Q2 2025 Peloton Interactive Inc Earnings Call
One.
Speaker Change: Good day and welcome to the peloton Interactive Q2 2025 earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your.
Speaker Change: Telephone well then the ear an automated message advising your hand is race. So withdraw your question. Please press star 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 head of Investor Relations. Please go ahead.
James Marsh: Thank you operator, good morning, and welcome to peloton second quarter fiscal 2025 conference call. Joining today's call are peloton, Chief Executive Officer, and President, Peter Stein, and Chief Financial Officer, Liz Coddington.
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.
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.
James Marsh: For a discussion of those 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.
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.
Peter Stein: I'll now turn it over to <unk>, Chief Executive Officer, and President Peter start.
Peter Stein: Thank you James and good morning, everyone.
Peter Stein: Thank you for joining today's call. It is an honor to be here with you.
Peter Stein: I'd like to start by thanking Karen Boone and Chris Brewster out for their leadership during the past few months inclusive of the quarter, we're reporting on today.
Peter Stein: Both have now returned to their focus on board duties, having left peloton stronger than they found it.
Peter Stein: And for that we share our deepest gratitude.
Speaker Change: For me the opportunity to lead peloton is a dream come true.
Speaker Change: Fitness has been an important part of my life dating back to my childhood. When my mother was a fitness instructor.
Speaker Change: I've personally been a peloton member since 2016 and like millions of others I Love This category defining brand.
Speaker Change: Few companies deliver a product where the more people consume it the better they feel that.
Speaker Change: Peloton.
Speaker Change: And the wonderful thing is that the healthier our members become the more likely they are to stick around and recommend us to others, which makes our business stronger too.
Speaker Change: That's peloton, it's a virtuous cycle.
Speaker Change: The peloton team has made impressive progress over the last few quarters and putting the company on sound financial footing.
Speaker Change: Nonetheless, we have a tall hill to climb before we can demonstrate the impact of that virtuous cycle on member and revenue growth.
Speaker Change: So right now our primary focus is on executing against and delivering our fiscal 'twenty five financial and operating goals, while we prepare to climb that tall hill in fiscal 'twenty six and beyond.
Speaker Change: We'll share more about longer term strategy as the calendar year progresses.
Speaker Change: But today I can share my perspective, after one month of official duties of telecom.
Speaker Change: Achieving the new purpose, we've defined for ourselves.
Speaker Change: Powering people to live fit strong.
Speaker Change: Long and happy.
We need to focus on.
Speaker Change: Innovation on new products and experiences that lead to even better outcomes for members.
Speaker Change: Presence in more places so we can meet members wherever they are.
Speaker Change: More ways to connect members with peloton and our uniquely supportive community.
Speaker Change: And last but certainly not least <unk>.
Speaker Change: Improved unit economics, and the cost structure thats right sized for our business.
Speaker Change: Like every peloton workout this will be part inspiration.
Speaker Change: Perspiration.
Speaker Change: There's a lot of research that shows that engaging in multiple fitness disciplines improves member outcomes.
While peloton is best known for our cycling workouts.
Speaker Change: We're a leader in strength too.
Speaker Change: In Q2 over 2 million unique members completed our strength training boot camp Pilates yoga workout.
Strength drove 735 million minutes of workout time in Q2.
Speaker Change: And in terms of workouts equaled, 75% of our total number of cycling workouts.
Speaker Change: Variety is good not only for our members, but also for our business as it drives higher subscription retention.
Speaker Change: Is 60% lower for subscriptions, where members engaged with two or more disciplined per month versus just one.
Speaker Change: On the cardio side, we continued to elevate shred, thanks to our marketing efforts, which enabled us to exceed our tread portfolio sales goals and achieve a higher new subscription attach rates on tread and tread plus sales year over year in Q2.
Speaker Change: And with the release of our 10-K training program in Q2 peloton now offers training for all major race distances and.
Speaker Change: And already over 300000 members have trained for running rates with peloton.
Speaker Change: We're also seeing the positive impact of innovative new software features like pace targets, which offer running instruction with personalized intensity levels rather than treadmill speed.
Speaker Change: Nearly 60% of our members who take instructor led running workout on our tread products are using pace targets.
Speaker Change: And our members running paces are improving as a result.
Speaker Change: Another way to improve our business is to meet members in more places for example at the gym.
Speaker Change: In December we launched strength, plus our new app offering non class strength training programs with audio guidance from expert coaches and a custom workout generator.
Speaker Change: In Q2 and reached over 220000 monthly active users.
Speaker Change: The vast majority of whom were existing all access members.
Speaker Change: Third party retail enables us to meet new members in places where they already shop.
Speaker Change: Our new seasonal partnership with Costco in the U S drove more bike plus unit sales than any other third party retail partner <unk>.
Speaker Change: Enabling us to meet many new members at a retailer they trust.
Speaker Change: And we remain focused on meeting more new members across the globe.
Speaker Change: We are encouraged by the performance of international hardware sales in Q2, alongside our continued growth in paid connected fitness subscriptions from international markets.
Speaker Change: Turning to the connections between peloton members with the company and with each other.
Speaker Change: As you May know <unk>.
Speaker Change: Peloton is named after the pack of cyclists, who ride closely together to reduce their collective resistance.
Speaker Change: So we're focused on deepening the connections are 6 million members have with each other and with peloton.
Speaker Change: In September we launched teams, which enables members to share workout and compete and challenges.
Speaker Change: 70000 teams have been created since launch.
