Good morning, ladies and gentlemen, and welcome to the Peloton Interactive 1Q '20 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded..

I would now like to turn the conference over to your host, Ms. Alison Brightly. You may begin. .

Good morning, and welcome to Peloton's First Quarter Earnings Conference Call for FY 2020. Joining us on today's call to answer your questions are John Foley, our Cofounder and CEO; William Lynch, our President; and Jill Woodworth, our CFO..

A copy of today's shareholder letter is available on the Investor Relations section of our website at www.onepeloton.com and have been furnished to the SEC on Form 8-K..

Before we begin, I would like to remind you that our comments and responses to your questions this morning reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities laws.

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 actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our website. .

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..

With that, I'll turn the call over to John, who will begin with a few opening remarks. .

Hi, everyone. Thank you for joining our first earnings call. I want to kick off by saying that I am very proud of what the Peloton team has accomplished over the last few months and the results we delivered in the first quarter. Go Peloton team..

Specifically, let me jump into our first few highlights for the quarter. We obviously completed our IPO in September, raising over $1.2 billion of capital.

As you have heard us say several times, we put our members first and we're excited about what these funds raised in the IPO will allow us to do to expand our global footprint, to build a robust pipeline of products and continue innovating on our software, our content and our platforms..

Second, on October 12, we launched Home Trial, which allows customers to try the Peloton Bike at home for 30 days after delivery, risk-free. Obviously, this stays true to our members-first obsession, and we are encouraged by the initial sales impact that we are seeing..

In October, we closed the acquisition of one of our long-time Taiwanese-based bike manufacturing partners, Tonic Fitness, who I've personally worked with for years going back to as far as 2012 and who collaborated with us on creating our award-winning Peloton Bike.

We are excited that the acquiring -- sorry, we are excited that acquiring Tonic gives us more control over scaling our supply chain in order to stay out in front of the high demand for our products.

We will continue to work with our -- with other great manufacturing partners in Taiwan and beyond as we believe that it is smart to be dual-sourced on all of our core products..

Lastly, I want to give some highlights -- some financial highlights for our strong operating and financial metrics for Q1. Connected fitness subs ended at over 500,000 -- 562,000 subs, representing 103% year-on-year growth rate, allowing us to serve more than 1.6 million members.

We continue to see low churn with the average net monthly connected fitness churn at 0.90%. As you can guess, engagement is the leading indicator of retention, and in Q1, our connected fitness subscribers averaged 11.7 workouts per month, showing significant year-on-year growth of 31% versus the same period last year.

Interestingly, combining the subscriber growth and the engagement growth, I want to point out that last quarter -- last year Q1, we saw 7.1 million workouts on our platform. And this Q1, that number jumped to 19 million workouts from our members, representing 171% year-on-year growth rate in the number of workouts on the Peloton platform..

Revenue was up $228 million -- up to $228 million, which represented 103% year-on-year growth, while gross margin held steady at 46.1%. Adjusted EBITDA loss was negative $21 million and adjusted EBITDA margin was negative 9.2%, showing an improvement of 283 basis points over Q1 of last year..

I will now turn things over to Jill Woodworth, our CFO, to give a quick review of our guidance. .

Great. Thanks, John..

We remain focused on driving strong connected fitness subscriber growth and engaging and retaining our growing scaled member base.

Our subscriber guidance is based on the early success of Home Trial, which was launched on September 12; our expectations for a robust holiday and new year's resolution season; and continued low average net monthly churn of our connected fitness subscribers..

For Q2, we expect ending connected fitness subs of 680,000 to 685,000, that represents 88% growth at the midpoint. For the full year 2020, which ends in June, we expect ending connected fitness subs of 885,000 to 895,000, representing 74% growth at the midpoint..

Churn is expected to rise slightly but stay below 1.05% in Q2 and average below 1.05% for the full year fiscal 2020. It is slightly increasing from our 0.90% churn in Q1 primarily due to Home Trial and the continued rolling off of prepaid connected fitness subscriptions..

For revenue, we expect Q2 to come in at $410 million to $420 million, that represents 58% growth at the midpoint. And for the full year fiscal 2020, we expect $1.45 billion to $1.50 billion of revenue, representing 61% growth at the midpoint..

