Peloton Interactive Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Peloton Interactive 1Q24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Peter Stabler, Head of Investor Relations.

Speaker 1

Good morning, and welcome to Peloton's Q1 fiscal 2024 conference call. Joining today's call are CEO, Barry McCarthy CFO, Liz Huntington and Chief Marketing Officer, Leslie Berlin. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, Please refer to our SEC filings and today's shareholder letter, both of which can be found on our Investor Relations website.

Speaker 1

During this call, we will discuss both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP financial measures is provided I'll now turn the call over to Barry McCarthy.

Speaker 2

Good morning, everyone. Thanks for joining us. In a break with tradition, I invited Leslie Brolin to join us knowing that growth is on everyone's mind. And this begins a process whereby in future calls from time to time, you can expect me to invite into the room other So that you have an opportunity to gain exposure to them and they have an opportunity to gain exposure to you and you can hear firsthand from them about different aspects of how the business is being operated. And with that, we'll open the phones to questions, Josh.

Operator

Thank you. Our first question comes from Doug Anmuth with JPMorgan. You may proceed.

Speaker 2

Thanks for taking the questions. I have 2. First, you have a number

Speaker 3

of different growth initiatives going. Just as you think about your forecast for revenue growth and positive EBITDA and substantial free cash flow in the back half of the fiscal year, can you just help us rank the 2 to 3 biggest drivers across these various initiatives. And then secondly, how do you think about timing for the Lululemon partnership to benefit

Speaker 2

Jump in on the drivers, do you want to take it? I'll take it. Well, let's see. From my perspective, with respect to the drivers, Couple of things. One is, we're going to reintroduce the TreadPlus this quarter and began taking preorders.

Speaker 2

And that will be If we're successful, that will be a big driver of incremental cash flow and revenue for us. Remember, we have all of that inventory in warehouse already and fully paid for and have since before I walked in the door. So that would be thing 1. Thing 2 is continued success growing app related subscribers. And I'm sure we'll have more questions about how we're thinking about that opportunity on a go forward basis.

Speaker 2

And then we need to continue to have success with the core All Access membership. But I think our Growth projections are reasonably conservative in that regard. So that's why I'm thinking about the growth initiatives. In terms of Lululemon, that's live And we are benefiting from it as we speak. So Actually nothing more to say About the economics of that on a go forward basis.

Speaker 4

Yes. The one thing I can add on Lululemon is that, we just started Having our content available for the Lululemon studio members who have a mirror that actually went live yesterday on November 1st. And so as far as receiving the revenue sharing benefit from that agreement that we have with Lulu that started effective in November. And we expect roughly I could give you a sense of the size for the quarter, roughly about $10,000,000 of revenue for Q2 coming from that subscription revenue Thank

Speaker 2

you. There is an apparel component to it. It started Phenomenally, strongly, I was kind of inarticulate. Then an initial launch in Chicago, we drove a tremendous amount of store traffic for them, A huge increase in apparel sales for us, and we'll be working on a More complete integration of that opportunity and that will be a little slower to develop over time.

Speaker 3

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Shweta Khajuria with Evercore ISI. You may proceed.

Speaker 5

Okay. Thank you for taking my questions. Could you please talk about the promotion environment this year versus last year and any change in your strategy in terms of running promotions this year, length of time, the depth of promotions, any comments on that, please? And then the second is, How should we think about your guidance for the quarter and for the full year? Puts and takes that are baked into or the assumptions that are baked into your guidance and any potential What impact from these new partnerships are you accounting for in your guidance for the full year?

Speaker 5

Thank you.

Speaker 2

Let me say just a brief intro. I'll turn it over to Leslie to talk about thoughts about the promo environment for the current quarter. And Liz will take the last part of the question. So I think I'm right on a Q over Q basis, for the quarter completed, we had a higher ASP and we're less on promotion than we were a year ago. We were higher by 3% something like that.

Speaker 2

So and you saw that reflected In the improvement in gross margin on a year over year basis and 31% increase in gross profit that helped deliver in the quarter. You want to talk about the holiday?