Speaker Change: Then in November we hosted the 11th annual Thanksgiving Day, Turkey burn where over 50000 members worked out together lives.
Speaker Change: This year's Turkey Burn also brought the feast or first Thanksgiving live strength class, which became the largest slides strength class and peloton history.
Speaker Change: One of the best ways to measure the strength of our members connections at peloton.
Speaker Change: As through member satisfaction and retention.
Speaker Change: In Q2, we made meaningful improvements in member happiness.
With net promoter scores improving across all our bike and tread products to over 70.
As someone who has spent many years in consumer tech and services businesses.
Speaker Change: I can tell you that this level of member love puts us in truly rarefied air.
Part of the reason for this was improvements in the responsiveness and quality of our member support.
Speaker Change: Our members support satisfaction score was $4 three on a scale of one to five.
Speaker Change: Up from $4, two last quarter and meaningfully higher than the three one in Q2 of fiscal 'twenty four.
Speaker Change: From a retention standpoint, we continue to benefit from exceptionally low churn rates.
Speaker Change: With average net monthly paid connected fitness subscription churn of one 4% in Q2.
Speaker Change: Liz will discuss our second quarter financials in more detail, but I want to take a beat on unit economics and right sizing our costs because both of these are foundational for us to address before we can return to growth.
Speaker Change: During this important holiday quarter, we achieved a 12, 9% connected fitness product gross margin, reaching double digits for the first time in over three years by selling a favorable mix of premium priced products and demonstrating real discipline by aligning our discounts with the margins of our products.
Speaker Change: <unk>.
Speaker Change: On the cost side the team has made great progress.
Speaker Change: We are on track to exceed $200 million of run rate cost savings by the end of fiscal 'twenty, five which is the target announced in our May 24, our restructuring plan.
Speaker Change: As well as additional operating expense efficiencies, including reduced media spend.
Speaker Change: The progress made so far shows in our profitability.
Speaker Change: Where we achieved meaningful improvements in Q2.
Speaker Change: Both adjusted EBITDA and free cash flow increased roughly $140 million year over year.
Speaker Change: This enabled us to make meaningful progress deleveraging, our balance sheet with net debt decreasing over $280 million or 30% year over year.
Speaker Change: All of this is to say that while we are working on our long term growth strategy for fiscal 2006 and beyond.
Speaker Change: Our financial goals for fiscal 'twenty five.
Speaker Change: And continued disciplined towards improving gross margins, reducing operating costs and deleveraging our balance sheet are and will remain.
Speaker Change: Top priorities for me.
Speaker Change: Now I'll turn it over to Liz to discuss our Q2 results.
Liz Coddington: Thanks Peter.
Liz Coddington: We are pleased with our second quarter results as we exceeded our guidance on key metrics and continued to make meaningful progress improving unit economics and profitability.
Liz Coddington: We also made progress on our marketing objectives by improving LTV to CAC year over year, and elevating track with target audiences.
Liz Coddington: We ended the quarter with $2 eight 8 million paid connected fitness subscription.
Liz Coddington: Selecting a net decrease of 21000 in the quarter.
Liz Coddington: This exceeded the high end of our guidance range by 19000 subscription.
Liz Coddington: Outperformance was driven by favorable net churn, partially offset by lower growth edition.
Liz Coddington: Average net monthly paid connected fitness subscription churn was one 4%.
Liz Coddington: This reflects a 50 basis point improvement quarter over quarter exceeding internal expectations for seasonally lower churn in Q2.
Liz Coddington: Nextgen was positively impacted by lower than expected subscription cancellations.
Our subscription process and higher reactivation.
Liz Coddington: Activation performance was positively impacted by marketing efforts targeting churned subscription.
Liz Coddington: Q2, net churn of one 4% also reflects an increase of 20 basis points year over year as the benefit from higher reactivation with offset by two main factors.
Liz Coddington: First in Q2 fiscal 2024, we had a onetime benefit from fewer net positive as a result of a shift towards shorter mine option.
Liz Coddington: Second we continue to see a slight headwind to churn as a result of subscription mix shift towards the secondary market, which has a higher churn profile than subscriptions that purchase of hardware directly from us or our channel partners.
Liz Coddington: Favorable churn was partially offset by lower gross additions due to slightly lower hardware unit sales.
Liz Coddington: Higher mix of <unk> portfolio sale, which have lower near subscription attachment rates than our bike products.
Liz Coddington: And longer delivery times for <unk>, plus units that delays subscription activations until Q3.
Liz Coddington: Secondary market Activations were in line with internal expectations and represented roughly 40% of total gross additions in the quarter.
Liz Coddington: We ended the second quarter with 579000 paid app subscriptions inclusive of <unk> plus subscription reflecting in that decreased a 4000 in the quarter. This result exceeded the midpoint of our guidance range by 9000.
Liz Coddington: Total revenue was $674 million in the second quarter, comprising $253 million of connected fitness product revenue, a decrease of $66 million or 21% year over year and $421 million of subscription revenue, a decrease of $4 million or 1% year.
Liz Coddington: Over here.
Liz Coddington: Total revenue was $14 million above the high end of our $640 million to $660 million guidance range due to higher than expected revenue from both segments.
Liz Coddington: The holiday season is a critical period for our connected fitness products revenue as Q2 has historically represented over 40% of annual hardware unit sales.
Liz Coddington: Connected fitness products revenue exceeded expectations from higher than expected premium priced hardware sale predominantly tried and tried plus.
