Peloton(PTON) - 2024 Q3 - Quarterly Results

Shareholder Letter Introduction Q3 Performance and Strategic Priorities Peloton's Q3 performance reflects continued leadership in connected fitness and the strength of its subscription business, achieving positive Free Cash Flow for the first time in over three years, alongside a new restructuring program to reduce annual expenses by over $200 million and a 15% team reduction, while actively pursuing debt refinancing - Q3 performance reflects continued leadership in the connected fitness category and the strength of the subscription business, serving over 6 million Members[1] - Achieved positive Free Cash Flow for the first time in over 3 years in Q3 FY24[1] - Announced a new restructuring program to reduce annual expenses by more than $200 million, aiming to align cost structure with business size and generate sustained positive Free Cash Flow[2] - Expect to reduce team size by approximately 15%, or roughly 400 global team members, with full run-rate savings by the end of fiscal 2025[2] - Reimagining international go-to-market approach, reducing retail showroom footprint, and investing in innovation across software, hardware, content, and member support[3] - Working with lead banks (JP Morgan, Goldman Sachs) and financial advisor (BDT & MSD Partners) on a debt refinancing strategy to deleverage and extend maturities[4] Quarterly and Recent Highlights Connected Fitness Products and Channels Q3 marked the successful re-launch of Tread+, with 67% of pre-orders delivered, while the Bike Rental program continued to outperform expectations with a 10% Y/Y increase in new rentals and a 60 bps Q/Q churn improvement, alongside strong growth in refurbished and third-party retail sales and expanded availability on Amazon - Q3 marked the restart of delivering Tread+ to Members, with 67% of pre-orders delivered in the quarter[6] - Bike Rental new rentals were up 10% Y/Y, and churn from rental subs improved 60 bps Q/Q[6] - Peloton Certified Refurbished and third-party retail sales had strong growth Y/Y[6] - Began selling the Peloton Tread and Peloton Row on Amazon to distribute products to a larger audience[6] - Launched the Peloton History Summary to enhance the secondary market buying experience and provide visibility into bike age, usage, and service histories[7][8] Peloton for Business Peloton announced a new partnership with Hyatt Hotels, involving outfitting over 800 Hyatt properties with Peloton equipment and providing access to Peloton classes on guestroom TVs at nearly 400 properties, expanding Peloton's reach in existing markets - Announced a partnership with Hyatt Hotels to outfit more than 800 Hyatt properties with Peloton equipment and provide access to Peloton classes on guestroom TVs at nearly 400 properties[9] Content Innovation Peloton continues to invest in diverse fitness experiences, introducing the New York Road Runner Collection on Tread and Tread+ with auto-incline functionality, and seeing growing engagement with Entertainment offerings, with over one-third of active Tread and Tread+ subscribers completing an Entertainment workout in Q3 - Added the New York Road Runner Collection on Tread and Tread+, providing auto-incline functionality that matches the TCS New York City Marathon course's gradient fluctuations[10] - More than one-third of active Tread and Tread+ subscribers completed an Entertainment workout in Q3[10] Member Experience In response to member feedback, Peloton launched Self Moderation features and Distance Tracking for App treadmill workouts, leading to positive results in service levels and member satisfaction, as evidenced by improved Net Promoter Scores across multiple connected fitness products - Launched Self Moderation features, allowing Members to hide tags and other profiles, and Distance Tracking for treadmill workouts on App[11] - Seeing positive results in service levels and member satisfaction, with observed improvements in Net Promoter Scores (NPS) across multiple connected fitness products[11] Q3 FY24 Performance Overview User Metrics Peloton ended Q3 FY24 with 3.06 million Paid Connected Fitness Subscriptions, a net increase of 52 thousand, with churn at 1.2%, while Paid App Subscriptions saw a net reduction of 44 thousand to 674 thousand due to lower additions and higher churn, despite a 2.4% Q/Q increase in App subscription revenue driven by premium App+ subscriptions | Metric | Q3 FY23 | Q2 FY24 | Q3 FY24 | % Change Y/Y | % Change Q/Q | | :-------------------------------------------- | :------ | :------ | :------ | :----------- | :----------- | | Members (in millions) | 6.7 | 6.4 | 6.6 | (1)% | 3 % | | Ending Paid Connected Fitness Subscriptions (in millions) | 3.055 | 3.004 | 3.056 | 0 % | 2 % | | Average Net Monthly Paid Connected Fitness Subscription Churn | 1.1 % | 1.2 % | 1.2 % | 10 bps | 0 bps | | Ending Paid App Subscriptions (in millions) | 0.853 | 0.718 | 0.674 | (21)% | (6)% | | Average Monthly Paid App Subscription Churn | — | 7.2 % | 9.2 % | — | 200 bps | - Ending Paid Connected Fitness Subscriptions increased by 52 thousand in the quarter to 3.06 million, with Average Net Monthly Paid Connected Fitness Subscription churn at 1.2%[14] - Ending Paid App Subscriptions decreased by 44 thousand to 674 thousand, primarily due to lower additions (underperformance in Peloton for Business, softer trial demand) and higher churn (9.2%) from expiring legacy pricing[15] - Paid App subscription revenue increased 2.4% Q/Q, driven by continued growth in premium App+ subscriptions, despite a decline in Paid App Subscriptions[16] Financial Results In Q3 FY24, Total Revenue was $717.7 million, with Total Gross Profit reaching $309.7 million (43.1% margin), and Total Operating Expenses decreasing 15% Y/Y to $455.9 million, resulting in positive Net Cash Provided by Operating Activities ($11.6 million) and Free Cash Flow ($8.6 million) for the first time in 13 quarters | Metric | Q3 FY23 | Q2 FY24 | Q3 FY24 | % Change Y/Y | % Change Q/Q | | :------------------------------------ | :------ | :------ | :------ | :----------- | :----------- | | Connected Fitness Products Revenue | $324.1 | $319.1 | $279.9 | (14)% | (12)% | | Subscription Revenue | 424.7 | 424.5 | 437.8 | 3 % | 3 % | | Total Revenue | $748.9 | $743.6 | $717.7 | (4)% | (3)% | | Connected Fitness Products Gross Profit | $(17.6) | $13.8 | $11.6 | 166 % | (16)% | | Connected Fitness Products Gross Margin | (5.4)% | 4.3 % | 4.2 % | 960 bps | (20) bps | | Subscription Gross Profit | $287.8 | $285.6 | $298.1 | 4 % | 4 % | | Subscription Gross Margin | 67.8 % | 67.3 % | 68.1 % | 30 bps | 80 bps | | Total Gross Profit | $270.2 | $299.4 | $309.7 | 15 % | 3 % | | Total Gross Margin | 36.1 % | 40.3 % | 43.1 % | 710 bps | 290 bps | | Total Operating Expenses | $536.2 | $486.5 | $455.9 | (15)% | (6)% | | Net Loss | $(275.9) | $(194.9) | $(167.3) | 39 % | 14 % | | Adjusted EBITDA | $(18.7) | $(81.7) | $5.8 | 131 % | 107 % | | Net Cash (Used in) Provided by Operating Activities | $(40.9) | $(31.2) | $11.6 | 128 % | 137 % | | Free Cash Flow | $(55.3) | $(37.2) | $8.6 | 116 % | 123 % | - Total Revenue for Q3 FY24 was $717.7 million, within the guidance range of $700 million to $725 million[17] - Total Operating Expenses decreased by $80.3 million Q/Q and $80.3 million Y/Y to $455.9 million, primarily driven by a $96.1 million decrease in General and Administrative expense Y/Y[19] - Recognized $56.6 million of Impairment and Restructuring expense in Q3, with $20.7 million being non-cash related to asset write-downs for retail showroom exits[20] - Achieved positive Net cash provided by operating activities ($11.6 million) and Free Cash Flow ($8.6 million) for the first time in 13 quarters[21] FY24 Outlook Full Year Outlook Peloton has lowered its full-year outlook for Ending Paid Connected Fitness Subscriptions by 1% to 2.97 million and for Ending Paid App Subscriptions by 19% to 605 thousand, consequently lowering full-year Revenue guidance by 1% to $2.687 billion, while raising Total Gross Margin outlook by 50 basis points to 44.5% and Adjusted EBITDA outlook by $37 million to negative $13 million, with expectations for modest positive Free Cash Flow in Q4 | Metric | FY23 | Low | High | Y/Y % Change | | :-------------------------------------------- | :----- | :---- | :---- | :----------- | | Ending Paid Connected Fitness Subscriptions (in millions) | 3.00 | 2.96 | 2.98 | (1)% | | Ending Paid App Subscriptions (in millions) | 0.83 | 0.60 | 0.61 | (27)% | | Total Revenue (dollars in millions) | $2,800.2 | $2,675.0 | $2,700.0 | (4)% | | Total Gross Margin | 33.0% | 44.5% | 44.5% | 1,152 bps | | Adjusted EBITDA (dollars in millions) | $(208.5) | $(20.0) | $(5.0) | 94% | - Lowering full-year outlook for Ending Paid Connected Fitness Subscriptions by 30 thousand (1%) to 2.97 million and for Ending Paid App Subscriptions by 150 thousand (19%) to 605 thousand[23][24] - Full-year Revenue guidance lowered by $25 million (1%) to $2.687 billion[25] - Raising full-year outlook for Total Gross Margin by 50 basis points to 44.5%, primarily due to a revenue mix-shift toward the Subscription segment[25] - Raising full-year Adjusted EBITDA outlook by $37 million to negative $13 million, driven by Q3 outperformance, lower media spend, and