Q4 2025 Peloton Interactive Inc Earnings Call
2.
Good day and welcome to the pelaton interactive fourth quarter fiscal year 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 1. 1 on your telephone. You will then hear an automated message advising. Your hand is raised.
So withdraw, your question, press star, 1 1 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 sir.
Thank you, operator. Good morning and welcome to pelaton fourth quarter fiscal year 2025 conference call.
Joining today's call are pelaton chief executive officer and president, Peter Stern and Chief Financial Officer. Liz cottington.
Our comments and responses to your questions, reflect Management's views as of today only and will include forward-looking statements related to our business under Federal Securities Law.
Actual results May differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.
Please refer to our FCC filings in today's shareholder letter, both of which can be found on our investor relations website for discussion of the material risks. And other important factors that could impact our results.
During this call, we will discuss both gaap and non-gaap financial measures. A Reconciliation of gaap to non-gaap financial measures is provided in today's shareholder letter.
I'll now turn over the call to pelon's chief executive officer and president, Peter Stern.
Thank you, James.
Good morning everyone. And thank you for joining today's call.
As we wrap up our fiscal year, everyone at Team pelaton should take pride in our results and all that we accomplished.
While Liz will review the results in more detail. Our team, exceeded all our key financial performance goals for Q4 and fiscal 2025,
we delivered what we promised operationally, and then some
And we reignited our Innovation engine on every aspect of our magic formula of equipment software and human coaching.
As we look to the future, our team is rounding out nicely.
Who joined us from Apple?
And chief Communications officer Diana Krauss who joined us from fleshman Hillard.
We have also completed the search for our CIO.
Corey Ferrell joined last week from Pearson and reports to our coo Charles Cairo.
As I promised, when I started at pelaton, in January, in today's shareholder letter I outlined pelaton strategy.
I won't reiterate that strategy in these remarks, but I will provide some highlights and color
Our strategy is grounded in our purpose.
Which is nothing short of delivering, human impact at massive, scale by empowering our members to live fit, strong long and happy.
We already deliver on this purpose in part as The Trusted Fitness partner for approximately 6 million members in 6 countries.
But we are just getting started.
Let me explain by providing historical context.
Over the past Century or so advances, in medical science, contributed to the prolonging of life.
Here in the US, by a remarkable, 30 years from 1900 to 2020.
However, as lifespan has increased Health span
The quality as opposed to the quantity of those years has failed to keep up.
People are living longer but they are also living sicker.
In the us alone. We now have the largest gap between lifespan and health Span in history at over 12 years.
Addressing Health span requires a different approach from lifespan because Health span depends Less on medical interventions and more on our choices and behaviors regarding exercise, sleep, stress and diet.
This is where pelaton comes in.
Cardio fitness is the foundation of wellness and is critical to maximizing health spans.
If it were a drug, it would be a miracle drug available to everyone without negative side effects.
But while cardio Fitness is essential for health span, it is not enough by itself.
With each passing year, we are coming to understand better. The importance of strength, Stress Management sleep and nutrition to living our best lives.
This creates the opportunity, no more than that. The Mandate for pelaton to evolve from being a cardio Fitness partner to become the world's most trusted Wellness partner across the full array of behaviors that maximize Health span
There is no company better positioned than pelaton to achieve this kind of human impact.
Behavior. Changes hard.
But we've spent over a decade helping millions of people start and maintain Healthy Habits by making it fun. And by creating a real sense of community and human connection,
So with that backdrop, here's where we're taking the business: with the goals of returning to sustained growth in revenues and members, and of sustaining our progress in achieving profitability.
We plan to support our members Wellness Journeys by expanding our offerings in strength where we are already a category leader.
Mental well-being, sleep and Recovery.
And over time, nutrition and hydration.
While we're exploring New, Wellness areas, we will continue to build on our strengths and cardio, cycling running walking and Rowing recognizing the centrality of cardio for human well-being.
We recognize that our members come to us at various stages of their fitness journey and so a 1 size fits all approach fits. No 1.
Determining what to do to meet your goals can be overwhelming.
So, we will employ advanced technologies, like AI, to enhance our ability to serve as personalized coaches, delivering individual insights, recommendations, and custom-tailored plans that make it easier and more efficient to achieve your goals.
To grow Our member Community. We will increase our Global presence through Hotel Partnerships retail expansion and the launch of new markets.
An example of this is our successful microstore Pilot in Nashville.
Last month, we opened our second micro store, this 1 in Utah.
And we plan to launch an additional 8 stores in time for the busy holiday season.
Here's another example.
and yet another
in may, we launched a special pricing program that offers a discount on equipment to military, personnel, healthcare workers, First Responders, and educators.
These purchases have already made a meaningful impact on first-party retail sales in Q4 while making pelaton more accessible to thousands of people, we all count on for the quality of Our Lives.
We also launched special pricing for students offering them discounted access to our pelaton app subscriptions.
Precore is a strong asset to pelaton. As it has a presence in more than 60 countries and 80,000 locations.
