscription trends, combined with an expected seasonal increase in hardware sales.
Speaker Change: Total gross margin guidance of 46.5% reflects an expected sequential decline in gross margin of 534 basis points. As a result of a seasonal mixed shift toward our connected fitness products segment during the holiday sales period.
Speaker Change: Our second quarter adjusted Eva Dogg items of 20 million to 30 million reflects a sequential decline of 91 million at the midpoint, mainly due to higher sales and marketing expenses as we increase media spend for the holiday season.
Speaker Change: Our full year FY25 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, we'll continue to increase modestly year over year, and follow our historical seasonal pattern.
Speaker Change: Our four-year guidance range will paid connected fitness subscriptions of 2.68 to 2.75 million remains unchanged and reflects a broad range of outcomes.
Speaker Change: We will continue to refine our strategy to improve unit economics over the course of FY25, which may include additional changes in pricing, promotional strategy, or other levers available to achieve our financial targets.
Speaker Change: Any changes in these areas may affect our growth additions for paid connected fitness subscriptions across the fiscal year.
Speaker Change: Our full year guidance range for paid app subscriptions of 550,000 to 600,000.
Speaker Change: A 20,000 reduction versus our prior guidance reflects our decision to limit at media spend as we invest in product development to improve the member experience.
Speaker Change: Additionally, as we continue to improve our member experience, we seek clear opportunities to improve engagement, which could result in favor of ability to turn for both connected fitness and that.
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, and therefore not reflected in our guidance.
Speaker Change: Our primary focus for FY25 is delivering our key financial results, which include total revenue, total growth margin and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash flow.
Speaker Change: Our FY25 outlook for total revenue remains unchanged at 2.4 billion to 2.5 billion, as well as our outlook for total growth margin, which remains unchanged at 49.0%.
Speaker Change: We are raising our FY25 adjusted EBITDAG items by 40 million to 240 million to 290 million.
Speaker Change: which reflects our continued improvements in profitability. Largely due to gross margin expansion, the operating cost savings we expect to achieve related to our previously announced cost restriction plan and reduced media spend year over year.
Speaker Change: We are also raising our free cash flow target to at least 125 million and increase a 50 million from our previous guidance. Primarily from lower inventory production that we expect to create a greater working capital tailwind, as well as continued operating expense efficiencies.
Speaker Change: Following our Q1 free cash flow results of 11 million, we do expect to achieve positive free cash flow in all four quarters of the fiscal year.
Speaker Change: We expect to make meaningful progress and do leveraging our balance sheet throughout FY25 and beyond.
Speaker Change: and now I'd like to turn it back to Chris for some closing remarks.
Chris Bruzzo: Thanks Liz.
Chris Bruzzo: I wanted to take a moment to recognize the remarkable progress the entire Peloton team has made since I took on the role of interim coceo with Karen in me.
Chris Bruzzo: In a relatively short time, I've seen this get smarter in many ways. We've made meaningful progress to what our goals of right-sizing our cost-structure, improving unit economics, and innovating to drive long-term profitable growth, and we are just getting started.
Chris Bruzzo: So, with today's announcement that Peter Sturne will start as Peloton's next CEO and President in January, I will be stepping down as CoCEO affected tomorrow November 1.
Chris Bruzzo: and Karen has graciously agreed to continue its interim CEO of Peloton until Peter arrives.
Chris Bruzzo: It has been a great experience working with Karen, Liz, the lead team and the many talented team members here at Peloton. I am very proud.
Chris Bruzzo: to be part of Peloton. For the difference we make in millions of lives every day. And I look forward to staying very involved as a much smarter board director going forward.
Chris Bruzzo: Thank you for the time this morning. We can now open the line for Q&A.
Speaker Change: 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 follow-up question.
Speaker Change: The End
Speaker Change: And our first question will come from the line of Simeon Seagull with BMO Capital Market. Your line is open.
Simeon Seagull: Thanks for joining everyone. Congrats on the ongoing progress and on the new CEO announcement. It's really great to see.
Simeon Seagull: [inaudible]
Simeon Seagull: So, some really nice moments didn't hear in the profitability trajectory. So, Karen, recognizing about asking something to speak on someone else's behalf, I guess I was hoping you could speak to how you think or expect Peter would approach the balance of growth and profitability.
