Good day, and thank you for standing by. Welcome to the Peloton Interactive 1Q 2024 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. [Operator Instructions] Please be advised today's conference being recorded.

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

Thank you, Ken. Good morning and welcome to Peloton's first quarter and fiscal 2024 conference call. Joining today's call are CEO, Barry McCarthy; and CFO, Liz Coddington and Chief Marketing Officer, Leslie Berland.

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. During this call, we will discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter. I'll now turn the call over to Barry McCarthy..

Morning, everyone. Thanks for joining us. In a break with tradition, I invited Leslie Berland 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 operating executives 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..

Thank you. [Operator Instructions] Our first question comes from Doug Anmuth with JPMorgan. You may proceed..

Thanks for taking questions. I have two. First, the number 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 two to three biggest drivers across these various initiatives? And then secondly, how do you think about timing for the Lululemon partnership to benefit the business just given access to their large membership base? Thanks..

Well, let's see. From my perspective, with respect to the drivers, a couple things. One is we're going to reintroduce the Tread+ this quarter and begin taking pre-orders. 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 sent before I walked in the door. So that would be thing one. Thing two is continue 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.

And then we need to continue to have success with the core all access membership. I think our growth projections are reasonably conservative in that regard. So that's how 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..

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 Lululemon, that started effective in November.

And we expect roughly give you a sense of the size for the quarter, roughly about $10 million of revenue for Q2 coming from that subscription revenue for us..

Yes. There is an apparel component to it. It started phenomenally strongly. And it's 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..

Thank you..

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

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? Thank you..

Let me say just a brief intro. I'll turn it over to Leslie to talk about her 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 AST and we're less on promotion than we were a year ago.

We were higher by 3% something like that. And so that reflected in the improvement in gross margin on a year-to-year basis and the 31% increase in gross profit that helps deliver in the quarter.

You want to talk about the holiday?.

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 past 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. The other part I'll mention is you read in the shareholder letter around our partnerships. Much of our partnership work is starting to take form at the exact same time and being in sample Michigan as well.

So there's a great sort of coming together of all these initiatives in the next few months..

Okay, 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 and the fact that there is some uncertainty around the performance in the holiday season. But it does reflect a few things.

So I want to call out that it does reflect seasonality of our hardware sales, the fact that Q2 is a heavier hardware sales quarter for us. This is the link 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 growth margin.

And some of the reasons for that and our overall growth margin is coming down seasonally as you would expect. But 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.

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, and that is offset by some holiday promotional activity, but net-net, we expect it to be slightly higher. Our adjusted EBITDA guidance reflects the fact that we will have seasonal marketing spend to support 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 started.

So there's not really an explicit benefit baked into our guidance for subscribers directly as a result of a lot of these partnerships in Q2. The one thing that I called out earlier about Lululemon would be the exception to that.

And so, 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 growth margin that we're targeting for the full year, that also reflects the fact that our Q3 and Q4 growth margins are expected to be higher.

And a lot of that is driven by the fact that, you know, in addition to the mix shift between subscription and hardware sales, we do expect to see some benefit. It's very called out earlier from the reintroduction of Tread+, but I do want to call out that we, you know, that is a new launch for us.

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

Okay, thank you. Thank you, everyone..

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

Great. Thanks for taking the question. I want to ask a little bit more about engagement trends. As 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 felt on the strategy of being everywhere, anywhere and everywhere, and with longer and more types of classes that are coming out? And I'm curious how you use this trend of greater engagement to just improve overall brand.

And with Leslie here, maybe you can help us a little bit more just about brand perception and what we're doing to increase that over time? Thank you..

Well, the 6% increase in engagement amongst the 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.

We continue great execution like Jen Cotter 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 serve their interests..

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

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

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 can get to? I know you've talked about double digit underlying margins.

Does that view change now with the growth of FAS in the mix? And then I have a quick question on POP. You took an impairment of 31 million. 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 expecting a sale? Thank you..

So, I can take the question on POP first. In the quarter, we actually took an impairment of only $15 million in this particular quarter. So we are still looking to sell POP. We are talking to a variety of interested parties and, you know, we hope to have a -- hope to be able to sell it as soon, but we are still working on that.

On the other question, which was related to inventory and normalized hardware gross margin, we do expect to see, you know, 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 regard to inventory and the seasonal cash flow that the business is accustomed to or has been historically accustomed to.