Liz Coddington: Partly offset by slight under performance and overall unit sales.
Liz Coddington: Due to higher than expected <unk> plus sales, we faced inventory constraints that temporarily led to longer delivery time.
Liz Coddington: <unk> plus deliveries and associated connected fitness product revenue recognition to the third quarter.
Liz Coddington: We also observed higher than expected sales for our low priced refurbished bike.
Liz Coddington: Offsetting the higher sales of our tread and refurbished bike products, we observed lower sales from the midrange price point, specifically the original bike.
Liz Coddington: Subscription revenue was higher than expected as a result of higher paid connected fitness subscription sees.
Liz Coddington: Seasonally higher hardware sales in the second quarter is reflected in the revenue mix of 38% connected fitness products revenue and 62% subscription revenue.
Liz Coddington: From a sales channel perspective third party retail sales were lower than we expected in Q2, which we believe was partly due to our decision to offer lower promotional discounts on the original bite compared to last year in accordance with our effort to increase hardware margins.
Liz Coddington: Our holiday performance reflects the continued progress we've made in evolving our marketing strategy in November we launched our find your power marketing campaign, featuring J J and T J what.
Liz Coddington: This campaign targeted men and highlighted tread and strict product with media concentrated on live sports.
Liz Coddington: This campaign resonated well with men in Q2, 42% of connected fitness subscription growth addition format.
Liz Coddington: 280 basis point increase quarter over quarter at 240 basis point increase year over year.
Liz Coddington: In addition to advertising more towards men. Our marketing efforts were also focused on demonstrating the full value of a peloton membership through better education of our extensive offerings among.
Liz Coddington: Among the <unk> and core female audiences exposed to our holiday campaign, we observed a lift in awareness of non cycling modality like walking running yoga and high intensity interval training.
Liz Coddington: We also saw an increase in the Latino audience that were considered using peloton, which is a leading indicator of future intent to purchase.
Liz Coddington: Alongside reaching new audiences and introducing additional discipline to our members we continue to make progress on improving our marketing efficiency, which we measure from the lens of our LTV to CAC ratio.
Liz Coddington: While our LTV to CAC remains in the range of one to two acts we have made progress year over year toward our target to reach at least two X and ideally closer to three X.
Our Q2 LTV to CAC was roughly 15% higher than Q2 fiscal 2024.
Liz Coddington: Total gross profit was $318 million in Q2, an increase of $19 million or 6% year over year.
Liz Coddington: Total gross margin was 47, 2% 70 basis points above our guidance due to favorable connected fitness product gross margin and favorable subscription gross margin, partially offset by revenue mix shift toward our connected fitness product segment.
Liz Coddington: Connected fitness product gross margin was 12, 9% up 860 basis points year over year, primarily driven by a mix shift towards higher margin products.
Liz Coddington: Lower warehousing and transportation related costs.
Liz Coddington: And a reduction in inventory reserves.
Liz Coddington: Subscription gross margin was 67, 9% up 60 basis points year over year.
Liz Coddington: Total operating expenses, including restructuring and impairment expenses were $364 million in the second quarter, a $122 million or 25% reduction year over year, reflecting the progress we've made thus far toward right sizing our cost structure, we are track.
Liz Coddington: <unk> ahead of our cost savings targets for fiscal 2025.
Liz Coddington: Sales and marketing expense was $153 million.
Liz Coddington: Decrease of $78 million or <unk>, 34% year over year, primarily from a 38% decrease in advertising and marketing spend and lower personnel related expenses.
Liz Coddington: General and administrative expense was $131 million.
Liz Coddington: A decrease of $29 million or 18% year over year, primarily driven by a decrease in settlement costs professional services fees and personnel related expenses.
Liz Coddington: Research and development expenses were $60 million.
Liz Coddington: A decrease of $20 million or 25% year over year, primarily driven by lower employee related and contractor expenses.
Liz Coddington: In Q2, we recognized $20 million of impairment and restructuring expenses of which $17 million was noncash.
Liz Coddington: Non cash charges were primarily related to asset write downs in relation to retail showroom exits the.
Liz Coddington: The cash charges consisted of $3 million of severance and other exit and disposal costs as we continue executing on our restructuring efforts.
Liz Coddington: Adjusted EBITDA was $58 million in the second quarter, which was $28 million above the high end of our guidance range and a $140 million improvement year over year.
Liz Coddington: We generated $106 million of free cash flow in the second quarter, an improvement of $95 million quarter over quarter and $143 million year over year, and our fourth consecutive quarter of positive free cash flow.
Liz Coddington: We ended the quarter with $829 million in unrestricted cash and cash equivalent an increase of $107 million quarter over quarter.
We continue to make progress towards deleveraging, our balance sheet as net debt reduced to $281 million or 30% year over year.
Liz Coddington: Overall, our second quarter performance reflects our continued progress in re architected, our cost structure, while maintaining our leadership position within the connected fitness category.
Liz Coddington: It also reflects the strength of our high retention high gross margin subscription business.
Liz Coddington: Next I'd like to provide context on our financial outlook for the third quarter and full year fiscal 2025.
Liz Coddington: Following our outperformance in Q2 relative to our previous guidance, we are raising our full year fiscal 2025 guidance midpoint across our key metrics, including ending paid connected fitness subscription total revenue total gross margin and adjusted EBITDA. We are prioritizing these <unk>.
Liz Coddington: <unk>, along with delivering free cash flow.