Simeon Seagull: and wondering you expect any actions that he takes will flow. Quickly once he starts, you think you can have it taking stock period. It just seems like you've all done a really collected nice job on diagnosing the problem and you're already...
Simeon Seagull: successfully affecting that plan to improve the free cash flow. So I'm just curious if we can assume that that continues or whether it's a wait and see and then we'll watch Peter wants to approach the business a new. Thank you.
Speaker Change: Thanks to me and...
Speaker Change: It's absolutely on our mind. It's absolutely the right question. It's how we're going to balance profitability and growth. And it was frankly top of mind for the board as we were looking for the next CEO. Peter is...
Speaker Change: The right CEO for this chapter, he's a season strategist, he's no-directed Houston, and he does have that strong track record and driving innovation and growth
Speaker Change: I will pause and just say, do you think we stepped a table for his rival?
Speaker Change: Job 1 was refinance in the debt and May, did that be stipulated about cheap and it's put us in a much better position to manage our maturity and LIST has talked a lot about the progress on the executing, the restructuring, reducing inventory levels, focus on profitability, to generate the cash flow to allow us to begin delivering. So we do feel like we now have that stable base upon which to grow.
Speaker Change: In the very near-term, and I don't know how long this is going to last, but we have been managing an uncertain macro environment, and uncertain consumer backdrop, there's been weather and hurricane, we have a very intense...
Speaker Change: Focus on the lesson, so we've been focusing on what we can control. I don't expect that to change other Peter's leadership. We've been very certain that we're not going to chase unprofitable subgroup.
Speaker Change: and we've been much more disciplined with spend up and down the P&L, our media and marketing investments have been much more thoughtful and we're optimizing.
Speaker Change: Are you in an economic by-products and by-channel? So, those are the things that I do not expect to change, where we're going to continue to monitor those and kind of see what it makes sense to turn back on some of the growth spending and more meaningful ways. But I guess, make no mistakes.
Speaker Change: That's not where the story ends, innovation and growth are still very important to us. It's an end, it's a both.
Speaker Change: We are making investments in content and product development with software and hardware and marketing growth is important for this very important holiday period where we are unlocking it's mercing dollars. And again, this is going to be a big part of
Speaker Change: Peter's going to be a big part of this equation. He has the relevant experience. He has the track record and a large portion of his compensation. It's going to be designed to balance those and drive both profitability and growth. So his incentives are well aligned with those goals.
Speaker Change: I think of course, you're going to have one of the things I love about him is he absolutely has a growth mindset So of course I think he's going to have a taking stock period I think we want him to come and learn what has worked, what has not worked before he just kind of You know, fires before he aims at learns So I do think he'll be a taking stock period
Speaker Change: But I'm really excited about his arrival, he is
Speaker Change: I believe the guy who is going to come in and set the strategy that is going to return us to Groves
Speaker Change: He's very bullish, we all are very bullish on the health and wellness space, the share of Wallace that is going to go to this category. So again, he's going to spend time learning, we will spend time aligning on this.
Speaker Change: Where to go, how quickly to invest, and again, I do believe he's the right leader to return his to growth, and I do believe strongly that under his leadership, our brand is well-sufficient to be a long-term player and the absolute leader in this category.
Speaker Change: As you can tell from Karen's remarks there, she and I have been very involved in this process and with Peter in particular and so we're very excited. He's really aligned. All those conversations have been so positive. So we know we've got the right leader that's kind of bringing the right balance and focus on growth.
Speaker Change: and say the excitement is resonating so that's great. So thanks guys, and if I just follow up quickly on that, maybe for Liz.
Speaker Change: of QuickWin. It's not a lot, but I think this is the first quarter of sequential inventory growth in a long time. So any health on the composition of that inventory, any way to frame what type of equipment is making up that increase. And I guess I'm asking, I'm not as much for the number of just wondering if we should be reading it to that as a signal that you do see some updick in demand ahead, or maybe it's the build for the new distribution partners, or maybe we just lay off and it's not a advantage, just a function of maybe the lighter growth size you mentioned. So any health on that inventory, a piece of either growth, comment, would be helpful. Sure. So, I'm...
Speaker Change: The question I believe is around our sequential growth in inventory in the first quarter. I've already said during its pretty modest, it's pretty modest and...