cost reductions from the restructuring plan[25] - Expect to deliver modest positive Free Cash Flow in Q4[25] Leadership Transition CEO Departure and Interim Leadership Peloton announced that Barry McCarthy is stepping down from his roles as CEO, President, and Board Director, with current Board Members Karen Boone and Chris Bruzzo serving as Interim Co-CEOs - Barry McCarthy is stepping down as CEO, President, and Board Director from Peloton[27] - Peloton Board Members Karen Boone and Chris Bruzzo will serve as Interim Co-CEOs[27] Legal & Disclosures Safe Harbor Statement This section contains a standard safe harbor statement, indicating that the shareholder letter includes forward-looking statements regarding future financial results, restructuring benefits, product launches, and market growth, which are subject to various risks, uncertainties, and assumptions that could cause actual results to differ materially from expectations - The shareholder letter contains forward-looking statements regarding expected financial results, restructuring initiatives, product launches, and future operating performance, covered by safe harbor provisions[30] - These forward-looking statements are subject to risks, uncertainties, and assumptions, including the ability to achieve profitability, attract and maintain Subscribers, manage growth and costs, compete effectively, and refinance debt[31] Financial Statements Condensed Consolidated Balance Sheets As of March 31, 2024, total assets decreased to $2,408.5 million from $2,769.1 million at June 30, 2023, primarily driven by a reduction in inventories, while total liabilities slightly decreased, and the total stockholders' deficit widened | Asset/Liability | March 31, 2024 | June 30, 2023 | | :------------------------------------ | :------------- | :------------ | | Cash and cash equivalents | $794.5 | $813.9 | | Inventories, net | 354.4 | 522.6 | | Total current assets | 1,421.0 | 1,639.1 | | Total assets | $2,408.5 | $2,769.1 | | Total current liabilities | 745.5 | 761.4 | | 0% Convertible senior notes, net | 991.4 | 988.0 | | Term loan, net | 692.1 | 690.9 | | Total liabilities | 2,998.9 | 3,064.2 | | Total stockholders' deficit | (590.4) | (295.1) | - Total assets decreased from $2,769.1 million at June 30, 2023, to $2,408.5 million at March 31, 2024, with inventories decreasing from $522.6 million to $354.4 million[34] - Total liabilities decreased from $3,064.2 million to $2,998.9 million, while stockholders' deficit widened from $(295.1) million to $(590.4) million[35][36] Condensed Consolidated Statements of Operations and Comprehensive Loss For the three months ended March 31, 2024, total revenue was $717.7 million, with gross profit increasing to $309.7 million and total operating expenses decreasing significantly to $455.9 million, leading to a substantial narrowing of the net loss to $(167.3) million, compared to $(275.9) million in Q3 FY23 | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Connected Fitness Products Revenue | $279.9 | $324.1 | $779.6 | $909.8 | | Subscription Revenue | 437.8 | 424.7 | 1,277.3 | 1,248.3 | | Total revenue | 717.7 | 748.9 | 2,056.9 | 2,158.1 | | Total cost of revenue | 408.0 | 478.7 | 1,162.4 | 1,435.6 | | Gross profit | 309.7 | 270.2 | 894.5 | 722.4 | | Total operating expenses | 455.9 | 536.2 | 1,360.1 | 1,693.8 | | Loss from operations | (146.2) | (266.0) | (465.7) | (971.3) | | Net loss | $(167.3) | $(275.9) | $(521.4) | $(1,019.9) | | Net loss per share, basic and diluted | $(0.45) | $(0.79) | $(1.44) | $(2.97) | - Net loss for the three months ended March 31, 2024, significantly narrowed to $(167.3) million from $(275.9) million in the prior year period[38] - Total revenue for Q3 FY24 was $717.7 million, with Subscription Revenue increasing to $437.8 million (from $424.7 million YoY) and Connected Fitness Products Revenue decreasing to $279.9 million (from $324.1 million YoY)[38] Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2024, net cash used in operating activities significantly improved to $(98.8) million, compared to $(332.2) million in the prior year, primarily due to a reduced net loss and favorable changes in inventories, while investing activities generated $33.5 million in cash | Cash Flow Activity | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :--------------------------------------------------- | :------------------------------- | :------------------------------- | | Net loss | $(521.4) | $(1,019.9) | | Net cash used in operating activities | $(98.8) | $(332.2) | | Net cash provided by (used in) investing activities | 33.5 | (51.4) | | Net cash provided by