Speaker 6

Yes, absolutely. Happy to be on the call. I think we're very excited as we embark on holiday and we always bring Exciting value to both our members and new customers as well. I think what's interesting to also mention is how we bring these promotions to life. So we've really learned a lot over the Couple of months around digital and social media marketing and specifically creator and influencer marketing, which really reframes and contextualizes Both this value as well as the promotion, so we're seeing really strong traction in all of our work in this space and you will absolutely see this come to life during holiday.

Speaker 6

The other part I'll mention is you read in the shareholder letter around our partnerships. Much of our partnership work It's starting to take form at the exact same time, NBA being in a sample Michigan as well. So there's a great sort of coming together of all these initiatives in the next Okay.

Speaker 4

So I'm going to go ahead and take the question about guidance for Q2 and the full year. So our Q2 guidance reflects what I believe to be a balanced view based on the macroeconomic outlook. In fact, that there is some uncertainty around the performance in the holiday season, but it does reflect a few things. So I want to It does reflect seasonality of our hardware sales, the fact that Q2 is a heavier hardware sales quarter for us, seasonally given all the holiday promotional activity. It's also a quarter where we expect to see surprisingly an improvement in maybe not surprisingly, Improvement in our Connected Fitness gross margin and some of the reasons for that, and our overall gross margin is coming down seasonally as you would Connected Fitness is actually going to be up in part because of fixed cost leverage that we expect to have from the higher Connected Fitness unit sales.

Speaker 4

And we also expect a slight mix shift away from our bike rental relative to Q1 because we expect our rental take rates to be a little lower driven by the fact that we will have the high promotional activity in the quarter. And then, in addition to that, that is For the holiday season, it's important to understand that that media spend actually supports growth in both Q2 as well as Q3. So the timing of that is reflected in the adjusted EBITDA guidance. Now you had asked about partnerships. The way that we are thinking about these partnerships is they are just getting So there's not really an implicit benefit baked into our guidance for subscribers directly as a result of a lot of these partnerships in The one thing that I called out earlier about Lululemon would be the exception to that.

Speaker 4

And so we will as we Build out these partnerships and the structures start to take shape and we gain more traction, we'll be incorporating more of that into perhaps future quarters of guidance. Now for the full year, I want to call out a couple of things. Our back half of the year forecast reflects the fact that we expect to see revenue growth acceleration in Q2 and Q3. If you also look at our gross margin that we're targeting for the full year, that also reflects the fact that our Q3 and Q4 gross margins are expected to be higher and a lot of that is driven by the fact that, in addition to the mix shift between subscription and hardware sales, we do expect to And benefit as Barry called out earlier from the reintroduction of TreadPlus. But I do want to call out that we that is a new launch for us.

Speaker 4

There is some uncertainty baked into our guidance around it and the performance of the back half of the year.

Speaker 5

Okay. Thank you. Thank you, everyone.

Operator

Thank you. One moment for questions. Our next question comes from Ron Josey with Citi. You may proceed.

Speaker 7

Great. Thanks for taking the question. I wanted to ask a little bit more about engagement trends. Barry, in the letter, you talked about An increase in monthly subscription engagement in the quarter and members engaging with longer classes. Do you think that has to do with more of a seasonal usage Pattern or just Peloton's strategy of being everywhere and everywhere, and with longer and more types of us a little bit more just about brand perception and what we're doing to increase that over time?

Speaker 7

Thank you.

Speaker 2

Well, the 6% increase in engagement amongst All Access subscribers is year over year. So it's not a Seasonal trend and Liz correct me if I'm wrong, I think it's 12% year over year for app engagement as well. So I think it reflects some progress on personalization, Continued great execution, like Jen Kotter and her content team and the preferences of the members. So, If we're programming our classes well and if more people are taking longer classes, it's because They're choosing to and we're producing enough of them and enabling them to discover them on the platform in a way that better serves their interests.

Speaker 4

I do want to correct one thing really quick. The 6% includes both the Connected Fitness and the app subscribers total for engagement.

Operator

Thank you. One moment for questions. Our next question comes from Anisha Sherman with Bernstein. You may proceed.