Speaker Change: No.
Speaker Change: It's really related to our seasonal build-up of inventory ahead of the holiday season And we do expect a significant inventory to the island on the full year We've done some great work on supply chain team, has done some excellent work
Speaker Change: in working with our manufacturing partners to reduce our production level of over the course of it year to enable us to be a lot more efficient with our inventory over time and reduce our days of on-handed inventory, which is great, and that will create a cash-trail and prep over the course of the year. In Q1, it's a very slightly but that's for in relation to just the seasonality of buying ahead of the holiday season and we expect our inventory balance has to come down over the course of it year. But we are just to be clear for reducing inventory for all of our products.
Speaker Change: So because we do need that inventory over the course of the year, but we do see it as the overall at Hillman's wrap on a clear basis.
Speaker Change: Guns great, thanks for all guys, best luck for holiday in this job.
Speaker Change: Thank you. Thank you. One moment for our next question.
Speaker Change: And that will come from the line of Kurt Nagel with Think of America.
Speaker Change: Your line is open.
Speaker Change: on the solid quarter. This is come until on for a cart make-all. This quarter came in line, turned came in line at this season early high period. What are the fact, what are we factoring for the rest of the year? Would that be a stable way compared to the last year for their meaning quarters?
Speaker Change: Sure, so first let's take a step back. Our business continues to benefit from very strong subscriber attention and low-churn overall.
Speaker Change: Thank you, one. Our average set-mom will be turned with 1.9% which was relatively in line with last quarter. It was up 40 basis points the over year.
Speaker Change: As we discussed during the last quarter earnings call, we expected to one net turn to the up-year year due to a few reasons including the following. Slightly worse overall retention from our 1T and 3T of Scriberbase which we've talked about.
Speaker Change: Nick shift towards secondary market subscribers, which do have a slightly lower retention than our first party subscribers.
Speaker Change: and then we also had the impact of a one-time benefit in Q1 of fiscal 24. We're related to higher subscription on-posses following elevated pauses in Q4 of fiscal 23 related to our original five-state post-requon. We did not repeat that benefit this year.
Speaker Change: As I move forward and look at Q2, we do expect our turn to improve seasonally compared to Q1.
Speaker Change: We do expect that improvement will likely be a bit muted though compared to the quarter of a quarter improvement that we saw in fiscal 24. Again, because of those two headlins that I mentioned about the slightly worse retention in our overall subscriber base, and that mixed up into secondary subscriptions, which you have that higher term profile.
Speaker Change: So overall, for the remainder of the fiscal year, we expect our turn to continue to be higher year over year because of the mix of subscribers from the secondary market continuing to grow. But we do expect turn to remain below 2% for the whole of fiscal 2025.
Speaker Change: I do want to point out the old and we've mentioned this before.
Speaker Change: That our guidance doesn't assume any potential upside to subscribe or retention as a result of the software innovation initiative that Chris talked about earlier, which we believe could possibly impact member engagement and ultimately retention over time. And I really have to be cooperative though, because the magnitude and timing of those benefits is on certain at this point.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: And that will come from the line of Brian Nagle with Oppenheimer. Your line is open.
Speaker Change: Good morning.
Speaker Change: I too would like to have my congratulations on the business and your CEO announcement.
Speaker Change: My question.
Speaker Change: So first question, I'm going to ask them in order. Just on the balancing.
Speaker Change: You can talk to me in a couple of comments about 25 being a due leverage here. So I guess the question I have is maybe you can go into one more detail. You'll include the business of the Alcomraptine Nelson points much more stable, you generate cash flow. But are there any specific steps you can identify here to address the balance sheet in particular the debt that the rebrands on the balance sheet?
Speaker Change: Yeah, this is the role I'll take after that one, I'll send you some shenanigans.
Speaker Change: So, first of all, Karen mentioned earlier that we divvished our balance sheet with a refinance thing you may, and that allows us to now be very focused on delivering over time. And we're also very excited to be talking about the positive free cash flow and also raising our minimum free cash flow target.