A couple of additional notes on gross margin. For Q2, we expect our overall gross margin in the range of 39% to 40%. When you look at it on a segment basis, we will expect for Q2 a connected fitness gross profit margin in the range of 37% to 38% and a subscription contribution margin of 58% to 59%.

For fiscal year '20, we expect overall gross margin of 41% to 42%, essentially flat year-over-year. Our connected fitness gross margin for full year we expect to be in the range of 38% to 39% and our subscription contribution margin in the range of 60% to 61%.

Our connected fitness gross profit margin decline year-over-year is attributed to the continued mix shift of sales to Tread and continued investments that we are making to scale our supply chain and logistics platform to meet the high demand for our products..

Our subscription contribution improvement over the last year are attributed to the significant reduction in expected content costs for past use and, to a lesser extent, the continued leveraging of fixed costs of producing our content.

We will continue to invest in building our brand, supporting our growth, scaling operations internationally, improving our end-to-end member experience and recruiting and retaining the best teams across all business functions at Peloton..

With all of that said, for adjusted EBITDA for Q2, we're expecting a range of negative $70 million to negative $65 million of adjusted EBITDA loss, which represents a negative 16.3% adjusted EBITDA margin at the midpoint.

And for full year 2020, we expect an adjusted EBITDA of negative $170 million to $150 million, which represents an adjusted EBITDA margin of negative 10.8% at the midpoint of that range..

With that, we will now move to questions. So I will turn it over to the operator. .

[Operator Instructions] Presenters, we have your first question coming from the line of Heath Terry from Goldman Sachs. .

On the quarter, can you give us a sense of sort of what you are looking for in Q4 as we go to the -- as you go into more direct relationships with the hotels, sort of what you're seeing in those relationships or how those hotel relationships are beginning to progress? Just are they beginning to have more of an impact on your reliance on booking in Expedia?.

It's William Lynch. In terms of the hospitality business, if you look at our growth rate year-on-year, it's tracking to about the same rate that our consumer business is. So as we announced our partnership -- Peloton partnership with Westin, and that was about 2 years ago, and since then we've been continuing to penetrate the hospitality channel.

We get inbound daily, weekly, monthly from hotels that want to put Peloton into their gyms, both Bikes and Treads, to differentiate their gym experience as our member base grows and they go to those hotels asking for Peloton..

So we've got a team focused on hospitality. We define ourselves as a consumer business, but that's a good channel for us. And as I said, it's over triple-digits top line growth. So the demand we're seeing from the consumer definitely is spilling into hospitality. .

Great. And then Jill, as you look at the way that you are thinking about guidance through the rest of the year, clearly, incredible performance in terms of profitability this quarter, particularly on the gross side -- gross margin side.

But as you look at the way you're thinking about the investments as we go through the rest of the year, can you just give us a sense of sort of what's implied in terms of the level of investment that you're expecting? I know with the German launch as well as sort of what you've seen already with U.K.

and Canada, kind of should we continue to expect this level of outperformance as you go further through the year? And sort of how much leeway, I guess, would you say are you giving yourself to be able to ramp up or down the degree of investment?.

Yes. So thanks, Heath. I think, first off, I would describe our guidance philosophy for you. Our guidance is our best current estimate of our performance. And as you know, our vertical integration does give us good control over our execution, both in our U.S.

Bike business as well as internationally, but we are still in the very early stages of growth and market opportunity. But you can take our guidance as what we believe we will achieve..

And in terms of spend to grow international, I mean obviously, as we prepare to launch in Germany, I would say the bulk of our expenses are in sales and marketing. And I think what we're very excited about in terms of what our guidance shows is that we continue to see tremendous efficiencies in our U.S.

Bike business from a sales and marketing perspective, and that's allowing us to offset slightly some of the less efficient spend, again, to launch Germany, with nascent businesses in both the U.K. and Canada as well as our new product, Tread.

So with all of that, I think we feel very good that those efficiencies are certainly helping us -- the less efficient spend internationally. .

Your next question comes from the line of Doug Anmuth from JPMorgan. .

Two questions.

Just for John and William, if you could talk a little bit more about the Tonic acquisition, what it does for you strategically? And why you thought it was so important to own the manufacturing capability? And if there's any color you can give us on the percentage of bikes or overall manufacturing that Tonic represents today?.

And then second, Jill, can you just comment on how you're thinking about core U.S.

Bike profitability in fiscal '20 and your confidence around this year being Peloton's peak loss year?.