We see a tremendous opportunity to expand our commercial presence and serve a broader range of Jim operators. By bringing the best of procore and pelaton together.
We have integrated precore with pelaton for business and forms. A new Commercial Business unit under Chief commercial officer Dion Camp, Sanders hiring Ian Reeves as his general manager.
Dustin grows, president of procore will be retiring and we sincerely. Thank him for his leadership and returning the Precor business to growth.
Our Commercial Business unit plans to expand on the success. We have achieved with our Hilton and Hyatt Partnerships.
Palleton for business currently operates in over 9,000 hotels and pelaton is now a must-have amenity in quality hotels?
Growing Our member base also means expanding our online and in-person presence through social channels and events.
In Q4 our instructors participated in over 40 events more than 3 times. The amount in Q4 of last year.
When you purchase a piece of pelaton equipment, you aren't just getting a fitness tool. You're joining a supportive community.
We've experimented with ways to strengthen this community and Foster more engagement through our social network teams.
We have more features on the horizon to deepen connections and engagement among our members.
We are also continuing to elevate the member life cycle, with new onboarding programs and to recognize our most loyal and committed members.
A core pillar of our strategy is ensuring our prices reflect the human impact we deliver to our members.
We continue to improve our unit economics and will adjust prices to reflect the value we provide to our members and the costs of operating our business, including shipping, returns, tariffs, and other fees we pay.
Peloton is at a critical juncture in our transformation, a moment to invest intentionally in our future.
To earn the right to grow. We must align our spending with areas of competitive Advantage specifically our equipment software and content, while reducing costs in areas that do not differentiate us.
To that end, we plan to capture an additional $100 million of run-rate cost savings by the end of FY '26.
By optimizing indirect spend.
Reshaping our teams and in some cases the locations, where we work.
And parting ways with a number of our talented colleagues.
Decisions that impact. Our people are the most agonizing ones we make.
We are deeply grateful for the contributions of our departing team members.
And we are committed to supporting them through this transition.
Making fundamental changes to the way our business operates, take sacrifice and hard work but I'm even more confident in our team now than when I started.
I will now turn it over to Liz to discuss our Q4 and full year 2025 results.
Thanks Peter.
I want to begin by highlighting our sustained progress toward improving the Financial Health of our business, over the course of fiscal year 2025
Our successful efforts to expand growth margins, reduce operating expenses, and optimize inventory levels enabled us to generate $324 million of free cash flow, an increase of $409 million year-over-year.
We also materially delivered our balance sheet, reducing net, debt by 343 million or 43% year-over-year.
We are pleased with the progress. We've made improving profitability in fiscal, 2025, and continue to prioritize delivering, meaningful free, cash flow.
Now, I'd like to touch on our fourth quarter results.
Which reflect another solid quarter from financial performance, as we exceeded the high end of our guidance on all key metrics.
We ended the fourth quarter with 2.8 million, paid connected, Fitness subscriptions, reflecting a net, decrease of 80,000 quarter over quarter due to seasonally lower hardware sales and seasonally higher turns.
ending paid connected, Fitness subscriptions, decreased 6%, year-over-year,
We exceeded the high end of our guidance range by 10,000 driven by both higher growth additions and favorable Net Insurance.
Due to higher unit sales of our connected Fitness products in both first-party and third-party retail channels.
The secondary market editions were in line with expectations.
Average, net, monthly, paid connected Fitness, subscription churn was 1.8% and Improvement of 10 basis points year-over-year and an increase of 60 basis points. Quarter over quarter in line with our expectations for a sequential increase in Q4 due to seasonality,
We ended the quarter with 550,000 ending paid app subscriptions.
Total revenue was 607 million. In Q4 comprising, 199 million of connected, Fitness Products revenue and 408 million of subscription Revenue. Outperforming the high end of our guidance range by 21 million
Outperformance relative to guidance was primarily driven by connected Fitness Products revenue from higher than expected, hardware sales of both pelaton and procore products.
Connected Fitness Products, Revenue, decreased 13 million, or 6% year-over-year.
Sales and deliveries partially offset by a mixed shift toward higher priced products.
Subscription Revenue decreased 23 million or 5% year-over-year driven by lower paid connected, Fitness subscriptions and lower paid app subscriptions, partly offset by used equipment. Activation fee Revenue, which was introduced in q1 of fiscal 2025.
Total gross profit was 328 million in Q4 and increase of 16 million or 5% year-over-year.
To growth margin was 54.1% and increase of 560 basis points, year-over-year and 380 basis points above our implied. Guidance of 50.3% driven by outperformance in both segments,
Connected Fitness Products, growth margin was 17.3% and increase of 900 basis points. Year-over-year driven by inventory, right? Downs, recorded in Q4 of last year.
A mixed shift toward higher margin products.
And decreases in service and repair warehousing and transportation costs.
Prescription growth margin was 71.9% and increase of 370 basis points year-over-year.
Driven by decreases in music licensing royalties.