Speaker Change: We are being disciplined with a level of indefinence that we're making and that goal, the goal there is to set the sub-for future of purpose sustainable and profitable And so the results of generating that meaningful free cash flow, we do see the opportunity to need to be fully relevered to go forward That we're going to continue to improve our job to deeper-dive it out and then continue to generate that positive free cash flow
Speaker Change: and what we do that, we will naturally leave the leverage. We also see over the course of time real interest cost savings with great steps on our leverage ratio falls between below five.
Speaker Change: and then eventually there is also the potential conversion of our 20-29, that's about five and a half percent convertible notes.
Speaker Change: So our biology is a much better position than it's been in the past with lower risks, with position to ourselves well for six to stay in a one-profitable growth. Now, and we also see the ability to strategically reduce our growth debt over time, and we will be strategic about that. But we don't have anything to share regarding a definitive capital allocation for more for how we're going to execute that at this time.
Speaker Change: Good, that's a very helpful, I'm going, sorry.
James Marsh: As you can see, James, I'm a fall question.
James Marsh: I did. Thank you for that and my follow-up questions on related, but I guess somewhat bigger picture too. Maybe a little, you know, it's probably the better question as you're, you're new man's, you take a place. You know, if you look at the, I mean, I guess I'm looking at the business, you know, one of the processes been.
Speaker Change: [inaudible] is there anything you can help us with is like, where you're finding those?
Speaker Change: and incremental pockets of new demand. Those new customers that could come into the Peloton System.
Speaker Change: Yeah, and science scripts.
Speaker Change: at the Great Question, and I think it goes straight to the kind of discipline that we've been talking about in marketing. A key part of that is who are you reaching? You know, and what's the opportunity and what's the message and how are you doing that efficiently? And I think we've had some really great success just recently in focusing on that. You know, in the Preparing Markshire, let me talk about...
Speaker Change: Two-thirds of our current members are women. And so now we're targeting the male demographic in our advertising.
Speaker Change: We've done some more vizering in a bellgames, we've featured the Wap Brothers, but more importantly, the campaign and the work that we're doing is expanding our reach and we're seeing in the data that...
Speaker Change: There's a shift toward men in new hardware purchases and with the greatest shift within that in the tread and tread plus products.
Speaker Change: We feel really good about that in just an indicator of the way we're thinking about the marketplace now, which is targeting, as you said, targeting those sounds discrete pockets.
Speaker Change: and then being efficient and effective in the way that we're reaching them. I should point out that here in November we're going to be holding a lot of member gratitudes, events and messages and that's another core part of this.
Speaker Change: Activating that incredibly loyal base to refer and engage their friends and family to bring them into the Peloton experience. You can see us do a lot more of that.
Speaker Change: Very helpful. I appreciate it. Thank you.
Speaker Change: Thank you. I'll bring it to the next question, please. One moment for our next question.
Speaker Change: And that will come from the line of the nation's feather with Morgan Stanley. Your line is open.
Speaker Change: Hey everyone, thanks for taking the question and really encouraging to see the progress on profitability.
Speaker Change: and you think about how to drive sustainable profit will grow. It's just to hear how you're thinking about where physical retail fits in as a component of your go-to market, and especially given the cost to a launch. You see some force in the customer base who are more willing to convert in person than online. And then reflecting on the own stories, Michigan, they can be our recent potential to improve performance for some of the prior format.
Speaker Change: Thank you.
Speaker Change: Sure, this is Karen, so on Reheal and General, I'd say we are...
Speaker Change: Still on the past to close some of the underperforming retail stores, that said we will have them this holiday season So the team has put together some really thoughtful activations in the subset of those stores to bring
Speaker Change: Instructors and magic and excitement to them to make sure they're not, you know, they're still representing the brand well and we can engage with our members and new customers and have some excitement around this basis.
Speaker Change: We are testing to the point on how we might be managing it, we're testing a smaller micro-store concept in Nashville. So, it's a way to do it in a low capital, low-repeable, low-respear footage, but still have it to the present. It's also the reason why we are exploring additional 3P locations like Costco. We're hoping that reaches an incremental audience. We're still excited about a lot of people shopping Amazon, we're happy to be there, and across the Amazon with just that part of their day to their team, and then we still have to explore the good. Internationally 3P is important too, and it's a much more capital-efficient way for restory-alots. So, retail-eye-lives-says in the reimagined process, it's not going anywhere, it's just working
Speaker Change: and it kind of optimizes the mix between 3P and 1P and makes sure that it makes economic sense and reaches as many new and incremental buyers as possible.