Speaker 8

Thank you. Two questions from me, please. The first one is on inventory. So as you're continuing to clear inventory, what is the normalized level of hardware gross margins you think the business I know you've talked about double digit underlying margins. Does that view change now with the growth of FaaS in the mix?

Speaker 8

And then I have a quick question on POP. You took an impairment of $31,000,000 Can you give us an update on the work being done on that and what you're expecting as the outcome? And are you still

Speaker 4

So I can take the question on POP first. In the quarter, we actually took an impairment of only $15,000,000 in this particular quarter. So we are still looking to sell POP. We are talking to a variety of interested parties and we hope to have it Hope to be able to sell it soon, but we are still working on that. On the other question, which was related to inventory and normalized Hardware gross margins.

Speaker 4

We do expect to see so we are moving into a more normalized Inventory position. We've been purchasing inventory as we prepare for the holiday season. And I did want to comment about the fact that In Q1, it was a use of cash and in Q2 to Q4, we expect to have a bit of a tailwind on inventory. But by the end of the year, we expect to be pretty normalized with regards to inventory and the seasonal cash flows that the business is accustomed to or has been historically accustomed to. Now in terms of gross margin, we are seeing some benefit on the fact that we are moving into that more normalized inventory position.

Speaker 4

We don't to have any more write offs of inventory. We'll be able to better manage our reserves. And then we do have On a unit economics basis excluding promotions, all of our SKUs are a double digit gross margin positive aside from the guide.

Speaker 8

Okay. And can you talk about how the impact of SaaS might change the normalized gross margins going forward?

Speaker 4

Yes. So, let me so a little bit about FAST. So from the In terms of the impact on gross margin in Q1, FAST was less than 10 basis points impact on our overall gross margin. So relative to the size of FAST Compared to the overall size of our business, it's a bit of a drag, but not a huge drag on gross margins. The reason that FAST impacts our gross margin It's because of mainly because of the fact when people join fast, they pay a fee for the delivery and our cost to deliver that hardware is more expensive and the actual delivery charge that we charge to the customer.

Speaker 4

And so as we grow that part of the business, you see that impact to gross margin in the 1st month of the SaaS subscription.

Speaker 8

Really helpful. Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Eric Sheridan with Goldman Sachs. You may proceed.

Speaker 9

Thanks so much for taking the questions. Maybe 2 if I could. In terms of FaaS, has there anything you've learned so far in the subscription side that we might see you extend out subscription options into other Connected fitness hardware products over time, I'm thinking around elements of relaunching Tread and trying to come back to market with that with maybe a new Messaging, that will be number 1. And then I just want to make sure we understand the messages on the app strategy and what you're seeing. In terms of Applying marketing dollars and ROI, how would you characterize the success you've had in terms of the free tier of the application layer versus The paid tier and elements of how the conversion funnel continues to sort of evolve for the application strategy.

Speaker 9

Thanks so much.

Speaker 2

Let me jump in on FaaS and I'll say a few words about App Strategy and then ask Leslie to I think it's unlikely that we will extend SPAT At least the treads and treadmills because that installation is more complex Ben, Ben, is it possible that we might extend it to row possibly, but it's still quite early in the lifecycle of that product. And I think we have more to learn before we would consider doing that. So I think the and then lastly, I would say there We have our hands full with the growth opportunity that BaaS currently presents at 90% plus year over year. And having just opened up Germany where it right out of the box, very small numbers, but right out of the box going really fast, Much faster than we were forecasting. So There's plenty for us to chew on on pass with just the current business model, I think is the macro point.

Speaker 2

As it relates to the app strategy, The marketing team was enormously successful in driving huge volumes into free. We were not successful in seeing conversion of those free into the paid funnel, which was why we pivoted in the quarter Back to focusing on the paid app And the on ramp there is free trial and there we have had terrific success and we're seeing higher price points Then we were forecasting significantly higher take rates of the App Plus sub at $24 And we were expecting a heavier mix of the $12.99

Speaker 6

Yes. And I'll just jump in a little bit to Provide context on the strategy and some of the interesting data points that we saw. So again, the goal including this app is to energize our core member base And to attract new and underpenetrated demographics that have historically not been, as I said, as penetrated for Peloton. And App gave us an amazing opportunity and the pre App message gave us an amazing opportunity when we rebranded the company and relaunched the brand. What we saw to Barry's point was obviously a massive volume of downloads.