Thank you, Doug. So yes, with respect to Tonic, in order to sell millions of Bikes and Treads globally in the coming years, we need to be able to make millions of Bikes and Treads globally. So obviously, supply chain and scaling supply chain is a very important thing for us..

We do understand that Apple doesn't own Foxconn, so it is a little bit atypical for a company like us to acquire a manufacturer, but we -- the reason why we did and the reason why we're excited about it is we need to invest into the supply chain in order to scale it and create world-class manufacturing capability.

Our contract manufacturers were largely investing, but we wanted to do it and have a little bit more control over it. And based on our strong relationship with Tonic, which is 1 of our 2 big bike manufacturing partners, we love them both. We have the longest relationship with Tonic, and the team is incredibly strong.

The founder, Andy Wu, is kind of a visionary in our space with respect to fitness equipment manufacturing. His son has become a force in manufacturing equipment leadership. And so we are excited about it. We will continue to be dual-sourced.

So we're excited about contract manufacturing in general, but for us, strategically, to control our destiny, make sure that we could invest properly..

A fun thing I will tell you, we're working on in the coming months, launching a brand-new fitness facility with Tonic that is going to be kind of a greenfield or a brand-new from-dirt manufacturing facility that is going to be, we believe, one of the best, if not the best manufacturing facility for fitness equipment in the world.

And we're very excited about that relationship..

So -- I'm sorry, Jill and Doug, I apologize. Jill is asking me to take the profitability one as well. And I do think because it's on everyone's mind, I'll talk about it..

For us, profitability is a managed outcome. We have said this before. Our Bike business is profitable. And because of our gorgeous unit economics that you guys know well, it will continue to be profitable.

So the investments we're making in international and new products and digital and content and more retail locations are just that; they're investments, but I think based on what you guys just saw, which is our Q1 performance of triple-digit top line growth, single-digit EBITDA loss, we are within striking distance to profitability.

It's a managed outcome. I believe if we pulled back on growth, we could be profitable tomorrow, but that is not what the Board and the leadership of Peloton believes we should do. We think this opportunity globally is so big that we think we're right on the right balance of investing for future growth. .

Your next question comes from the line of Justin Patterson from Raymond James. .

And I'll resist asking any online travel questions. So I'm curious.

I know it's early, but could you talk about how the Home Trial and marketing campaigns are performing against expectations? Are you seeing any differences in the demographics and engagement among new customers versus who you shipped to previously? And then how do you get comfortable with forecasting that around the holiday season?.

It's William Lynch. I'll take both of those. On Home Trial, it's still early days. As John and Jill said, we launched it September 12, so it was really the last 2 weeks of the quarter..

So the impetus for Home Trial is our brand marketing team led by Carolyn Tisch Blodgett does a lot of great research around the biggest barriers to purchase our Bikes and Treads, and what we found were the 2 biggest barriers were price, affordability and then will I use it? And so we did a test. We don't guess.

We test almost everything in terms of major programs. We did a test earlier this year around Home Trial and what it showed is substantial lift in the markets we tested it in. And since launching 30 days free, bring it home, try it, we've been really encouraged by the results..

So again, both -- and then secondly, on the marketing, our big push this holiday is both Home Trial as well as, for the first time ever, promoting a $58 bike. So with our 39-month financing, 0% APR, consumers have the ability to get a bike for $58 a month, and we're underwriting all the costs. So it's an incredible deal.

We think it's the best deal in fitness. Interestingly, that goes right against the gym -- average gym membership that most people pay, which is, on average, $58 a month. So between attacking the affordability sort of perception with promoting the $58 with heavy TV weights and then early results in Home Trial, we feel great about holiday.

And again, we feel like we're attacking the 2 biggest barriers to purchase. .

If I might just add on to that, I just want to remind everyone, if you look back to fiscal year '19, we had a very strong holiday period.

And so our Q2 guidance of 88% at the midpoint for our connected fitness subscribers, we're lapping a pretty big holiday period and a lot of that was driven by some program changes that we had made to our financing program, which we commonly refer to as de-bundling where we stopped financing the subscription with our equipment, which created a pretty significant uplift in conversion.

So I just wanted to remind everyone of that from this time last year for holiday. .

Your next question comes from the line of Eric Sheridan from UBS. .