Speaker Change: Okay.
Speaker Change: Great, this helpful. And then, a given the more flexible international model you talked about in Germany and Austria. If you're here, how you're thinking about potential further international expansion, and is distribution the primary constraint to growth, or is it more on the local S-Tron website?
Speaker Change: Sure, so international still another important part of the long-term growth strategy for us, which is the matter of prioritization and sequencing. I do think we've made some very important steps. Germany is the example where we are entirely 13 now. So in order to do that and do that profitably, effectively, we have to make some right and change as we need to make sure that we're sufficient margins.
Speaker Change: for that third time to have some margin and it still makes economic sense for us to do so. So now we have...
in a couple of different models and we can test and see which ones we're still learning. What makes sense and how much to invest as we roll it out? It's not one limiting factor. It's just how we want to see things in terms of the various investments. But I would say we're really excited about the way the international models has taken shape, again, both with the way we've...
Speaker Change: Take us on the investments on the people's scientific exercises.
and then also with the pricing.
is just a better go to market strategy. So we will expand over time. We have no new plans to talk about markets right now, so that's something that Peter gets on board and will evaluate additional investments in current markets and or new markets who want to go into it for time. But it's still very hard part of the long-term strategy.
Speaker Change: and it's not really pretty much about Mary. It's not so much about Mary's, it's about it.
Speaker Change: and we were thoughtful about our priorities. We have to be thoughtful about making an experience that meets the bar. And so the content does have to be relevant and localized. And so you can see it's be thoughtful about that. And if we're expanding international markets, we're going to do it in a way that we're proud of.
and thank you.
Thank you, one moment for our next question.
Speaker Change: And that will come from the line of Schweter Coddington with Wolf Research, your line is open.
Speaker Change: Hello, thank you for joining me.
Okay, thank you for taking my questions. I guess could you please talk about how you came to the decision list Peter, as a CEO, it seems like he has phenomenal experiences, especially as it relates to Apple Plus.
Speaker Change: or Fickness Experience with Apple, which is translatable, but as you were going through different candidates, what specifically about Peter using Bull Jump out as he comes on for, thanks a ton.
Speaker Change: Well, I couldn't be more excited. This is a fun one to talk about. Peter just really hits and checks a lot of the boxes that we were looking for. As you mentioned, his experience, not just the alphabet, but really he has...
A ton of aggressive experience across Harvard, software, and any content businesses, across services, but he also had a lot of experience driving growth through innovation, and that's where we are in our journey as we kind of talk about. We have disabled days, we now need to return to growth, and I also just really believe you've highly aligned with Peloton's core values.
Speaker Change: He has been a member for eight years. He loves what we're doing. He loves health and wellness. It's part of his own routine and his own...
Regiment, so I think he believes in the product, he believes in the space, he has this perfect skill set experience set and I just think he's going to be a great set, so we're just really really excited to get him started. I'm sorry to add anything to that, I would just say, a personal level he's thoughtful.
Speaker Change: He's going to definitely bring an approach to learning, which I think is excellent and he deeply appreciates what Pelethon has done and he's excited about helping to lead the next chapter.
Speaker Change: Thanks for watching. Next question please, operator. One moment, our next question.
And that will come from the line of Andrew Boone with jam-piece securities your line is open.
Thanks for taking my questions. I wanted to do a double click on the reduction in marketing. This quarter, you guys talked about the learnings as you guys did pull back there and what may be incremental and then as we think about that two to three X kind of the LTV to you guys can't tell me what you're doing.
Speaker Change: Can you guys talk about the path back into that framework?
and that's my second question, is I'd love to double-click in terms of connected fitness-graced profit margins. You guys have seen Fettian improvement there. Is that kind of the ceiling, or do you guys feel like there's more progress to go? How does that move into a step-on in the maybe in the double-dechets? Thanks so much.
Speaker Change: Yeah, I mean, I'll start and then as you can turn it, I think
I would say the word at the top here is a relationship marketing discipline and I talked about it for a few more, I talked about it early in the Q&A but you know effective audience targeting, being effective in the way that we're optimizing our investments.