Personnel, related, expenses. Inclusive of stock-based, compensation and depreciation, and amortization.
Subscription growth margin benefited from a 1-time balance sheet adjustment to acred music royalties associated with renewing and music licensing agreement.
Excluding this 1-time benefit subscription gross. Margin would have been 69.2%.
Total operating expenses including restructuring and impairment expenses were 299 million in Q4.
A 77 million or 20% decrease year-over-year.
We made progress in right-sizing our cost structure, partially offset by expenses associated with today's announced restructuring plan.
We exceeded our Target to achieve. At least $200 million of run rate cost savings by the end of 6. Fall 2025.
Sales and marketing expenses were 81 million in Q4.
A decrease of 32 million, or 28% year-over-year, driven by decreases in advertising and marketing spend, personnel-related expenses inclusive of stock-based compensation, and retail showroom expenses.
We exited 24 retail, showroom locations in fiscal 2025, reducing our retail footprint from 37 to 13, showrooms at the end of Q4 excluding, the addition of 1 micro store application.
Research and development. Expenses were 56 million in Q4. A decrease of 14 million or 20% year-over-year, driven by decreases in Personnel related expenses, inclusive of stock-based compensation and product development costs.
General and administrative expenses were 125 million in Q4. A decrease of 61 million or 33% year-over-year driven by decreases in stock-based, compensation associated with executive departures in Q4 of last year. And other Personnel related expenses, partially offset by slightly higher professional fees.
This quarter, we recognize 37 million of impairment and restructuring expense.
Structuring plan.
As well as other non-cash impairment charges.
Adjusted Eva was 140 million in Q4?
which was a 70 million or 99% Improvement, year-over-year and 54 million dollars above the high, end of our implied, guidance range,
We generated 112 million of free cash flow in Q4 and increase of 86 million year-over-year.
Performance in revenue and growth margins, as well as lower operating expenses.
We ended Q4 with 1,040 million in unrestricted, cash and cash equivalents, an increase of 125 million quarter over quarter.
overall our fourth quarter performance, reflects a continuation of meaningful profitability Improvement for our already high retention high, growth margin, connected Fitness, subscription business,
Our continued focus on right sizing, our cost structure and de-risking. Our balance sheet has enabled us to achieve a strong financial footing, from which we can execute our strategy that is focused on achieving sustainable profitable growth.
Next, I'd like to share contacts for our financial Outlook.
For full year, fiscal 2026. And on a quarterly basis. We are providing guidance for total revenue. Total growth, margin and adjusted iPad. Do
We will also continue to provide an annual Target for minimum. Free cash flow and a quarterly guidance range for ending paid connected Fitness subscriptions.
Our full-year fiscal 2026 total revenue outlook of $2.4 to $2.5 billion reflects a 2% revenue decrease year-over-year at the midpoint.
As we execute on our strategy, over the course of the year, we may evaluate changes in pricing promotional strategy and other actions to achieve our financial targets.
Q1 total revenue is expected to be 525, to 545 million and reflects a decrease of 9% year-over-year at the midpoint, as a result of anticipated year-over-year declines in hardware sales and paid connected Fitness subscriptions.
Similar to fiscal 2025. We expect q1 to be a seasonally low quarter for hardware sales.
Taken together with our guidance for revenue for the full fiscal year, which reflects a lesser decline at the midpoint compared to what we expect in q1. You can see that we expect to inflect toward year-over-year Revenue growth over the remaining 3/4 of the fiscal year.
Starting in fiscal 2026.
We will assign executive and other corporate overhead associated with our New York headquarters, and other corporate facilities. As we focus on driving more accountability for costs at a functional level.
Historically, these costs were all recorded in GNA, but going forward will be assigned across cogs sales and and marketing GNA and R&D.
Our guidance for total growth margin, reflects these assignments, which drives a roughly 70 basis points headwind to total gross margin.
Full year, fiscal 2026. Total growth margin is expected to be 51%.
Adjusting for the impact of assigning executive and corporate overhead expenses. Our Outlook reflects a total growth margin Improvement of roughly 140 basis points year-over-year. As a result of our continued focus on optimizing costs.
Our q1 fiscal 26. Total gross margin Outlook is roughly 52%.
Our fiscal 26 adjusted ebit dog. Guidance range of 400 to 450 million.
Reflects an increase of 21 million or 5% year-over-year at the midpoint primarily driven by operating expense savings connected to the new restructuring plan. We introduced today.
We've actioned roughly half of the Run rate cost savings as of today.
And expect the remainder to be realized over the course of the year.
Roughly 15% of the hundred million dollar run rate. Savings goal is expected to come from lower stock based compensation.
Q1 adjusted. EBA is expected to be within the range of 90 million to 100 million reflecting, a decrease of 21 million or 18%. Year-over-year at the midpoint primarily driven by our expected Revenue decline.
Because over time.
We plan to make trade-offs between pricing for both subscriptions and Hardware.
And subscription growth.
We also believe that we have many vectors for growth that do not result in an increase in subscriptions.