Maybe 2, if I can. One, coming out of the IPO, did you see anything around a halo effect of either better effective marketing channels or better gross additions coming out of the IPO that might sustain into fiscal Q2 or fiscal Q3? Just so we're aware of sort of the dynamic in the marketplace..

And secondly, 1 year into the opportunity in the U.K.

and Canada, any sense you can give us around growth curves or unit economics or how the international opportunity might be developing that might contrast with what happened in the U.S.?.

On the IPO, we definitely saw a bump in traffic -- in sales, but it was fleeting. We saw it for about 3 or 4 days and then -- but it typically happens, which is we are able to project by marketing channel, and it got to steady-state in terms of traffic conversion and sales..

And then on international, what we've said is the U.K. and Canada are tracking ahead of where the U.S. was at the same period. One of our leading indicators actually on sales is awareness. We measure unaided awareness and aided awareness.

And what you see, with the benefit of the marketing spend and the investments Jill was talking about internationally in Canada and the U.K., we've been running advertising there, we've opened up retail, is that the markets are developing faster. And so they're ahead of our expectations. They're ahead of where the U.S. was.

It actually gave us confidence to invest in Germany, which launches, as Jill said, 11/20. That's -- we'll see -- that's our first foreign language market, but that's the answer..

In terms of unit economics, they're not substantially different than the U.S. And so I wouldn't spend a lot of time -- it's really about -- in terms of business model, it's about that upfront investment that we had to put into the U.S. And again, on the curve, they're tracking ahead. .

Your next question comes from the line of Edward Yruma from KeyBanc Capital Markets. .

I guess first, you guys have added a lot of functionality to the app and you've added a lot more activities and such over the past 6 months.

I guess how would you score kind of customer acceptance and usage of some of these nonspin activity?.

And then second, and maybe a broader question, the competitive environment continues to intensify. You guys clearly have a big lead, but you had a competitor that rolled out a bike that used your likeness. Obviously, there are other connected fitness products starting to emerge.

I guess how would you -- how should we consider the overall competitive environment?.

Yes. So we love the digital business. We are very excited about digital. It's not a big driver of our top or bottom line growth, as you may see, Ed. But we just -- we have a new Head of Digital in Karina Kogan, who is a monster. She is -- you're going to hear more about her in the coming years. She's one of our strongest young leaders..

But we like digital for what it represents for our connected fitness subscribers and giving more engagement and more content and more utility to a connected fitness membership. And then we like it for its own business, which is a great driver of customer acquisition for us.

It's a way for the 34 million people in America that have a treadmill in their basement today to engage with our boot camp classes or to take our app to the gym and ride a bike from the gym and get to know our community and our instructors and our content. We have launched a lot of features, as you pointed, Ed.

We're going to continue investing in that software. We're going to continue investing in that content. And we think that the digital business is an acorn that could develop into its own mighty oak akin to our connected fitness business, which is gorgeous, as you know..

With respect to competition, you are right. We have a 7-year head start. We created the category. I would say, at this point, we do not have what I call like-minded competition, which would be a very well-capitalized technology company. To our knowledge, that company doesn't exist yet, but it may at some point in the coming years..

But I will point from the -- from a competitive perspective, what we do is very, very hard. We have invested -- we've raised, as you know, $2.2 billion. We are investing it very aggressively, very smartly. Hardware -- back to the manufacturing, we bought the manufacturer.

We are investing in hardware, software, media, retail, logistics, music, community, apparel. There is a lot to the Peloton business, and we believe it all works in concert and that it is vertically integrated direct-to-consumer, multichannel marketing approach that we have, I wouldn't say perfected, but we're working on perfecting it..

And to William's point, we're getting better at -- we've cut our teeth in the U.S. We're smarter in the U.K. We're smarter in Canada. We're going to be even smarter in Germany in the coming months as we roll out that market.

And so we're building a global technology platform that we believe is going to be pretty hard to compete with and pretty formidable. .

Your next question comes from the line of Michael Graham from Canaccord. .

On the connected fitness product gross margin, it was a lot stronger than we were modeling for this quarter, and you're guiding it to come down a little bit sequentially.

Just what were some of the things that helped it be strong this quarter? And conversely, on the other side, what might happen to kind of bring it back down to your normal sort of outlook level?.

And then I just wanted to ask also on the German local language content, how long do you think it's going to take until that catalog sort of gets to a density of local language classes so that that's the majority of the experience for those subscribers?.