Liz Coddington: We are raising our full year fiscal 2025 guidance for paid connected fitness subscriptions by 55000 at the midpoint to a narrower range of $2 75 to $2 709 million. This increase reflects our expectations for lower net churn due to the continued favorability across.
Liz Coddington: Subscription cancellations pauses and reactivation, partly offset by our expectations for lower gross additions due to lower hardware sales and mix shift into truck products, which have lower new subscription attachment rates than our bike products.
Liz Coddington: Our guidance for third quarter of fiscal 2025, ending paid connected fitness subscription of $2 85 to $2 $87 million reflects our expectations for seasonally lower hardware sales trend following the holiday season and for our average net monthly paid connected fitness subscription churn rate to remain relatively in line.
Liz Coddington: With the second quarter.
Liz Coddington: Our full year fiscal 2025 guidance range for paid App subscriptions of 550000 to 600000 remains unchanged our outlook for third quarter fiscal 2025, ending paid App subscriptions is 560000 to 580000.
Liz Coddington: Our full year fiscal 2025 outlook for total revenue of $2 four 3 billion to $2 four 8 billion.
Liz Coddington: Flex a narrower range and an increase of $5 million at the midpoint.
Liz Coddington: This reflects our expectation for favorable subscription revenue from higher paid connected fitness subscription and favorable connected fitness product revenue from higher trend portfolio sale, partly offset by lower <unk> portfolio sale.
Liz Coddington: Q3 revenue guidance on 605 to <unk> 25 billion reflects our expectations are seasonally lower hardware sales compared to the second quarter.
Liz Coddington: We are increasing our full year fiscal 2025 outlook for total gross margin to 50%, reflecting a 100 basis points increase from prior guidance from expected favorability in connected fitness product segment gross margin and higher subscription segment gross margin as well as a slight revenue mixture.
Liz Coddington: <unk> toward our subscription segment.
Liz Coddington: Our third quarter total gross margin guidance of 50% reflects an expected sequential increase in gross margin of 280 basis points as a result of a seasonal mix shift toward our subscription segment in the third quarter.
Liz Coddington: We are raising our full year fiscal 2025 guidance for adjusted EBITDA by $60 million to the range of $300 million to $350 million.
Liz Coddington: Which reflects our expectations for continued improvements in profitability largely due to gross margin expansion and continued operating cost savings.
Liz Coddington: Our third quarter, adjusted EBITDA guidance of $70 million to $85 million reflects a sequential increase of $19 million at the midpoint, mainly due to seasonally lower sales and marketing expenses following the holiday season.
Liz Coddington: We are also raising our fiscal 2025 free cash flow target to at least $200 million, an increase of $75 million from our previous target.
Liz Coddington: This reflects faster than expected improvements in operating expense reduction a higher degree of confidence in full year hardware sales performance following the holiday season, and inventory related networking capital efficiencies.
Liz Coddington: We expect to continue making meaningful progress in deleveraging our balance sheet through fiscal 2025 and beyond.
Peter Stein: Before we open for Q&A I'd like to hand, it back to Peter to talk about what makes peloton, so special and gives us such optimism for the future.
Peter Stein: Thanks Liz.
Speaker Change: You and the team should be proud of the work you all accomplished in Q2.
There are lots of companies that make fitness equipment doesn't.
Speaker Change: Dozens of fitness apps countless trainers.
Speaker Change: But there is only one peloton.
Speaker Change: That's because we combine the best hardware the best software and the best human coaches with the world's most supportive community.
Speaker Change: That's our magic Formula and when we get it right we are unstoppable.
Speaker Change: And as I, just discussed winning is about focusing on what matters most improving.
Speaker Change: Outcomes for our members meeting them in more places.
Speaker Change: And deepening the connections between them and peloton as well as with each other.
Speaker Change: And that will take operational excellence and financial discipline.
Speaker Change: Tension to the details that raise our performance for members and as a business.
Speaker Change: This will be hard work.
Speaker Change: As <unk>, often says never easy.
Speaker Change: <unk> worth it.
Speaker Change: With the energy momentum and excitement I've seen from peloton team members in the few short weeks since I started.
Speaker Change: I am more optimistic than ever about the future of peloton.
Liz Coddington: With that Liz and I are delighted to answer your questions.
Liz Coddington: 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 withdraw your question Press Star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A.
Liz Coddington: <unk> roster.
Liz Coddington: Okay.
Speaker Change: And our first question will come from the line of Simeon Siegel with BMO. Your line is open.
Simeon Siegel: Thanks, Hi, everyone. Good morning, Peter honored to welcome you to the fund that is analyst Q&A. So welcome.
Speaker Change: Hi.
Speaker Change: I was curious how youre thinking about the path to growth versus the ongoing improvement in profits I know, it's still early days for you, but just curious if you have any thoughts on any timelines you'd want to share in terms of your views as you dig in and then just as a follow up I'm not sure. It is for you or for lids, but you guys have been doing such a nice job of improving profitability in recent quarters could you share any thoughts on continuing.
Speaker Change: That profitability improvement, if and when you do decide to start investing for growth.
Simeon Siegel: Thanks, Simeon for the warm welcome.
Simeon Siegel: As you know I've been in peloton for just over a month, so I'm not ready to talk about when or the details of how we plan to turn the business back to top line growth.
Simeon Siegel: I can tell you what we're doing to earn the right to grow.
Simeon Siegel: Sure My belief that we will and suggest where to look when we do.