Speaker 6

And what's interesting about that tied to the objective is we brought

Speaker 7

in new demographics.

Speaker 6

So we brought in So we brought in lots of people who represented what you would consider our core member base, but you saw movement and significant Both in free and paid for demos including men, Gen Z, class and others. So these are the areas and again going back to our partnerships where you will see us continuing to invest and to drive relevance and engagement, both on our current numbers that represent those demographics, but also new for growth.

Speaker 9

Thank you.

Operator

Thank you. One moment for questions. Our Our next question comes from Lauren Schenck with Morgan Stanley. You may proceed.

Speaker 10

Hey, everyone. This is Nathan Feather on for Lauren. I guess, can you give us an update on how rental Churn has progressed. And are you seeing that decline as we anticipated a few months ago? And then how should we think about the range of outcomes you're now considering for the kind of steady state of churn there?

Speaker 4

Got a little bit garbled, if you wouldn't mind repeating that.

Speaker 10

Yes. Just how should we think about the new range of outcomes to the steady state of churn rate, kind of over the long term? Thank

Speaker 4

you. I can take this one. So, in terms of Churn for our rental subscription model for FaaS. We actually in Q4, we talked about the fact that we had an It can churn with regard to the Seapost recall and we saw that for FAS as well, but we have seen it come down substantially from the high in Q4 roughly by 100 basis But it is still higher than our All Access regular member of churn. Now your other question, I think, was about just Churn in general and what we did see if you remember, we did see an uptick in churn with regard to the The bike seat post with the increase in pause numbers, we are seeing our we saw our churn come down as people are unpausing and then also with regard And we expect to see our churn rates come down in Q2 and Q3 as well.

Operator

I want to spend a

Speaker 2

minute and talk about the changing mix The sub base rejoins and then the core All Access members and growth And rental, so that as the mix changes over time people can

Speaker 4

Yes. So overall, we do see We see different churn rates for these different types of Peloton subscribers. So we've got our regular all access numbers who purchase new hardware from us. Then we've got the bike rental model for our rental subscribers. And then we have a 3rd group, which is secondary market, which is people who decide to buy their hardware from someone else on a marketplace that we are not facilitating that sale and it's generally used hardware.

Speaker 4

So for our regular All Access member base, We see the lowest churn rate, in the low it obviously varies a bit seasonally, but it's the lowest closer to one I don't have the exact number in front of me for that group. 1.4.1. This last quarter, yes, probably 1.4.1.5 ish, little less. Then we have the secondary market group, which actually has a higher churn rate. They are more in the 2, 2.5 ish range.

Speaker 4

And then we have the bike rental group, which is more in the 5% to 6% -ish range over the seasonality of that group.

Speaker 2

Just been a minute talking about secondary market. That has grown pretty dramatically.

Operator

And

Speaker 2

What's the source? It's a Peloton All Access member who canceled, so they showed up in our turn numbers. On average within 6 months, a bike is sold, let's use a bike, a bike is sold in the secondary market. Someone purchases that bike and they come to us and become an All Access member. And so, as our core business continues to grow, the secondary market is growing even faster.

Speaker 2

It means that, let's call it, 1.4% turn rate on all Access members actually really on a net basis It's lower, and it means that 1. 2, it also means that our average churn rate, The reported average churn rate is going to go up, if the secondary market continues to grow faster than the new sales market, Even if the individual cohorts are behaving

Speaker 11

the way they have historically,

Speaker 2

Excuse me, even if the turn rate for secondary members remains steady. And so you ought not to be alarmed if you see it increase Congrats will be because of the mix change. If the cohorts deteriorate, we'll let you know

Operator

One moment for our next question. Our next question comes from Andrew Boone with JMP Securities. You may proceed.

Speaker 11

Good morning and thanks so much for taking my questions.