One is the mix shift to Tread, which currently carries a lower gross profit margin; and secondly, some incremental investments that we've made year-over-year in our supply chain and logistics platform..

I think if you're referring to kind of the expectation of consensus versus what we achieved in Q1, I'll say that we really had a lot of factors that are moving in our favor. And again, just to remind you, we achieved 43%, but for the balance of the year, we expect our connected fitness gross profit margin for full year to be 38%, 39%.

So for the first quarter though, what I would say is, again, better than expected supply chain and logistics, but again, through the balance of the year, we'll continue to make investments there. They will be a little bit more back-end-loaded perhaps than perhaps what is reflected within consensus..

Secondly, we did have a onetime favorable inventory reserve benefit. We're piloting a resale program for a small amount of returned inventory, which resulted in a onetime benefit to our inventory reserve in Q1. We also are seeing product cost efficiencies in both Bike and Tread that were better than expected.

And then lastly, I would say, our warranty utilization on both Bike and Tread were lower than expected..

So it was just a lot of positive news in our favor. But again, for the full year, the 43% will continue to decline throughout the balance of the year given the mix shift in Tread and, again, the supply chain investments we plan to make throughout the year. .

I can take the German catalog question just very quickly. So interestingly, if you look at the U.K., some of the most popular instructors are actually out of the U.S. Our 2 U.K. instructors are doing really well. But it talks to the fixed cost nature of our content and the instructors, which is exciting as we think about expanding globally.

We have hired 2 German instructors. We're not going to announce them on this call. They'll be announced shortly. Jen Cotter, our Chief Content Officer; and Kevin Cornils, who is our Managing Director of International, have done a phenomenal job of priming the pump.

But we're going to have substantial German content at launch, including -- we're also going to subtitle because at our testing -- again, we try to test everything. In the spring, German consumers that we tested with actually wanted to take U.S. language classes subtitled.

So we think that's going to be, again, a competitive advantage given our catalog in the U.S., but also really bolster the catalog as Germans are curious to take U.S. language cycling classes. So we'll be well-covered from a German catalog perspective. .

Your next question comes from the line of Deepak Mathivanan from Barclays. .

Jill, I wanted to ask you to elaborate on the connected devices gross margin comment. Specifically for 2Q, I think you noted 37% for 3 -- 2Q.

Is there an incremental step-up from current levels in terms of logistics investments sequentially? And how should we think about the promotional strategy during the holiday season?.

And then the second question is can you also provide an update on the timing of some of the big investments that you are looking to make in the next few quarters? Like the headquarters and studio launches in New York City and London, is the timing and then the cost flow-through into the P&L also happening at the expected cadence?.

Yes. I might ask you to repeat the second question in a minute while I address your first question on the sequential decline from Q1 to Q2.

Yes, we historically see a decrease in our connected fitness gross profit margin between Q1 and Q2, and that is -- one of the drivers there is the holiday season and any promotional activity that we do tends to fall in that time period..

The one other thing I might note, and I think you perhaps saw this in our advertising which happened over the last couple of months, is we've also been highlighting in our marketing, the $58 bike.

And so we have, over the last few weeks, began to see an uptick in our financing penetration rates, which, as you know, impact our gross margin on our connected fitness unit..

The other thing I would say is we've recently launched 39-month 0% APR financing for Tread just in time for the holidays. So that is another driver of that sequential decline, if you will, and again, just continued investments in mix shift to Tread and continued investments made in supply chain and logistics. .

CapEx. CapEx. .

Sorry.

And then if you could just repeat the second question one more time?.

Yes. Yes. I was just asking about the cadence of some of the big OpEx and CapEx-related investments that you are planning to make, specifically along headquarters and the studio launches and those.

Is the cadence still expected to be as you previously anticipated in terms of just the flow-through into the P&L over the next few quarters?.

Yes. So in Q1, you'll again -- versus perhaps what was there for consensus. Obviously, there's been a little bit of a timing shift in some of the CapEx with respect to the new builds we have going on for Peloton Studios New York, Peloton Studio London and our new headquarters near Hudson Yards. So all 3 are 100% on track with respect to budget.

There is some timing differences as to when we will be impacted by that CapEx spend, but the overall budgets are completely on time. The other aspect of CapEx, as you know, is the continued growth of our showroom footprint, so that's kind of the incremental balance, but everything is on budget. .