Simeon Siegel: So first we are setting the stage to be able to grow while ensuring we can deliver meaningful adjusted EBITDA and free cash flow.
Simeon Siegel: By right sizing our expenses.
Simeon Siegel: Which are down 25% year over year in Q2.
Simeon Siegel: Improving our equipment gross margins, which are back up to double digits for the first time in years.
Simeon Siegel: And increasing our LTV to CAC ratio.
Simeon Siegel: It has improved about 15%.
Simeon Siegel: Year over year.
Simeon Siegel: And doing all of this is reducing our net debt and our leverage ratios, which means that we'll have the financial capacity that we need to make investments.
Simeon Siegel: That have strong returns.
Simeon Siegel: But I don't want to leave you hanging on the growth question. So I'll, just sort of tell you where to look and the levers.
Simeon Siegel: So there.
Simeon Siegel: There are three areas one.
Simeon Siegel: We're looking to improve member outcomes through innovation on new products and services.
Simeon Siegel: And if we get that right.
Simeon Siegel: Then we have the potential to pull all three levers.
Simeon Siegel: Of growing members growing revenue per member and increasing member lifetimes.
Simeon Siegel: The second is meeting members in more places.
Simeon Siegel: And that also allows us to pull the levers of meeting of growing members and revenue per member.
Simeon Siegel: And then third is deepening the connection that we have with our existing members, which in particular has the potential to.
Simeon Siegel: Lengthen.
Simeon Siegel: The lifetimes that we have with our members which are already impressively long. So again, no specifics today, but thats where to look.
Simeon Siegel: Sure.
Simeon Siegel: And I'll take the question about the continuing profitability improvement.
Simeon Siegel: As you just heard US say a few minutes ago. We did just raise our full year adjusted EBITDA target for FY 'twenty five by $60 million and so that is reflecting continued improvements in profitability that we expect largely due to our gross margin expansion that we talked about as well as continued operating expense savings.
We are on track to exceed our $200 million annualized run rate cost savings plan by the end of fiscal 'twenty five that we committed to in our restructuring plan back in May of 2024, and then on top of that as we continue to talk about.
We are seeing upside from savings in media, which we also expect to be down materially year over year for the remainder of FY 'twenty five.
Simeon Siegel: We're pleased with this progress that we've made we do see further opportunities for cost optimizations, and we've built a culture of cost discipline into our company.
Simeon Siegel: We know that our opex as a percent of revenue is still too high overall for the long term and especially that's true within our G&A area and we do see multiple opportunities to rightsize it.
Simeon Siegel: Couple of examples include things like we still have a lot of tech debt, where we're continuing to solve technology gaps inefficiently with manual work, we're going to work to eliminate that and then another example would be reducing our corporate real estate expenses over time, as we see opportunities to do that.
Simeon Siegel: Great.
Speaker Change: Operator next question one moment please.
Speaker Change: And that will come from the line of Schweitzer <unk> with Wolfe Research. Your line is open.
Schweitzer: Thanks for taking my questions I have two please.
Speaker Change: Well, so you're starting to make progress on deleveraging can you. Please highlight some of the milestones on your plan deleveraging plan from here and maybe some of the tangible and intangible benefits of deleveraging and then the follow up question is on the tariffs do you expect to see any meaningful impact from tariffs.
Speaker Change: If levied.
Schweitzer: On your P&L. Thank you.
Speaker Change: Thanks, Sean.
Speaker Change: I'll start with the question on deleveraging so.
Speaker Change: The increase to our minimum free cash flow target to at least $200 million in fiscal 'twenty five.
Speaker Change: That first of all reflects that.
Speaker Change: Tremendous improvement of over $200 million year over year, and then if you go back to FY2023 it's over $670 million improvement and that improving free cash flow has really enabled us to deleverage.
Speaker Change: And a reduction in net debt, we talked about it earlier of 285 million or 30% year over year. In Q2, now if you pair that lower net debt with growing trailing adjusted EBITDA, that's helping our reported leverage ratio to decline from seven <unk> in Q1 to $2 seven X in Q2 now in terms of the Tam.
Speaker Change: <unk> benefits of that the improvement to our leverage ratio has enabled us to achieve a first lien net leverage ratio below <unk> and that is resulting now in a in a 50 basis point step down on our term loan and that relates to roughly $5 million of annualized interest expense savings going forward as long as we continue.
Speaker Change: To hit that threshold each quarter now.
Speaker Change: Now on the intangible side.
Speaker Change: The improvements that we're making to our balance sheet are lowering risk they are positioning us well for future sustainable and profitable growth and over time, we do expect that this will lower our cost of capital.
Speaker Change: And that will give us more optionality around capital allocation.
Speaker Change: Why don't I jump in for a moment on the tariffs part of your question whether.
Liz Coddington: And then I'll pass it back to Liz for it for a bit more detail.
Liz Coddington: As I'm sure you all know that questions around tariffs really represent a rapidly moving target.
Liz Coddington: And so we're closely monitoring it I'm sure alongside all of you.
Liz Coddington: The good news here is that no peloton branded hardware products.
Liz Coddington: Our subject to the tariffs from China.
Liz Coddington: Or if they were to reemerge from Mexico or Canada.
Liz Coddington: And of course, most of our revenues come from subscriptions.
Liz Coddington: Liz can provide a little more color here.
Liz Coddington: Yeah, so while the tariffs on imports from Mexico, and Canada are currently paused if all of the tariffs went into effect at the current proposed tariff rates, we would expect to see roughly 1% impact to our connected fitness products and that is mainly related to peloton apparel and pre corp.