We will continue to provide quarterly guidance for ending paid connected business subscriptions.
Going forward, total revenue will be our primary Topline metrics because it is a better measure of pelon's, long-term health.
Q1 ending, paid connected, Fitness subscription guidance of 2.72 to 2.73 million, reflects a year-over-year, decrease of 6% at the midpoint.
We expect growth additions to decrease year-over-year as a result of an expected year-over-year. Decrease in pelaton, Hardware unit sales,
Average, net, monthly, paid connected Fitness. Subscription churn is expected to follow our historical seasonal patterns with higher churn and q1 but still slightly lower than q1 of last year.
Before we cover free cash flow, I wanted to share a quick note on tariff policy which as you know, is a dynamic situation.
While palleton tablets are currently subject to a tariff exemption for computers.
We anticipate that our imported tablets from Thailand may become subject to a country specific reciprocal, tariff rate within the coming months
Pelaton and pre Court. Imported equipment are also currently subject to a 50% tariff on their aluminum content.
We remain committed to generating, meaningful free. Cash flow with a Target to achieve, at least 200 million in fiscal 2026 inclusive of anticipated tariff, exposure of roughly 65 million.
As tariff rates continue to evolve this exposure could change.
In fiscal 2025, we reduced our inventory position, creating a significant networking Capital benefit to free cash flow.
while we do expect a small cash benefit from inventory in fiscal 2026,
Overall, we expect changes in networking Capital to be a free cash flow headwind. This fiscal year,
We also expect greater one-time cash restructuring charges within the fiscal year as a result of our $100 million run rate Cost Savings Plan.
These headwinds are partially offset by improvements in gross margin and operating expenses. As a result of our focus on improving, monetization, and optimizing costs.
For q1 specifically, our typical seasonal sales pattern for connected fitness equipment, requires us to build up inventory, ahead of the holiday season and puts pressure on free cash flow within the quarter.
When compounded by cash, outlay for restructuring costs, we expect q1 free cash flow to be slightly negative.
By continuing to generate meaningful free, cash flow in fiscal 2026.
we expect to continue to make progress on reducing net, debt and deleveraging our balance sheet over time while also investing meaningfully in Innovation, so that we can make progress on our long-term objective to return, pelaton to sustainable profitable growth,
Now, we'd like to open the line for Q&A.
Thanks, Liz. Uh, we'll begin the Q&A process this morning by taking a couple of questions from investors that sent their topics in in advance.
We received more than 2 dozen questions this quarter. So while we can answer all of them, we did pick a couple representative ones that will tackle before the operator opens the line for additional questions.
Our first question was asked by a number of us investors, so I'll paraphrase.
How does pelaton see the opportunity for growth As Americans? Focus more on health and fitness and in particular, can you speak to how this impacts the younger demographic? Peter maybe you can jump on that 1. Thanks, James.
Uh, the attitudes of younger people are a big reason for the strategy that we announced today.
When we look at, uh, young people, they're expanding their definition of what it means to live. Well,
From a narrow focus on cardio as a tool for weight loss, toward a more holistic approach that brings together cardio and strength and sleep Stress Management and nutrition.
to improve the quality of their lives and as as I talked about their health span
We also see that younger people are more likely to do, uh, training for their Mental Health.
Of training approaches with a more equal emphasis on strength and cardio, they're also adopting functional nutrition, thinking about food as a tool to enhance their wellness.
Um, at the same time that we're seeing all those, those positive Trends. We're also seeing just uh upsetting the high levels of stress and depression and anxiety, among young people.
So while we're reorienting pelaton with the announcement of today's strategy to maximize human impact for everyone. We know young people need us more than ever
And that means, we're going to be focusing even more on personalized training programs, that cut across the, uh, many disciplines that we offer, it means even more investment in strength.
Including things like our strength Plus app because young people are more likely to pursue hybrid workout regimens both at home. And at the gym,
Um, it means more investment in areas like meditation and sleep for mental well-being. We have something really cool on the way. Can't wait to talk more about it soon. Using a mix of software and human coaching.
And then, last but not least. Uh our our special pricing program that I talked about earlier offers discounted subscriptions on the pelaton app for students because not everyone has access to our equipment at college.
Great. Uh, our next question comes from Barack in San Jose. California, leaderboard named B Menton, he asks,
Stock based compensation expenses. Have been growing disproportionately to the growth in your business. What are Management's? Thoughts on current levels of SBC Peter. Yeah, thanks Brock. Um, great question. I I'll start by just noting that some stock based compensation is is a good thing.
It aligns, the interests of, um, the company's employees, especially senior leadership with the interests of, uh, shareholders. We're all, we all benefit, um, when we see stock, um, uh, improvements in the value of our stock, it's also retentive. Um, so typically cash payments happen within the year, but, um, parts of stock, based compensation, require employees to stay from multiple years, in order to receive the benefits. Uh, it also encourages a long-term, um, mindset as a consequence,
Uh, that being said, your question was, you know, what's what's our thought on the current level of stock-based compensation? And I, uh, I'd say, um, historically it's been too high, uh, but I'll note that an fy2. We were able to reduce our stock based compensation expense by 777 million.