Speaker 1

I wanted to ask

Speaker 11

if there were any callouts on OpEx this quarter? And then as we think about the EBITDA guidance for the rest of the year, it implies a decline in OpEx in the back half. Just walk through any OpEx puts and takes you may have. And then can we touch on Peloton Business? What needs to happen for Peloton Business to really move the needle in terms of overall numbers.

Speaker 11

Thanks so much.

Speaker 2

There's a business piece. Do you want to do the first two?

Speaker 4

Yes, I can take the first. So, just some comments about OpEx. So we don't provide specific targets for OpEx, but we do expect our OpEx for the year to be below that of fiscal 2023, despite the fact that we are investing more year over year in marketing. So we expect our FY 2024 GAAP G and A spending to be roughly $1,000,000 lower than fiscal 2023. The largest sources of savings are around legal, member support, outside services.

Speaker 4

And then for R and D, remember the fact we have changed our capitalization policy with regard to R and D. So we are expensing a much larger portion versus When prior years we capitalized more. If you combine both of those pieces, we expect to be about 10% to 12% lower year over year spend in fiscal 2024. Now for sales and marketing, we do expect to be up year over year. That's driven by an increased spend on media, brand and creative.

Speaker 4

So actually the marketing that drives subscriber acquisition, we will see that partially offset by lower retail costs as we continue to Now you had called out on adjusted EBITDA that our guidance reflects lower OpEx. That's true with regard to marketing spend. What it also reflects not to be missed is the fact that we do expect improvement in our gross margin as well.

Speaker 2

And with respect to Peloton Business, I have this core belief that talent is foundational to the success of businesses And we have seen an influx of senior seasoned talent who have Management skills and relationships that are important to the future Success of that business and we have begun to see significant new traction in teleconference business and we will be seeing I think significant traction this This will be your end, corporate wellness as well and you should expect to be hearing more about both from us as The year

Speaker 11

unfolds. Thank you.

Operator

Thank you. Our next question comes from Edward Yruma with Piper Sandler. You may proceed.

Speaker 12

Hey, guys. Thanks for taking the question. Two quick ones for me. First, Barry, to go back to the sub commentary. So just so that we're crystal clear, is it your assessment today That the difficulty in conversion or the softness conversion is driven more by the marketing and some of the changes you've hopefully implemented?

Speaker 12

Or do you think that there are broader kind of price value issues with the paid tier? And then just it's been a little while since you guys have updated us on ROE. So I'd like to hear kind of how that device And maybe any learnings from that. Thank you.

Operator

Joseph, you want to do

Speaker 2

A commentary on conversion for apps, I don't think it's a price value Conundrum, I go ahead.

Speaker 6

Yes, I think that, Natsuki on behalf of the product team, Bhakut has done amazing work continuing to evolve both of those experiences. The free app experiences is obviously with the relaunch new for us as a company. We had it prior, but it was more of a steady state And we've learned a ton. We've seen what they're drawn to, what they're not, what these new members are not drawn to, what they're using, what they're not using. And To the point before, we are now strategically shifting to paid and paid trial, so people can really get a taste of everything that Peloton has to offer versus sort of a smaller segment of our content as an example.

Speaker 6

So you're going to see us moving in parallel paths. We're going to continue with the team The product team is iterating on the free product, as we continue to learn, and drive traction on our page as well.

Speaker 2

The perspective that I would contribute is a couple of things. 1, I think we've had great success with driving growth in the paid app and at a higher price point than we were expecting. So I think for me, I'm persuaded that Price value proposition is working for consumers. What we weren't successful in doing is Finding the right front door for free users and introducing them into the Peloton value proposition, remember our app was born as an adjunct to An All Access membership for people who already understood what the value proposition was and how to engage with the service. And we shifted the focus for the pre app to people who had no idea who we were, who were arriving on our front door for the first time based on The marketing message and which brings us to Nick Caldwell.

Speaker 2

So if you were to ask me, hey, like where do you think the real value add is in the foreseeable future, I would say it's everything e commerce and everything app, because that's a software challenge, that's a discovery challenge, that's a personalization challenge And that is our alley. So I think there is more opportunity than risk for us. But I believe strongly that the price value proposition is being successful And then on ROE really quickly.