And that estimate also assumes no mitigation for China, only or unmitigated impact is well under 1% of connected fitness Cogs.
Great.
Peter Stein: Helpful. Thanks, Peter Thanks, Thanks Louis.
Peter Stein: Thank you one moment for our next question.
Speaker Change: And that will come from the line of Curtis Nagle with Bank of America. Your line is open.
Curtis Nagle: Good morning, Thanks, very much I.
Speaker Change: I wanted to focus on the free cash flow.
Speaker Change: What drove the outperformance in <unk> and then on the take rates for the.
Speaker Change: Full year, assuming thats, mostly just be incremental flow through on the target maybe some working capital efficiencies could be I guess some of your first question if you're talking about.
Speaker Change: A follow up.
Speaker Change: Sure. So let me, let me talk a little bit through our free cash flow. So.
Speaker Change: Our Q2 free cash flow of $106 million that did exceed our internal expectations and some of the benefits that we saw were permanent and some of them are timing on the timing front, we saw significant significant amount of favorability associated with the timing of invoices for music and media vendors that we do expect to pay in Q3.
Speaker Change: Our outperformance on the permanent side, our outperformance in Q2 adjusted EBITDA also benefited free cash flow and so that outperformance was driven by favorable revenue and faster than expected operating expense reductions that we've talked about earlier and then again I also mentioned that we raised our you know our guidance midpoint for adjusted EBITDA by $60 million and we.
Speaker Change: Specced most of that to flow through.
Speaker Change: Free cash flow.
Speaker Change: We also did see a benefit in networking capital from reducing inventory production level.
Speaker Change: <unk> when we had set guidance last quarter, there was some uncertainty around how much we could optimize production.
Speaker Change: And so our full year guidance, our target of at least $200 million of free cash flow reflects the impact of inventory production improvements to networking capital and then also that faster than expected operating expense savings I do want to point out that the 200 minimum free cash flow target.
Speaker Change: Which implies roughly $87 million in free cash flow in the second half of FY 'twenty five that's our minimum expectation expectation our goal is to achieve more than that.
Speaker Change: Good to hear.
Speaker Change: A question for you just.
Speaker Change: Churn numbers.
Speaker Change: It was encouraging.
Speaker Change: Just in terms of maybe a little bit more.
Speaker Change: Driving it I mean, it sounds like its results of somebody's engagement efforts.
Speaker Change: Maybe youre seeing a leveling off across the sub.
Speaker Change: Sub base more generally.
Speaker Change: Just digging into that and then just what's assumed.
Speaker Change: And the guidance, maybe a little more specifically I think churn is lower but yes.
Speaker Change: Yes, I'd love to hear your thoughts on that.
Speaker Change: Yes, Chris Thanks for asking I like to talk about our churn.
Speaker Change: Because we've our subscription business continues to show remarkable consistency and resilience.
Speaker Change: With that exceptionally low average net monthly churn rate of one 4% for connected fitness subscriptions.
Speaker Change: So whats going on here one.
Speaker Change: <unk>.
Speaker Change: All of the subscription business as I've ever seen.
Speaker Change: Theres a tenure effect here we have.
Speaker Change: A great deal of long standing and highly loyal members.
Speaker Change: So with the passage of time that benefits are.
Speaker Change: Our churn.
Speaker Change: The second thing.
Speaker Change: Looking at engagements.
Speaker Change: Peloton is.
Speaker Change: That rare brand that makes you healthier at the more you use it and so one of our goals is to get more people using our product more and were pleased to see here.
Speaker Change: Some growth in our engagement levels in terms of the average monthly workout time for ending connected fitness subscription.
Speaker Change: If we look at that on a.
Speaker Change: On a year over year basis, So we've got.
Speaker Change: No.
Speaker Change: A healthy customer base, we've got healthy usage.
Speaker Change: As I mentioned earlier, we have strong.
Speaker Change: NPS scores and that all adds up to healthy churn.
Speaker Change: Now, let me provide a little more I can provide more color on the outlook I think you were asking a little bit more we're not we don't guide specifically to churn, but we can I can tell you that in Q3, we do expect our average.
Speaker Change: Net monthly paid connected fitness churn rate to remain relatively in line with Q2, and then just on a full year basis. We do continue to expect our churn rate to increase modestly year over year and.
Speaker Change: As we've talked about before we do continue to see a mix shift of our subscriptions into the secondary market, which has a lower retention rate compared to subscriptions where customers purchase sitting here.
Speaker Change: Hardware directly from US and then we have talked about this one time subscription on pause benefit in fiscal 'twenty for that won't repeat.
Speaker Change: It's creating a slight headwind for us.
Speaker Change: Partially offset by all the great work, our marketing team is doing to reactivate lapsed subscription.
Speaker Change: Yeah.
Speaker Change: Got it helpful. Thank you.
Speaker Change: Thanks, Curtis one moment for our next question.
Unidentified Operator: And that will come from the line of Arpin Kocharyan with UBS. Your line is now open.
Arpin Kocharyan: Hi, Thanks for taking my question Peter welcome to peloton, great to hear you on the call you.
Speaker Change: You talked a lot about improving churn.
Speaker Change: I was wondering is it fair to assume that this better than expected churn, which is probably not.