Which is a 25% reduction year-over-year and we do expect that to decline further. Um in FY 26.
I, you know, I think we are definitely focusing on on dilution. It's it's important. But the other thing that we're doing is trying to even more closely, align the interests of our, our leadership with the interest of our shareholders and to that end in fy2, we introduced, um, performance stock units psus, uh, as a component of our executive compensation and we are planning on increasing the mix.
Of psus, as a fraction of total stock based compensation. As we, uh, as we um, entered FY 26. Thanks again for the question. Thanks Peter, Sheree. Can you open up the question of the line for questions? Please, of course, as a reminder to ask a question. Please press star, 1 1 1 on your telephone and wait for your name to be announced to withdraw your question. Press star, 1 1 1 again, due to time restraints, we ask that you please limit yourself to 1 question and 1. Follow-up question, please. Stand by while we compile the Q&A roster,
And that will come from the line of arpine Coach, Orion with UBS. Your line is open.
Hi. Thank you for taking my question. Good morning. Um, I was wondering if you could go over, what's baked into your Revenue assumptions for the year? You provided some good contacts in terms of sort of current strategy of why all you're doing, could increase sort of higher engagement and that can lead to better turn and outcomes. And ultimately, uh, hopefully stabilization in Subs, but and I know it may be challenging to get into pricing. Given there's no, there was no price increase announcement from pelaton in the release, but maybe you could go over the
Key inputs of how you get to your revenue numbers for the year, and then I have a quick follow-up for Liz. Thank you.
And our full year guidance um, reflects a 2% decline at the midpoint. And that does imply that we expect to inflect toward year-over-year Revenue growth in the following 3 quarters of the year. And we tend intend to achieve this through a combination of growth lovers that are available to us and that includes sales and subscriptions as a result of some of the exciting product updates, um, that we hope to be able to share with you soon, adjusting prices to reflect the value that we provide to our members and um, and cost of operating our business. And this includes things like charging delivery and return fees and adjusting pricing and promotions.
Um, and in today's shareholder letter, we did note that we'll have more details to share about our product Innovation before our next earnings call. And we're very excited about these and they make us optimistic for the holidays and then we'll be able in our next earnings. Call to be able to provide some more color on how these are impacting our full year expectations.
Thank you. That's very helpful. And then is maybe this 1 is for you as well. Would it be possible to go over the Cadence of that 100 million? Of course saves. Um, and you alluded to where they're coming from outside of headcount, where else you see opportunities? There's always that concern that incremental cost. Cutting is almost always more difficult when the low-hanging fruit has been harvested. But if you could help us sort of break down the Cadence of those cost safe throughout the year. Uh, it would be helpful. Thank you.
Sure. So um today's announced restructuring plan is designed to achieve at least 100%. And as of today we will have actioned about roughly half of the Run rate savings through the reductions in our Workforce and we expect to achieve the remainder throughout the balance of the year. Um, 1 of the areas that we are focused on is indirect spend optimization and then also potential Workforce relocations.
Um, so and the hund million dollar run rate, savings targets consists of reductions across our operating expenses. The biggest area is GNA, and then we also expect some savings across R&D sales and marketing and um, and cogs. And then, um, I mentioned it earlier, but I'll mention it again that um, our stock-based comp represents about 15% of the Run rate, saving targets.
Okay, helpful. Thank you.
1 moment for our next question.
And that will come from the line of Yousef squali with truist Securities. Your line is open.
Good morning. Um, congrats on that solid quarter. Maybe just a follow-up to the prior question about growth. Um, and just to be clear, it's great to see you guys going from having shrunk for the last several years to...
Looking at a pivot in Revenue growth starting hopefully in Q2 through the rest of the year. But as we look at the business, maybe longer term and maybe Beyond, uh, the price adjustments that may get you there near term. Can you maybe just talk about your expectations for kind of the secular growth in this business? Is this business still at a holistic level still flat. So maybe declining from a, an overall Market standpoint or do you see that having maybe improved? And then I have a quick gross margin question, for at least after that.
Yeah, Yousef, uh, thanks for that question. Uh, we have great optimism for the future of this business. Um, 1 of the things that we've we've done here is, uh, some research focusing on the US and looking at what, what we believe the the market opportunity is even if we just focus on Fitness for a moment.
so we we looked at uh in this case, just people with household income of over 75,000 who spend money on Fitness
And that's the 117 million people in the US just alone.
And then if we further qualify that group to add uh, that there, they're willing to spend money on both fitness equipment and fitness subscriptions.
Um, we believe that's about 17 million households in our service addressable Market.
And in the U.S., we have only a fraction of those households as subscribers.