The way that we're focused on the entire picture, marketing picture, including retention engagement of our existing members.
These are kind of the key hallmarks of what Lauren Weinberg, our CMO, has brought in this last year to Peloton. We've gone from being promotion heavy to a place where we're now balancing demand creation and desire with those.
Speaker Change: moments where we can capture demand through conversion events and promotions and season opportunities. We have coming up in the holiday. And then you see the numbers. We're significantly reduced our customer acquisition costs.
We've become much more disciplined in our media spending and a lot more focused on where are those qualified growth audiences.
Speaker Change: All of these areas, I'm really impressed with what Lauren and her team have done and the way they've set up Peloton as part of this broader effort at the company to have created a solid foundation of sustainable and profitable growth. So, you can expect that to continue.
Speaker Change: So, on the question around the LTVCack and the pass back to getting to that 2-3X
So, you know, our goal is to get to that to the free exchange. Ideally, closer to three. We do have some work to get there. We're not quite there yet. And we have these new term levers that we have focused on that are under our control. And then as Chris was talking a lot about investing in future growth.
Speaker Change: So the pricing changes that we've made and the reduced promotional activity that you saw in Q1 are for us to improve our close margin.
Speaker Change: So we make progress on those in Q1 and as we go into Q2, we will still have promotions over the holidays, but we will continue to make progress on our LTV by improving our growth margin over time.
Speaker Change: and ultimately our goal is to get to where we have significant positive growth margins across all products, all channels, and all markets.
Speaker Change: The other piece is around a cab, which, you know, Chris, was talking about that's really about the discipline, not over sending to acquire unprofitable customers.
and then also evolving our messaging to target those audiences in order to drive that efficiency.
And then we also have an addition to kind of the working media dollars that we invest in marketing, or also focus on those non-media costs that you hit ourselves in marketing and impact our tech and that includes things like exiting retail showrooms, which Karen talked a little bit about earlier, optimizing our brand and creative spend and also optimizing our head count.
I'm so even focused on all of those things.
Speaker Change: Now I think the last part of your question was around connected fitness growth margin and what do we have ability to make more progress?
We certainly have the ability to make more progress over time. Again, we're really focused on the things that we can control and you're seeing some of the progress they are manifest.
Speaker Change: and then we will do the right thing in terms of LTV to CAC and if it does make sense to invest a bit more in the LTV side of the equation relative to the CAC's other equation. We will continue to make those trade-offs as we go. But our goal is to continue to drive improvement in gross margins because that helps us fund our CAC and create a lot of that efficiency that we're looking for. Our holiday is our example, seasonally hired a man. We will be spending on media at NAC4 and that will drive growth into the future quarters.
and we will also be spending on promotions in that quarter. One other thing I want to mention is that Creek Lord does that with an disconnected fitness fitness and it's a creative, two-arconnected fitness-girls margin overall, so that's the Creek Lord business growth that will also drive higher connected fitness margin to over time.
Speaker Change: and the selected fitness margin.
Okay, next one, I'll see you, boy
One moment for our next question.
And that will come from the line of Douglas Amuse with Dave P. Morgan, your line is open.
Speaker Change: Great thanks, it's Brian Smiley on Sir Doug. I'm like it's just as you enter the hall, they see, and can you just talk about which go to market, channels, and then the tutors are key to just driving, improving seasonality, and higher hardware sales. And then I know we've talked about it in the past too, but can you just provide an update where the connected fitness industry is in the overall cadence of return to growth at rate of decline? Thanks.
I'll take all the questions and let's get it done
Yeah, thanks for the question. We're entering the holiday season with cautious optimism. I think we talked about maceral cinemakers that are out of our control, but we're focused on things that are art within our control.
and I'm just going to be a broken record and you can expect us to spend just in a disciplined way. We'll spend less on media this year, we'll be less promotional than we were in our holidays these in the last year.
and we will continue to manage our LTVDECAC ratios in the right way. But we're excited about...
As I mentioned, ways of getting existing members engaged in involved through referrals, the way we're targeting pockets of growth, and about new third party relationships like the one we just discussed today related to Costco.
Speaker Change: When we can do things like have our bike plus available with special bundled pricing and extended warranty like we're doing at Costco, that's another great opportunity. We have a strong plan, we're prepared and I think we're going to focus well. It's all they see.