Speaker Change: As much of a surprise to you is to us given the efforts you've taken to get there. My question is how should we think about potential price increases in light of improving churn. It seems like you feel better about churn today than you did three months ago first is that a fair assumption and second how should we think about sort of price increases.
Speaker Change: In the subscription business in light of improving churn.
Speaker Change: And I have a quick follow up.
Speaker Change: <unk>. Thanks.
Speaker Change: Thanks for the question and we obviously, we feel good about the churn that we just reported and Liz just talked you through a little bit about how we were thinking about it.
Speaker Change: For the rest of the year.
Speaker Change: With regard to pricing to state the obvious pricing is a powerful lever.
Speaker Change: With every change up or down.
Speaker Change: Essentially dropping straight to the bottom line.
Speaker Change: So we're taking a hard look at pricing alongside everything else in our business.
Speaker Change: As a reminder in Q1.
Speaker Change: We took steps to improve our unit economics.
Speaker Change: By taking up the price of our lower in North America and.
Speaker Change: And we also raised prices for bike and bike plus in our international markets.
Speaker Change: This holiday season, we also improved our hardware unit economics by.
Speaker Change: By reducing the number of days that we were on promotion.
Speaker Change: And by structuring our promotional strategy to better align with the margin profile of our products.
Speaker Change: So all of that added up to greater discipline.
Speaker Change: As well as some terrific learning opportunities for us around pricing.
Speaker Change: I think a question that might be in everybody's mind is around subscription pricing and we know how important subscription pricing is to our members as well as to the performance of the business and we won't take any actions there lately.
Speaker Change: So beyond what I have shared so far that's about all we have to say today, but we'll share more about pricing when we're ready to.
Speaker Change: Wonderful great. Thank you.
Speaker Change: Peter I was wondering if you could share your initial impression of where you see low hanging fruit in terms of further cost optimization do you feel that that's first in hardware cogs versus more in sort of opex in the obvious sort of G&A that you have.
Speaker Change: <unk> talked about before in terms of being higher than and it's.
Speaker Change: As opposed to be where do you see that low hanging fruit as you sort of look at the business with fresh eyes.
Speaker Change: Mhm.
Speaker Change: Thanks Art.
Speaker Change: So let's talk a little bit about this before I think the important thing for us to note is that.
Speaker Change: We're being very aggressive with regard to cost and we are on track to deliver the $200 million in expense savings that we laid out.
Speaker Change: Just a few months ago and you can see that reflected.
Speaker Change: And the results that we reported today.
Speaker Change: We also think that there are some opportunities both in the.
Speaker Change: Space, both as an enabler.
Speaker Change: Of.
Speaker Change: Of reducing manual effort from our employees.
Speaker Change: As well as an area that we're looking at are things like <unk> licenses.
Speaker Change: <unk> shared with you the work that we're doing on reducing our corporate.
Speaker Change: Real estate expense as well and that does feel like relatively low hanging fruit, although those savings do take time to materialize due to our contractual commitments. So we are we're absolutely.
Speaker Change: Our planning on achieving those savings, but don't materialize when it makes sense.
Liz Coddington: In terms of free cash flow you heard Liz is good news about the $5 million step down in our.
Speaker Change: Our interest expense that's real money.
Liz Coddington: And Thats thats low hanging fruit that.
Speaker Change: It might not have felt low hanging a year ago.
Speaker Change: But from where we are right now that's that's an immediate benefit that that the team has achieved due to there.
Speaker Change: Impressive work on deleveraging.
Speaker Change: Thank you very much.
Speaker Change: Thank you. Thank you one moment for our next question.
Speaker Change: And that will come from the line of Lane <unk> with Goldman Sachs. Your line is open.
Speaker Change: Hi, This is Eric.
Jordan: Jordan from Goldman Sachs.
Speaker Change: Hi, Peter.
Speaker Change: A question on brand versus direct marketing investments and generating and demand. How do you think about the mix of those marketing investments over the medium to long term and where there could potentially be a higher return on marketing spend as you think about deploying that those growth investments against your platform goals. Thank you.
Speaker Change: Thanks, Eric.
Speaker Change: The fitness category in particular.
Speaker Change: Is a category, where you do have to remind people.
Speaker Change: To get back into the back into the market and and do the right thing for themselves.
Speaker Change: So I don't think you can anticipate that this is a business, where we're suddenly going to be able to do away with all brand marketing spend and I think we've demonstrated the ability to.
Speaker Change: Do some brand marketing for example, our watt brothers advertising and move the needles that we intended and promise to move for example, with the increased uptake that we saw of our product.
Speaker Change: By men that being said.
Speaker Change: We recognize that.
Speaker Change: Brand marketing is more difficult.
Speaker Change: To measure and justify then performance marketing.
Speaker Change: What does that mean with regard to brand marketing.
Speaker Change: Lauren and our team are being really disciplined about doing things like.
Speaker Change: Media mix modeling.
Speaker Change: And hold out.
Speaker Change: Areas for us to try to determine the real impact of our brand marketing spend and no.
Speaker Change: Which have works versus which have doesn't work.
Speaker Change: So that we can be as efficient as possible with that.
Speaker Change: Secondly, we are.
Speaker Change: Doing as much of our marketing spend in the performance category, where it's highly measurable as.
Speaker Change: As we possibly can and the good news there is that when you look at the sum total of our marketing spend we're.
Speaker Change: We're getting more effective and more efficient.
Speaker Change: R R.
Speaker Change: Reduction.
Speaker Change: In marketing spend in Q2 exceeded the reduction in our connected fitness sales by a meaningful amount.