Um and so we've got we've got plenty of upside just in the market as it's been as sort of as it exists right. Now I talked earlier about the trends that we're seeing in the marketplace as well with people becoming ever more focused on, uh, on their quality of life and recognizing that that's it. That creates, um, a real need for them to engage in, in behavioral change that has won the potential to further increase those numbers that I just, I just described, but second for us to, to open up additional vectors for growth for our company. You know, we we've we've basically only uh, really been serving
The the disciplines while we have amazing offerings and and really impressive, uptake of those are essentially adjuncts to that. But as you start to think about each of those as a vector for customer acquisition and uh potentially drivers of incremental value from our members, you can start to see um a significant potential for growth and and as as I've said earlier, I believe that there's no company better positioned as a matter matter of um, credibility and the resources that we have. Um, and the amazing people that we have in our company to capture those opportunities. So I I view this as a um,
An expanding market and in 1, that we have barely scratched. The surface of
That's awesome. That's really helpful and then maybe Liz. Could you please double click on your expectations for gross margin for 2026 particularly across both subscription Hardware. I think you guys have done a really good job improving margins on the hardware business. How how, how does that progress throughout the year? As maybe you could see in maybe some headwinds to to that Top Line. Thank you.
Sure, so, um so let me talk a little bit about q1 and then I'll talk about the full year. So in q1, we do expect our total growth margin to decrease sequentially and that's due to lower margin across both of our segments. Um, our connected Fitness, growth margin will be impacted by, um, the fact that we will have less, we expect to have less hardware sales so that causes some fixed cost you leverage, um, and similar to Prior years,
Um, you know, we, we do expect to have, um, you know, just a lower seasonal, mix of of Revenue, um, from connected Fitness in in q1 and then q1 sub margin is expected to return into the 68 to scoot 69% range that we are typically in. We outperformed a bit in Q4 but we expect to be back in kind of our 6869 percent range. Now, on a full year basis, if you look at our fiscal 26 guidance, it reflects a year-over-year Improvement of 140, basis points after you adjust for the impact of assigning, the executive and corporate overheads costs to cause I talked a little bit about how we are making that, um, that change in the assignment, that's starting this year. Um, and so we do expect margin Improvement in both of our segments, um, connected Fitness segment, we expect to benefit from things like lower service and repair costs, lower warranty costs, and also some of the benefits associated with our FY 26 cost savings plan and then the sub.
In the subscription segment, we do expect to benefit from optimizations to our content production and music royalties expenses.
Super helpful. Thanks Liz. Thanks Peter.
Thank you. 1 moment for our next question.
And that will come from the line of Curtis Nagel with Bank of America. Your line is open,
Yeah. Great thanks. Uh, thanks very much for taking the question. Maybe just Switching gears a little bit. We touched on this a bit on the call but just thinking about Capital location and you know potential refi. You know that you guys have demonstrated you know, very strong even in cash flow. Um how are we thinking about that I guess in relation to the term loan?
Sure. So let me, let me just sort of recap a little bit on our Capital, allocation strategy and kind of where we've been and where we're going. So um, many of you may recall that in May of 24, we were approaching a maturity wall and we've successfully completed a 1.35 billion refinancing of our balance sheet. And then since that time, we have grown our adjusted debe de from 4 million in fiscal 24 to over 400 million in fiscal 2025. And we also generated over 320 million of free cash flow. So, with that progress, which we've been really pleased with, we have been able to quickly de-lever our balance sheet and our net debt has decreased 43% year-over-year.
Comes with a penalty of 1% or roughly million dollars and then that reduces to par in May of 26. So, you know, we are always looking at our, you know, optimizing our um, our our capital structure. Um, but we do want to be mindful of that, 10 million dollar penalty, which as we get closer and closer to May of 2600 opportunities we have, and we do believe that our much stronger balance sheet should enable us to achieve um better interest rates at the right time when we do. Um when we do restructure
Okay, got it. Um, then maybe just Peter a quick 1 for you. Just turn the sizing uh, commercial opportunity. You have a new, uh, working group dedicated to that. So, in terms of how material that could be to, you know, revenue of the results this year, um, just any any thoughts there?
Yeah, um, Curtis. Thanks the
The commercial business unit that we launched is already turned back to growth.
and uh, that that is
The consequence of the amazing work of the pre-court team in rebuilding relationships with, with gyms around the world. I love this combination.
Um, you've got basically Procore, which builds world-class, heavy-duty equipment for the commercial environment.
and,
Just as important as a service model that they've got, that's ideal for the high use environments, um, and the expectations of commercial gym operators.
And then you've got pelaton.
Um, with our magic formula, a beautiful high-quality equipment and software and human coaching. When you put those things together, you've got a foundation, um, in terms of the equipment software content and the services
That I just know 1 can match for Jim. You add to that the fact that procore is already in 80,000 facilities across 60 countries um pelaton in 20000. We haven't duped the whole thing, but we're talking about relationships with close to a 100,000 facilities around the world. Um, so when you, when you do what we're now we're working on which is you get to 1 combined sales force, with 2, powerful complimentary Brands, we we think commercial Fitness and Wellness is ours to win. And it, it is an important Vector for growth for us.