Speaker 4

I can take the question on ROAR. So ROAR actually is still a relatively small portion of our hardware sales today. But we were pleased to introduce it to the Canadian market last week, I mean, I've spent on tentwenty 4 and we also achieved commercial certification of our rower in the U. S. On So we're excited to be able to bring that to the commercial market.

Speaker 4

And then in terms of our content for ROER, we recently started a beta test of Gaming content with Ergata, which is exciting for us to be able to test for that platform.

Speaker 12

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from John Blackledge with TD Cowen. You may proceed. Great.

Operator

Thanks. Two questions. On TreadPlus, what's the opportunity with the TreadPlus relaunch? And is the cost of the TreadPlus kind of a limiting factor given The current macro conditions. And then secondly, on the university program, you provided that example for the University of Michigan In the shareholder letter, just wondering kind of how long does it take for all the facets of the program to get going, selling the hardware in the campus community, getting the rental program going, etcetera.

Operator

And are there kind of hiring needs at Peloton to address this opportunity? Thanks.

Speaker 2

Let me talk about TreadPlus. Could be that in the current economic environment, It will fall flat. But I don't think that's going to be the case. Of all of the products that I've ever been exposed to at Peloton, the one single product that you couldn't pry out of the dead hands of members Is the TreadPlus. I mean, they are absolutely over the top, fanatically obsessed About the user experience on the TreadPlus.

Speaker 2

I mean, dramatically, exponentially, more emotionally with that product than anything we've ever produced. And it frankly, it's That reaction that It informs my belief that we're more likely than not to be successful in the reintroduction of that product.

Speaker 6

Yes. And then, I'll jump in on Michigan. So thank you for the question And for mentioning sort of the full ecosystem of what we're trying to do with this partnership, it ranges from the student app, which is very obviously relevant to that core base, but also rental on campus, the bike itself. And then we have marketing and Brand integration, leveraging, including leveraging student athletes. So there's a lot to not just this partnership, but all of the partnerships that we're going to be bringing to life.

Speaker 6

You will start to see in the next couple of weeks the beginning of the Michigan partnership come to life and then we will have drumbeat throughout next You're at sort of key more relevant moments, both for students, but also alum and the staff, both on campus and off campus as well.

Speaker 2

Thank you. I think the most interesting thing about

Speaker 1

I

Speaker 2

As Leslie and I have talked about the sort of the world's reaction to the announcement of Liverpool and Michigan, At one point in the conversation, she turned to me and said, you know, And particularly after the announcement of the NBA, WNBA, that there wasn't a brand in the world that we wanted to partner with, Who wouldn't kill to partner with Peloton now and people have been beating down our door To talk about different ways to work with us, I was trying to convey in the letter some of that enthusiasm and energy, I'm not sure I succeeded. But there is enormous opportunity for us here. The costs, at least so far have been, I would say modest to quite reasonable and it opens up a number of Potential growth factors for us both to increase and unaided awareness The opportunity to associate with these great brands and at least in the case of the NBA It gives us access to stream content, which helps members discover other stream content on the platform to a degree that We haven't been able to do for ourselves today thinking about the entertainment section of our content. Anything you want to add to that?

Speaker 6

No. I was going to just say on the entertainment piece, there is a ton of pent up interest In this area, we've been in beta for quite a while. We have not marketed it even to our members. And so there's a lot of organic trends that we're seeing, especially around trends excuse me, around Tread, where people just want to consume different types of content as they work out. So it really expands our offering in a really powerful way.

Speaker 6

And again, Goes back to different demographics that we're trying to reach. So certainly through NBA League Pass, we're really excited to bring entertainment and that

Operator

One moment for questions. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed.

Speaker 3

Thanks. Hi, everyone. Just any color you can share on engagement across the various degree of users? I assume you have some strong power users, maybe periodic users, Probably some who don't use that often. So just any help thinking through how you look at your own how you segment your own engagement for the sub base?

Speaker 3

And then maybe, just what percent of current subscribers currently have multiple pieces of connected equipment? And do you see that as a further opportunity? Thanks, guys.