Speaker Change: And that also resulted in improvement in our LTV to CAC ratio again, not where we want it to be long term, but material progress toward our goal of exceeding a ratio of two to one.
Speaker Change: So we're getting better we're putting in place the tools and the discipline to achieve further improvements and I think youll see us balance performance and brand marketing in a thoughtful way going forward.
Unidentified Operator: Great. Thanks, Eric Operator, we have time for one more question.
Speaker Change: And our final question will come from the line of Lee Horowitz with Deutsche Bank. Your line is now open.
Lee Horowitz: Okay. Thanks for sneaking me in maybe Peter we appreciate the growth plans for 2006 and beyond are still in the works can you just talk at a high level as to what you see as the most obvious levers you can pull in order to stabilize gross addition declines that you've seen worsen to start off the calendar year and one follow up if I could.
Speaker Change: Sure.
Speaker Change: The most important thing for us to do in the near term.
Speaker Change: Is to Super serve.
Speaker Change: The members that we have.
Speaker Change: And we've made real progress on that.
Speaker Change: If you.
Speaker Change: If you look at the improvement for example, in our <unk> scores, which year over year. Remember. This is a five point scale has gone up from three one to $4. Three we have a and we have a higher target than that going forward.
Speaker Change: That's a situation where we're doing everything we can to ensure that that every new customer.
Speaker Change: In particular loved.
Speaker Change: Loves us as much as the ones that that we've retained in the past.
Speaker Change: We're also working really hard in the near term to launch new capabilities that add value to.
Speaker Change: Two are existing members so as we mentioned.
Speaker Change: In the remarks, when we see members who are engaging in two or more disciplines, we have a 60% reduction in our churn rate.
Speaker Change: So we're working really hard to get people to for example embraced the strength modality.
Speaker Change: Which we know based on a lot of research.
Speaker Change: A terrific addition to our cardio program. These things I think are the are the lowest hanging fruit in the next few months for us to continue to retain that that customer base that we worked so hard to acquire.
Liz Coddington: Liz do you want to add anything no. The only thing that I would say is to your point, it's about retaining the subscribers that we have and then also for those that are joining us new making sure that they get off to a really great start and are able to engage because we do know that if they engage early that there.
Liz Coddington: I will predict that they will be a subscriber for a longer period of time. So that would also manifest in lower churn for those subscribers, who are joining us as new gross additions.
Speaker Change: Really helpful and maybe one just follow up on connected fitness gross profit gross margin sort of reaching a double digit sort of milestone for the first time is a great hurdle to clear, but we think that you still are always away from where you think this can go over time any context as to sort of where you see the upper band on connected fitness product gross margin.
Speaker Change: And the levers you have there to sort of pull those higher.
Speaker Change: Going forward. Thanks, so much.
Speaker Change: Sure. So you know what.
Speaker Change: Our improvements in connected fitness gross margin.
Speaker Change: There's multiple dimensions to that some of that is mix into some of our more premium products that you have a higher gross margin and then some of that is also just being more optimized and how we offer discounts and then we've also made some pricing changes. So we can continue to pull all of those levers over time and we do expect our gross margins.
Speaker Change: That they cannot continue to expand I'm not going to give you a specific target for that but we know that there is more opportunity to expand them overtime and.
Speaker Change: We do expect for the remainder just just just to clarify for Q3 and the full year for fiscal 'twenty five at least we do expect to maintain double digit connected fitness product gross margins, primarily because we are shifting towards those higher margin products and being really disciplined about about our promotions.
Speaker Change: Great. Thanks, Michael.
Unidentified Operator: Thank you I would now like to turn the call over to Mr. Peter Stern for any closing remarks.
Unidentified Operator: So before we end the call I want to acknowledge that peloton has a very special base of investors because many of you are also are enthusiastic members.
Unidentified Operator: And in addition to being the CEO I'm also enthusiastic member. So let me leave you with a few thoughts that bridge the two ways, we relate to peloton.
Unidentified Operator: I talked earlier about improving member outcomes.
Unidentified Operator: One of the ways. We're doing this is by providing personalized coaching.
Unidentified Operator: If you haven't already tried a power zone right pace targets on <unk> or.
Unidentified Operator: Or the personalized plans future, we released last week.
Unidentified Operator: Please do so.
Unidentified Operator: These are already delivering impact for our members and they are a taste of the future.
Unidentified Operator: And if you haven't already tried to peloton strength bootcamp Pilates Yoga class, there's no time like the present.
Unidentified Operator: I also talked about meeting members in more places.
Unidentified Operator: There are lots of ways that peloton shows up in the physical world.
Unidentified Operator: But one way that I am excited about this month is in the virtual one hour.
Unidentified Operator: Our appearance and Marvel Studios' Captain America, Brave New World in theaters next Friday.
Unidentified Operator: And while you wait for that keeping an eye out for some special work out to help you get fit like a superhero.
Speaker Change: Finally, I talked about making members for life.
Speaker Change: And the importance of connecting our members with each other.
Speaker Change: We launched public teams last week and.
Speaker Change: And I would encourage every one of you to go on our App and join one and if you are an analyst. Please join James's team together, we go along.
Speaker Change: Because we know that being part of a supportive community helps people established and stay with healthy routines.
Speaker Change: Okay, you have your assignments.
Speaker Change: You for joining today's call and I'll see you on the leader Board.
Speaker Change: Thank you all for participating. This concludes today's program you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.