Okay, thank you.
1 moment for our next question.
And that will come from the line of Brian Nagel with Oppenheimer. Your line is open.
Hi, good morning. Thanks for taking my questions.
So, I want to balance, I apologize. I think this will be a little repetitive, but I do want to bounce back to the uh, the revenue guidance for the year.
The question I want to ask is as you've laid it out, you know, here in in fiscal q1 you know revenues expected for your guidance to be down to high single digits that improved through the year. So
What are you?
To help us understand better that guidance.
For the cheap ability of that guidance, can you point to anything you're seeing in the business? Now, that gives you that, you know, that that confidence and then I guess with that, you know, how should we think about, you know, the split, if you will between, you know, any any changes you plan to make on, on on subscription pricing, you know, versus, uh, new new new, new new member acquisition within that guidance.
Um Brian, why don't I I take a little bit of a a crack at this uh, because Liz sort of did the did the first pass at this question? So again, as you noted the first point is that uh,
From a revenue standpoint. If you look at q1 versus the rest of the year, we go from down,
At the midpoint minus 9 to at the rest of the year, you know, minus 2. So we are inflecting toward growth in the back part of the year.
Um, the
You know what are the vehicles for accomplishing that, right? It's it's growing the uh, our
Uh, new member acquisition, and you'll see that happening as a consequence of some of the innovations that we are not talking about today, but that, um, we will reveal before our next earnings call.
And we believe that will attract more new members to, uh, to the company. Alongside the fact that Q2 is usually a seasonally strong business. So, we hope to achieve sort of a, an acceleration of that.
Of that progress.
Um, it comes from higher Revenue per member.
New members.
Um,
You know, you're pushing on questions around a price change, and I guess what I would say is.
Uh, the best time to announce a price change.
If you're going to do that is when you've actually got um the value lined up looking both backwards and forwards.
And uh, looking backwards.
We are we are delivering tremendous value to our members and we feel great about where we are.
We've more than doubled our instructor-led programs since we lasted a price change over 3 years ago.
Uh, We've significantly increased our library of workouts.
We've done so much on strength, whether it's the launch of the strength Plus app, or whether it's launching, uh, new categories, like kettle bells, and weighted vests.
Um, we've expanded many of the features of our our product. Like we launched entertainment options, like YouTube and Disney plus and NBA league pass to our our product. Um, I've talked a lot about personalized plans. Um, and and we're, you know, now up to 700,000 of our members, uh, taking advantage of personalized plans, that are based on their goals and their preferences. So I think looking backwards
You know, we feel really great about the value we provided but but people, you know, a lot of members will feel like, well, I already got that. So,
What are you going to do for me going forward.
And I, today, am not going to talk about those sorts of things.
Um but when we do, I think, um, our members are going to be even more excited about what pelaton has to offer. So again I'm not going to comment anymore on on that particular topic except to just, you know, signal the the value we have we already delivered and intend to deliver
um, is being really positive, but there are those things, the other point that I, I'd like to make right, is that
There are a lot more ways of driving growth now for us as a business.
Right. Um,
selling a second or even a third connected, Fitness product to our existing subscribers.
I talked a moment ago about the revenue that we generate from our Commercial Business unit and we we're seeing so much momentum now.
Um, from from that unit.
Um, we're starting to, um, see some real, uh, interest in the marketplace on content licensing opportunities because there is simply nothing like Peloton out there in the world.
Um and uh so all of those basically aggregate up to uh give us the confidence that we can uh turn the tide.
On the revenue side.
I appreciate all the color. I'll leave it there. Thank you.
1 moment for our next question.
And that will come from the line of shweta. Kajura with wolf research, your line is open,
Thanks a lot for taking my questions. Um let me try 2 please um Peter thanks for the context on how felon could do all it sounds like there will be more details coming here in the next few months, but to the degree that you can comment on any. Um uh uh. So is felon going to the value? Proposition going to be 1 1 1 of a wellness app rather than a a fitness app. And if we are thinking about it that way, the value proposition, that will be added on. Um, are you thinking about offering different types of keying? Because if I just want to have a part of it, um, versus, you know, the the full full package and then the second is, the Tam has been big. I think it is pretty well, understood, in terms of how big your Tam is, 1 of the concerns has been adding new subscribers at the price point. So um, uh because it's a premium premium product. So could you please address that and in the past it has been Fitness as a service and or certified refurbished. Are those going to still be? Um
A a strategies that you you're going to be doubling down on or or where do those stand. Thanks a lot.
Well, that's great. Lots to cover their
Um so I I want to start with the fact that cardio is and will continue to be the foundation for uh, for pelaton. Um, as it is the foundation for uh, our members achieving their, their health and wellness outcomes.
Uh, and our leadership in that space.
and the trust that we've built with our members in that category are what um, entitle us
To be able to offer these additional um, opportunity additional offerings.
Um, so right now strength is already a key part of our approach. Uh, if you were to if you were to listen to, you know, the CDC, they will tell you that a mix of cardio and strength is optimal for adult Fitness.