Speaker 2

Let's see. As many different ways as you can imagine, we segment the user base in terms of engagement both for subscriptions and both for members per subscription. We don't provide any color for it, mostly because into the business And each question we'd answer would result in a new question and it would end up being like the book, Give a Mouse a Cookie. So, one thing 1. Thing 2, I think we're in the very early innings of Having a deep understanding of how it is that personalization and the use of AI and personalization Across the membership and across different geographies.

Speaker 2

And we really have only Just begun and I have a deep understanding of the power of that from my experience both at Spotify and Netflix And there's a lot of open field running, I think, that we have the opportunity to do here. I think there are as Leslie's team is successful in drawing in new demographics to the platform, Latinx by way of example. There It's important that we be aligned internally, let's say, by way of example, With respect to our content programming, so that the content we're making Can be discovered by and is relevant to the demos that we're driving to the platform, maybe for the first time, Right. It wouldn't make any sense for Leslie to suddenly be driving a large proportion of Latinx against the platform if we're not successful in surfacing Our Latinx relevant programming on the platform and we have a lot of it. I think there are Point 1.

Speaker 2

Point 2, I think there are opportunities for us to lean into some user segments that maybe recently we've underserved. We've seen a big growth in our PML population. We have great programming services then. I There's an opportunity for us to lean a little heavily male, a little heavily, more heavily performance, which we have done historically, but a little less of So it's mostly about don't really simplistic say polishing the apple, but it's mostly about ensuring that we're aligned And that as we flex the business model, we Make the resource allocation decisions we need to make to capitalize on the opportunities we're seeing.

Speaker 4

On the question about multiple pieces of hardware, we it's actually a relatively small percentage of our That has more than one piece of Peloton hardware less than 10%, although that is increasing. And as we said before, The vast majority of our bikes go to new subscribers. We see higher overlap with treads, Larger percentage of them going to existing relative to bike and then also with the ROA, we see a higher percentage of them going to existing members who have another piece of hardware as well. One point I'll just add

Speaker 6

on the question earlier is around NPS, which continues to remain strong across all of our demos. It's something that we track obviously very carefully, especially given the power of word-of-mouth and referral for the business.

Speaker 3

Okay, great. Thanks a lot guys. Best of luck for the rest

Operator

of the year. Thank you.

Speaker 2

The only comment I make about multiple platforms is the more platforms you Have in your home, the lower your churn tends to be.

Operator

Thank you. One moment for our last question. And our last question comes from Youssef Squali with Truist. You may proceed.

Speaker 13

All right, great. Thank you very much for squeezing me in. A 2 parter please, Barry. So in the letter you talked about 75,000 subs for the FAST service by the end of the year. We're having somewhat of a Hard problem contextualizing that out of

Speaker 2

the universe of about $3,000,000

Speaker 13

How is the rental business Duane, relative to your own expectations, it seems to me that given such a great value proposition, maybe 75,000 is a little number, but I'm not Sure. So I'd love to know how that service is performing to your own expectations. And maybe relative to that, are the unit economics of that service Clear enough for you after maybe, I don't know, to be now for maybe 18 months now that You can maybe lead me a lot more aggressively or are the unit economics still kind of coming into kind of getting clearer, but they're not giving you enough confidence to lean in very aggressively. Thank you.

Speaker 2

Hi, Youssef. Thanks for the question.

Speaker 13

So

Speaker 2

I have been cautious in our management of the growth of FaaS And have on and off, even in the last quarter, taken steps to dampen down some of the growth Because I certainly early on was less certain about The future economics of it, as we were still learning what the churn characteristics were going to be and having a deeper understanding of what the payback periods would look like. I mean, of course, we had early data, but I wasn't confident that the early data would be representative of the market as we Sold more units. What is abundantly clear to me is that we have the opportunity to grow it Significantly faster than we have and it's been growing pretty fast. So if I were to step out of the way, so to speak, It would already be a bigger business than I have allowed it to become.