Your next question comes from the line of Justin Post from Merrill Lynch. .

A couple of follow-ups. You mentioned the Tread mix shift a lot.

Can you give us any update on how Tread sales are performing, either just in absolute or versus your expectations?.

And then secondly, in your guidance for the second quarter and for the year, can you talk about your marketing cost of acquisition? Do you expect your gross profit on your hardware to cover your marketing cost of acquisitions as you look out over the next 3 quarters?.

Yes, Justin. Thank you. It's John. Tread is doing very well. To your question, it is exceeding our expectations. We're very proud of it and the sales are out in front of what we anticipated.

Probably more important than that is that our Net Promoter Score for that experience is approaching 80, which you might have heard us talk about Net Promoter Score as kind of our true north of delighting our members and creating one of the most special consumer brands of our day.

And to the extent we're getting close to 80 with our Tread experience, it speaks to how great that platform is in providing boot camp experiences and circuit training at home, which was the goal..

The content continues to get better. William brought up Jen Cotter, who's our new Chief Content Officer; and her lieutenant, Kevin Chorlins, not to be confused with Kevin Cornils, who is our MD of International. But Kevin and Jen are really investing in the content and doing a lot of innovation for the Tread content and the boot camp content.

So that platform continues to get better just as the software continues to get better. So when you buy one of these connected fitness platforms, either Peloton Bike or Peloton Tread, every month, the experience gets better. So no different with the Tread..

And then as Jill pointed out, the 0% financing that we just launched, on a 39-month gets the tread to $111 a month, which you divide by 2, for your 2 -- the 2 adults living in your home, your live-in partner or your spouse or whoever, which becomes $56 a month which -- per person, which we believe is a screaming deal for the quality of that platform.

So we feel very good about the Tread. I don't know who wants to take... .

Yes. So I'll just briefly mention, I think you're referring to a measurement that we look at where -- in our unit economic model that our connected fitness gross profit margin offsets the majority of our sales and marketing expenses.

And so if you look at what's implied based on our guidance for full year, our net customer acquisition costs, again, that's taking our adjusted sales and marketing expense less our connected fitness gross profit margin, is about $86 based on the midpoint of the guidance range for the full year. So very much, our unit economics are very much intact.

What that means is that we're essentially acquiring a new sub for $86, and then thereafter, enjoying a very long lifetime subscriber, so very much intact. I would say, just overall, again, we continue to be very encouraged with the efficiencies that we're seeing in our U.S. Bike business in terms of sales and marketing and word of mouth. .

Your next question comes from the line of John Blackledge from Cowen. .

Two questions. The sub contribution margin was better than what we had. Just curious about the key drivers and any thoughts on the sub contribution margin trajectory longer term..

And then secondly, any color on paused subscribers? I'm not sure if you can quantify it as a percentage of total subs. .

So on the sub contribution margin, again, our guide for Q2 is 58 to 59 versus what we achieved in Q1 of 63. The beat was primarily due to a significant improvement in content costs for past use.

And then obviously, given our strong top line growth in subscriber adds, the balance was just fixed cost leverage of our content production that is produced as we scale our subscriber base..

In terms of going beyond 2020, we're not really guiding beyond that at that point, but I think what at least Q1 demonstrates is that, over time, as we scale our subscriber base, we will most certainly be able to leverage a lot of the fixed costs of the production of our content. So that is something we remain very confident about..

In terms of your second question, would you mind if -- I just want to make sure that I answer all of it.

Would you mind repeating? Pause? It's on pause?.

Yes. .

Okay. Sorry. You're on mute. So I think I -- so a great question. This is not something we plan to regularly disclose, but what we can say is that at any given time, our paused subscribers are in and around 0.5%. That is well below 4,000 based on current levels. And just to remind everyone that a paused subscriber can pause for up to 3 months.

That person is still included in our connected fitness subscriber base. And what we see -- and for up -- and they can pause for up to 3 months. And typically, a member pauses due to pregnancy, injury, they're moving house.

So -- and then the last thing I might add is that even if someone pauses, our data shows that they are no more likely to churn off of our subscription. So thanks for the question. .

Your next question comes from the line of Lee Horowitz from Evercore ISI. .