Engaging in our strength. Uh classes again, this quarter.
Uh, and so we've been uh, we've been doing even more in that in that area. I talked about kettlebell classes, um, the dedicated strength Plus app which now allows you to take pelaton into the gym. Uh, we're involving our software capabilities and strengths space. And we'll have some very exciting updates in that area coming soon.
Um,
mental well-being. Um, we continue to see strong levels of Engagement in our meditation classes. And as I indicated a little while ago um we have something cool coming along those lines that I can't wait to tell you more about.
Um, that I think will make a big difference for people and and it'll help with sleep as well.
And then we're we're basically using our, our content team as a as an R&D lab on nutrition.
So, in Q4, we launched, our pelaton kitchen series on social media. Um, we've been working in partnership with Dr. Jaime Sher, who's an expert nutritionist and dietician. And we're going to be testing and iterating on nutritional content over time.
In terms of your questions, then on, um, uh, their number of them that followed from that Shredder. So with regard to tearing um we we already do have a tearing structure between app 1. Um, at plus we've got the strength Plus app that's available. Alloc cart. Um, and those we think are uh, really nice gateways.
For people to discover pelaton and ultimately ladder up to the all access membership, um, with regard to, um, uh, our Tam. As I, I discussed earlier there, there is a big, you know, there is a 117 million people, who, who, um,
Are who spend money in the category and have the um capability to invest in our our type of equipment. But there's big gap between that and the people who are ready for subscription
uh, and so, it's important for us to be able to tell our story and to reignite The Innovation engine that excites people in the way that, uh, pelaton once did and, and most certainly will
um,
In the very near future with regard to and by and by the way in. So doing, we will essentially closed the gap between the 1717 million and that's where there's so much opportunity for us.
With regard to uh, fast and refurbished, we are committed to both of those programs.
Um, as well as to the secondary Market, which is contributing a very large fraction of our new members, essentially, what what you see here and this is the, the tearing of our equipment prices is that without having to produce.
in the case of particularly, of our bikes without having to produce a
Uh, a lower-end bike. We're able to use our premium products and, uh, and use the combination of, uh, the refurbishment and that secondary Market to offer, a lower price access point for people, and because we build that equipment to last
um it's uh basically as good as new
For secondary owners. Uh, so uh, yeah, we're committed to all of those and I appreciate the, the cam, the question,
Right now at the bottom of the hour here, uh Sherry I'll ask the last question it comes from Debbie in New York, leaderboard name, get busy living. And Debbie asks, what are some of your strategies and ideas for keeping pelaton? Interesting exciting, particularly for loyal and longtime users Peter
Um, Debbie thank you. I love that question because I'm 1 of them too.
Um, I'm approaching my ninth year anniversary as a pelaton member in September.
Um, so, um, and and there are occasions when I find myself just getting in the Rut of like, my, you know, my my go-to instructors, uh, and just doing the latest classes from them. Uh, but fortunately, I'm privy to all the amazing things that we're doing here. So here's here's, uh, some advice and this is what I've been doing 1. Try to Branch out and uh, we support about 15 different disciplines and that's not just good for keeping your interest.
Interest in pelaton is good for your, it's good for your body. Um, it's good for your mind. So, do strength in addition to cardio. Um, if you belong to a gym, please download and try the strength Plus app. It's amazing, um, add in meditations, um, whether you're doing them a daytime during the daytime for Focus, or whether you're doing it at night time, to help you sleep, um, it'll reduce your stress, it might might even improve your interpersonal relationships.
Um, try 1 of our new approaches like weighted vest classes or kettlebell workouts, um, again Branch out on the instructors. Um, I've had the privilege of meeting all of them. We have more than 50 remarkable instructors in every, 1 of them is an inspirational expert. Um,
Around your schedule and then what the personalized program will do is it'll recommend a mix of both newer and older classes. Um, that'll help you achieve your goals faster. Um, definitely join a team, I'm a member of 1 of them.
Um, and uh, that is basically now this supportive environment. Um, it's a, it's like a safe social network that gives you tips on what works for other people. And, um, encouragement. And we also recently just added the ability in the teams, um, feed to link to workouts. So, our our members are now recommending workouts to each other, which is awesome. Um, if you can afford it, um, add another piece of our equipment into the mix. I know that sounds self-serving, but
It's, uh, if you add, let's say a, you're recycling, die-hard, and you add Tread or Row into your routine, it's going to activate different muscles for you, both physically and mentally. Um, and then last but not least, since you're a longtime member like me, I think you're going to really appreciate the work that we're doing to recognize and reward healthy habits and loyalty to our community. So that's one of the cool things we're going to be announcing really soon, and it's going to grow over time. So all that, uh, with all that, um, stay with it, Debbie, stay tuned, and I welcome your feedback as we share more great. I want to thank everyone for joining us today. Uh, have a good day. Thank you.
This concludes today's program. Thank you all for participating. You may now. Disconnect