Speaker 9

So

Speaker 2

And we've taken some steps to accelerate the growth. Not to give too much color, but we took up The forecast by 20 percentage points of growth just by agreeing to change some of the tactics internally and honestly we could grow faster. So, now in terms of the unit economics, we have a fair amount of control over how We've dialed the outcome, a couple of vectors That inform us about how to do that is 1, the mix of certified pre owned and new. And then secondly, the mix of bike and bike plus And so as we turn those dials, we have A significant opportunity to dial up and down the payback profile and the unit economics. Nicky, do you want to contribute to that?

Speaker 4

Sure. I'd like to contribute. I would say a couple of things. So, our payback period For FAST, which we've talked about before being in the roughly 18 to 20 month ranges, we are there today. We're in the 18 month range.

Speaker 4

Still, we see opportunity to improve that by reducing churn rates and we're looking at ways that we can do that. I want to call out that one program that one option that we have for people who rent, we find that first of all, we find that it's over 60% incremental. That's important to comment. So that means that 60% of the people at least or more would not have joined Peloton if they didn't have this option to rent the bike without a commitment. And that's true both in the U.

Speaker 4

S, it's true that we've seen it in Canada, we're seeing it in Germany. So that is true for it's highly incremental in all of the markets that FAS Participating in today.

Speaker 2

Sorry, and that's an example where I continue to put my foot on the cap to break from time to time while we continue to test the validity of the incrementality.

Speaker 4

Yes. And another thing that we have not really leaned in on, but we are going Start to do, which would help the economics of the FAST program is improving our buyout rate. So today, if you want, we offer you an opportunity To purchase, if you're ready to commit, to buy out your Peloton bike rental. But the only way that you can do it is it's a very cumbersome manual process where you have to All our members support to figure out how to do it and we're about to launch shortly, a self-service process to be able to do that and we're excited about Learning how that performs over the holidays, especially because we'll have opportunities for incentives on buyouts over the course of holiday. And of course, if you think about that, If people try the bike, they don't want a commitment at first, but then at some point they're ready to commit, that's great for us because we move them to being a regular All Access Number down to that different churn curve that we talked about earlier with a much lower churn rate.

Speaker 4

So there is some opportunity there. Again, that's a learning For us, we buyout rate is pretty small today, but we haven't optimized it and we're going to be working on that.

Speaker 2

Now let's imagine a world where it's $500,000,000 worth of rental revenue. So that requires that is a different working capital profile than the core business and requires a different capital structure, which is among the reasons that I keep tapping the break to make sure we know exactly what it is we're talking about, if we're going to go Flat out to grow this business because I'm fairly confident that if we took all the brakes off, it would really go. So before you let it loose in the wild, we better know what we're doing, if that makes sense.

Speaker 13

Yes, that makes total sense. And you think within the next 12 months, we should get to that place where we have enough visibility to Let the dogs out.

Operator

Yes.

Speaker 13

Awesome. Thank you so much.

Speaker 2

Thank Thank you.

Operator

I'd now like to turn the call back over to Peter Stabler for any closing remarks.

Speaker 1

Thanks everyone for your time today. We'll talk to you next quarter. Have a good day.

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Key Takeaways

  • Pleasure reintroducing the TreadPlus this quarter with preorders underway and fully paid inventory on hand, positioning it as a major driver of incremental revenue and free cash flow.
  • The Lululemon partnership is live as of Nov. 1, with Peloton content on Mirror and an expected ~$10 million of subscription revenue in Q2, plus a strong apparel sales lift from in‐store traffic.
  • Peloton has shifted its app strategy toward paid trials of App Plus at $24/month, seeing higher take-rates and price points, while using free-tier data to refine discovery and personalization.
  • The equipment-as-a-service offering (FaaS) is growing >90% Y/Y, delivers ~18-month payback, shows ~60% incremental subscriber lift, and unit economics can be tuned via mix of new vs. pre-owned and delivery pricing.
  • Q2 FY24 guidance assumes seasonally heavier hardware sales, improved connected-fitness gross margin from fixed-cost leverage, and holiday media spend that supports growth into Q3.
AI Generated. May Contain Errors.
Earnings Conference Call
Peloton Interactive Q1 2024
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