Given that you disaggregated the financing from the subscription last year, how, if at all, is your full year outlook for churn being impacted by those cohorts rolling off of their finance agreements, I mean potentially seeing an impact to churn as their financing agreements laps?.

And then another one, I guess, maybe bigger picture on the macro environment. Obviously, you're in the U.K., moving into Germany.

How has maybe macro impacted the business in any way? And how are you maybe thinking about your marketing investments into perhaps softer macro environments in those growth markets?.

Great. So I'll take the first part of the question and then hand over to William. So in Q1, our churn did remain low at 0.9% average net monthly churn. The main impact, I think this is what you're getting at, although we used to offer 2 things. We obviously used to bundle our financing and we used to also offer prepaid subscriptions.

And so the main impact to churn in Q1 was really the roll-off of prepaid subscriptions on to month-to-month. That said, we did see higher-than-anticipated retention rates for those subs that came out of their prepaid period. Now over 90% of our subscribers are paying month-to-month and we expect that number to slowly climb throughout the year..

As you look at our guidance for Q2 and the full year at keeping our churn below 1.05%, one other thing to note is that Home Trial will start to impact churn in Q2. If a customer returns a Bike within that 30-day period, they will be accounted for as a churned customer and we recognize that churn immediately.

So if to the extent we see an increase in our return rates over time, that could create a little bit of upward pressure in churn. .

It's William. I'll answer the sales and marketing investment against the macro environment. We -- on a day-to-day and week-to-week basis, the macro environment doesn't impact our sales and marketing investment at all.

Our acquisition team led by Tim Shannehan, Johnny Jiang and Alan Smith look at what we can acquire a customer for and what is the LT of that customer. It's sort of the net CAC calculation that Jill talked about. And so we're really disciplined in our performance marketing..

As it relates to, internationally, how we think about those upfront investments, the decision to go internationally and the markets we select is very deliberate. And so we make those decisions 18 months in advance of actually going into the market. And so we assess sort of the rate of expansion against market risk then. As I said, U.K.

and Canada gave us a lot of confidence to decide to go into Germany. And once we decide to go into those markets, we are going to invest to win, and that means really sales and marketing upfront to get primarily awareness of this product. We know it had -- it delivers a great experience. We know there's unit economics in it.

So it's really about educating the market from, in some places, a cold start, our awareness is very low in Germany, to get that awareness up. What we've seen is, as we've done that in the U.K. and Germany, sales follows. So that's how we think about sales and marketing. .

Your next question comes from the line of Jason Helfstein from Oppenheimer. .

I'll do 2 today. John, you made a comment about using IPO proceeds to fund the pipeline of products.

Any color you want to share on that?.

And then OpEx was meaningfully lower than expected, I think, in the quarter.

How much of that was timing versus other budget decisions that you're making?.

Yes. Maybe I'll just do -- the second one is a very quick short answer and then I'll let John take the first part of your question. We -- I would say about $10 million of our Q1 beat was timing-related, which we will flow into subsequent quarters. .

Yes. And with respect to new product pipeline, I can say, and I've said this before, we are a technology software innovation company at our core. We created the Peloton Bike, was pretty innovative. The treadmill is at least as good of a product or platform, potentially better, for full body fitness obviously.

In the coming years, there will be new platforms, new products, new innovation that comes out of Peloton that will, I believe, surprise people and delight people. And we're having fun innovating, and our R&D lab is very busy. That's one answer..

The other answer is we're also innovating against software features against our core platforms, right? So new cool things that -- every month, new features that delight our existing Bike owners and our existing Tread owners, launching new digital features that we talked about earlier.

There is all kinds of innovation within our existing platforms and potentially new platforms that -- we're obviously not going to announce new products today, but certainly, in the coming years, I think you guys will be impressed with some of the stuff that we're working on today in the R&D lab..

I guess that's it, everybody. I'll close out. Last, I do want to, again, thank the team, all the Peloton team. We believe we've got one of the strongest teams in consumer tech. We're very proud of it. Thank you all for your hard work..

Thank you to any members listening. I know some of you analysts, buy-side and sell-side, are also Peloton Bike owners or Tread owners or digital subscribers. So thank you for your business..

And I will say thank you for the investors on the call who believed in us. We will continue to work hard in your honor..

Anyway, have a great holiday. I'm confident that we will. And we look forward to talking to you on the next call. Thanks, everybody. .

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..