Now, in terms of gross margins, we are seeing some benefit on the fact that, we are moving into that more normalized inventory position. We don't expect to have any more write offs of inventory. We're being able to better manage our reserves.

And then, we do have on a unit economics basis, excluding promotions, all of our skews are a double digit gross margin positive, aside from the guide..

Okay.

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

Yes, so a little bit about FAS. So in terms of the impact on gross margin in Q1, FAS was less than 10 basis points impact on our overall gross margin. So relative to the size of FAS 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 FAS impacts our gross margins is because of maybe because of the fact when people join FAS, they pay a fee for the delivery and we are cost to deliver that hardware is more expensive than the actual delivery charge that we charge the customer.

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

Really helpful. Thank you..

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

Thanks so much for taking the questions, maybe two if I could.

In terms of FAS, has there anything you've learned so far on 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 would be number one.

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? Thanks so much..

Let me jump in on FAS and I'll say a few words about app strategy and then ask Leslie to join. And I think it's unlikely that we will extend FAS at least to treads and treadmills because that installation is more complex than bike.

Is it possible that we might extend it to row possibly, but it's still quite early in the life cycle of that product and I think we have more to learn before we would consider doing that.

So I think that -- and then lastly, I would say, we have our hands full with the growth opportunity that FAS currently presents at 90 plus percent 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 FAS with just the current business model, I think is the macro point. As it relates to the app strategy, the marketing team was enormously successful in driving huge volumes into free.

We were not successful at seeing conversion of those free into the paid funnel, which is 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 forecast to significantly higher take rates of the app plus, so that 24 bucks and then we were -- and we were expecting a heavier mix of the 1299..

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 the app is to energize our core member base and to attract new and under penetrated demographic that has historically not been, as I said, as penetrated for Peloton and app gave us an amazing opportunity in the free app message gave us an amazing opportunity when we rebranded the company and relaunch the brand.

What we thought to Barry's point was obviously a massive volume of downloads. And what's interesting about that tied to the objective is we brought in new demographics.

So we brought in lots of people who represented what you would consider our core member base, but you saw movement and significant uptake both in free and paid for demos including men Gen Z plus and others.

So these are the areas and again going back to our partnership where you will see us continuing to invest and to drive relevance and engagement both on our current members that represent those demographics but also new for growth..

Thank you..

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

Hey everyone, this is Nathan Sheldon 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 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 term there? Thank you..

The question..

I can answer the first part of your question, Nathan, but we missed kind of the last part of your question about a little bit garbled if you wouldn't mind repeating that..

Yes, just how can we think about the new range of outcomes to the steady state of churn rate kind of over the long-term? Thank you..

I can take this one. So, in terms of churn for our rental subscription model for FAS. We actually in Q4 we talked about the fact that we had an up to churn with regard to the seat post we call and we saw that for FAS as well but we have seen it come down substantially from the high in Q4 roughly by 100 points.

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, you know, we, we did see an uptick in churn regardless of regard to the bike seat post with the increase in pause numbers.

We are seeing our, you know, we saw our churn come down as people are unpausing and then also with regard to seasonality and we expect to see our churn rate come down in Q2 and Q3 as well..

Let me spend a minute and talk about the changing mix of the sub base rejoins and then the core all access members and growth in rental, so that as the mix changes over time people can..

Yes, so, so overall, we do see slightly different we see different churn rates for these different types of Peloton subscribers. So we've got our regular all access members who purchase new hardware from us. Then we've got the bike rental model for our rental subscribers.

And then we have a third 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 it's used. We use hardware. 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 point. I don't have the exact number in front of me for that group. This last quarter, yeah, probably 1.4, 1.5-ish little, 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.

And then we have the bike rental group, which is more in the five to six-ish range over the seasonal seasonality of that group..

It’s been a minute talking about secondary market that has grown pretty dramatically. And what's the source? It's a Peloton all access member who canceled. So they showed up in our churn numbers on average within six 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. It means that the, let's call it 1.4% churn rate on all access members actually really on a net basis is lower.

And it means that one, two, 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 the way they have historically.

Meaning, even if the long-term churn for all access members remain steady, and even if the all access, excuse me, even if the turn rate for secondary members remains steady. And so you want not to be alarmed if you see it increase gradually because of the mixed change. If the cohorts deteriorate we'll let you know that..