I think the last question was a bit about the connected fitness industry overall.
So we do track with Clers Party data on some market shares data around connected fitness and market share trends. Our data suggests...
Speaker Change: that the overall fitness markets declined around 2% year rear and Q1. We're seeing that gyms are settling into a new normal, growing around 3 to 4% year over year in the last couple of quarters, compared to 8 to 9% year rear growth that they were experiencing in Q1 and Q2 at fiscal 24.
for the Connected Fitness Card where cell peace, on cells of roller continuing to decline year over year. So, James is still taking a bit of share. However, we are such a large part of the Connected Fitness Market that decisions that we are making to put out prioritized profitability are certainly impacting this trend.
Some of the other things that we're seeing are, you know, there are macarious and on-exceptors like the impact of inflation, interest rates.
and uncertainty around the upcoming presidential election that could be playing into overall connectivity in the hardware sales in general.
and then you know so just for us we're focused on the things that we can control which is really focusing on sustainable and profitable growth and then ensuring that we create the best possible experience for new and existing numbers that are joined our Pelton community.
Speaker Change: Thank you. I'll probably remember we have time for a one last question.
Speaker Change: and that will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.
Thanks so much for squeezing me and maybe just one question on content. You know, as you continue to sort of build learning around the business and think about where the strategy is going to go over the medium to longer term as Peter joins. How do you think about the right levels of investment in content, to ratio around content, and the role that content can play, continuing to drive sort of end to man on the user side and engagement and sort of conversion metrics over the medium to long term? Thanks so much.
Speaker Change: Yeah, thanks.
Well, I'm constantly absolutely at the very center of our experience and our instructor led.
Content is, you know, the hallmark of what makes for a great Peloton experience. So there's, that's, we're going to continue to invest there and to innovate. We've done some really interesting things just in the last quarter around bringing new hiking and, and walking experiences to the treadmill, walking boot camps.
Speaker Change: and we're doing some programs around taking walks after meals, which will be a relevant as we approach the Thanksgiving holiday. So, there's lots.
It's still happening in that space. We talked about all for one and the music partnerships that we did there. It's it has been and will continue to be an area that's you know incredibly important to us and
and I think that will continue.
I think you know, add one more thing, we are also investing in non-clock based content too.
Speaker Change: I'm Zoe and I are entertainment offering.
and our gaming and five sentence experiences which we're leaning into. So we're seeing the opportunity to expand beyond our core, our incredible instructor-led workout, which we have all these modalities and crisps of talking about some of the new ones that we've added that we really think are going to be value added, but also those non-class ones that we are seeing gave some interest in traction and we think we'll be able to drive engagement over time, which, again, as our subscribers are engaged, and they stick with us and we've seen that time and time again and we want that to continue.
Speaker Change: Thanks for watching.
Thank you, I would now like to turn the call back to Miss Karen Boone for any closing remarks.
Speaker Change: Sarah.
Karen Boone: Thank you, Alfredo. Before we end the call, I just wanted to thank Chris for all the leadership he has brought to the business over the last six months, driving or taking toward the innovation and reinforcing members first mindset during this period that has been a lot of transition and a lot of change.
I've been really lucky to have this nightmare over the last six months in our interim COOCO role and we're very lucky to have to return to the board and benefit from this experience and insight going forward.
I will continue the role of interim CEO through the end of the calendar year before handing the baton back to her, and January, and Chris, I will both be actively involved in ensuring that smooth and successful transition.
I really can't be couldn't be more excited to get Peter on board in addition to the death of experience he brings. He really has such a great respect for the many passionate team members.
who worked at bringing amazing experiences to our members every single day. And I know he brings a growth mindset and curiosity to learn all about the business. He's going to bring a fresh perspective as we continue on our path to deliver sustainable and profitable growth.
And lastly, I'm so proud of the Peloton Leadership Team, the many passionate and perfect driven team members who were devoted to Peloton's success. All of the hard work and progress has really set us up to continue to deliver on our goals as we enter the next phase of Peloton's journey under Peter's leadership.
and we truly can't wait for welcome to the team. Thank you and happy holidays.
Speaker Change: This concludes today's program. Thank you all for participating. You may now disconnect.
Speaker Change: The End