financing activities | 29.0 | 70.0 | | Net change in cash, cash equivalents, and restricted cash | $(36.7) | $(304.7) | | Cash, cash equivalents, and restricted cash — End of period | $848.7 | $952.9 | - Net cash used in operating activities significantly improved to $(98.8) million for the nine months ended March 31, 2024, compared to $(332.2) million in the prior year[40] - Investing activities generated $33.5 million in cash, a notable improvement from using $(51.4) million in the prior year, partly due to proceeds from asset sales[40] Non-GAAP Financial Measures Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure used to evaluate operating performance by excluding items such as total other expense, income tax, depreciation, stock-based compensation, impairment, restructuring, and certain litigation expenses, with Q3 FY24 Adjusted EBITDA reaching $5.8 million, a significant improvement from prior periods - Adjusted EBITDA is a non-GAAP measure calculated as net loss adjusted to exclude various non-operating and non-cash expenses, used to measure operating performance and leverage[44] | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Three Months Ended December 31, 2023 | Fiscal Year Ended June 30, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :------------------------------ | | Net loss | $(167.3) | $(275.9) | $(194.9) | $(1,261.7) | | Total other expense, net | 20.4 | 9.1 | 9.5 | 60.9 | | Income tax expense (benefit) | 0.6 | 0.8 | (1.7) | 3.7 | | Depreciation and amortization expense | 27.1 | 32.2 | 25.1 | 124.3 | | Stock-based compensation expense | 66.1 | 69.3 | 66.6 | 319.9 | | Impairment expense | 19.0 | 39.4 | 3.6 | 144.5 | | Restructuring expense | 37.6 | 12.0 | 13.9 | 193.0 | | Supplier settlements | (0.9) | 2.9 | (1.5) | 22.0 | | Product recall related matters | — | 9.7 | (6.5) | 80.9 | | Litigation and settlement expenses | 3.1 | 81.8 | 4.2 | 102.8 | | Other adjustment items | — | — | — | 1.0 | | Adjusted EBITDA | $5.8 | $(18.7) | $(81.7) | $(208.5) | - Adjusted EBITDA for Q3 FY24 was $5.8 million, a significant improvement from $(18.7) million in Q3 FY23 and $(81.7) million in Q2 FY24[48] Subscription Contribution and Subscription Contribution Margin Subscription Contribution, a non-GAAP measure, is defined as Subscription revenue less cost of Subscription revenue, adjusted for depreciation, amortization, and stock-based compensation, and in Q3 FY24, it was $316.4 million with a 72.3% margin, indicating effective scaling of fixed content creation costs - Subscription Contribution measures the ability to scale and leverage the costs of Connected Fitness Subscriptions, excluding depreciation, amortization, and stock-based compensation from cost of revenue[49] | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Three Months Ended December 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | | Subscription Revenue | $437.8 | $424.7 | $424.5 | | Less: Cost of Subscription | 139.8 | 136.9 | 139.0 | | Subscription Gross Profit | $298.1 | $287.8 | $285.6 | | Subscription Gross Margin | 68.1 % | 67.8 % | 67.3 % | | Add back: Depreciation and amortization expense | $8.5 | $9.8 | $8.7 | | Add back: Stock-based compensation expense | $9.9 | $9.7 | $10.0 | | Subscription Contribution | $316.4 | $307.2 | $304.3 | | Subscription Contribution Margin | 72.3 % | 72.3 % | 71.7 % | - Subscription Contribution Margin was 72.3% in Q3 FY24, consistent with Q3 FY23 and an improvement from 71.7% in Q2 FY24, indicating effective scaling of fixed content creation costs[52] Free Cash Flow Free Cash Flow, a non-GAAP liquidity measure, is calculated as Net cash provided by (used in) operating activities less capital expenditures and capitalized internal-use software development costs, and in Q3 FY24, Peloton achieved positive Free Cash Flow of $8.6 million, marking the first positive quarter in 13 quarters - Free Cash Flow is defined as Net cash provided by (used in) operating activities less capital expenditures and capitalized internal-use software development costs, providing insight into liquidity[53] | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Three Months Ended December 31, 2023 | | :--------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | | Net cash provided by (used in) operating activities | $11.6 | $(40.9) | $(31.2) | | Capital expenditures and capitalized internal-use software development costs | $(3.0) | $(14.3) | $(6.0) | | Free Cash Flow | $8.6 | $(55.3) | $(37.2) | - Free Cash Flow was positive $8.6 million in Q3 FY24, marking the first positive Free Cash Flow in 13 quarters, a significant improvement from negative $(55.3) million in Q3 FY23[55]