Release Date: August 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful refinancing of the balance sheet, reducing debt by $200 million and extending maturities to 2029.
- Second consecutive quarter with positive free cash flow and adjusted EBITDA.
- Introduction of new content licensing arrangements with Google Fitbit and lululemon, expanding reach and delivering incremental subscription revenue.
- Continued progress in the turnaround of Precor, showing strong year-over-year revenue growth and improved gross margins.
- Launch of innovative software features like Pace Target, Half Marathon Training Program, and new social features aimed at enhancing member experience and retention.
Negative Points
- Net decrease of 75,000 paid Connected Fitness subscribers in Q4.
- Average net monthly paid Connected Fitness subscription churn increased to 1.9%, up 10 basis points year over year.
- Decision to cease the original bike rental program due to insufficient refurbished inventory, potentially impacting subscriber growth.
- Reduction in sales and marketing spend, which may affect subscriber acquisition and growth.
- Expectation of continued sales headwinds due to an uncertain macroeconomic environment and seasonal low hardware sales in Q1 fiscal 2025.
Q & A Highlights
Q: Last quarter, you had talked about the Connected Fitness market becoming closer to recovery. Can you update us on the trajectory of return to growth across the industry and what you're seeing on the macro side? What are the key growth initiatives for fiscal year '25?
A: Liz Coddington (CFO): The Connected Fitness category is still declining year over year post-COVID, but the declines have lessened dramatically since fiscal '22, indicating we are nearing an inflection point for growth. However, short to medium-term softness in hardware demand is expected due to macroeconomic uncertainty. Long-term, we remain bullish on the growth potential for Connected Fitness. Chris Bruzzo (Interim Co-CEO): Key growth initiatives include software innovation, social features, personalization, gaming, and capitalizing on the Tread opportunity. We are also focusing on targeting new audiences like men and the Latinx population.
Q: When you think about improving your LTV to CAC over the next couple of years, what are the key factors? How do you see the components within your control versus the broader marketing or competitive environment?
A: Chris Bruzzo (Interim Co-CEO): We are focusing on efficiency and the parts of our business we can control. Our LTV-to-CAC ratio improved to 1.5x last quarter, short of our target but a good improvement. We are becoming more effective with lower spend and fewer promotions, positively impacting CAC. Karen Boone (Interim Co-CEO): We are also focused on improving hardware margins by evaluating pricing and reducing promotional depth and frequency.
Q: Can you help us think about the key components of the subscriber decline in fiscal '25, including lower marketing spend, macro factors, and the stoppage of the bike rental program? Is the bike rental program something you may toggle on and off depending on inventory levels?
A: Karen Boone (Interim Co-CEO): Subscriber trends are influenced by post-pandemic sales slowdown and macroeconomic factors. Liz Coddington (CFO): We are focusing on sustainable, profitable growth and not spending inefficiently to acquire unprofitable subscribers. The bike rental program for the original bike was ceased due to limited refurbished inventory, impacting subscriber growth. We do not plan to toggle the rental program on and off but will continue the Bike+ rental program as its economics work well.
Q: Are there any changes in subscription pricing or hardware pricing as newer products come out? Also, can you provide insights on churn rates and why they remain high?
A: Karen Boone (Interim Co-CEO): No plans to increase subscription prices currently, but we are evaluating hardware pricing, especially in international markets. Liz Coddington (CFO): Churn was around 1.9% in Q4, up year over year due to a one-time benefit from unpausing subscriptions last year and a mix shift to higher churn populations like secondary market subscribers and bike rental program users.
Q: Could you discuss the underlying assumptions for Connected Fitness subscribers in 2025 and the contribution from the lululemon deal in Q4?
A: Liz Coddington (CFO): We do not share specific revenue from the lululemon deal but are pleased with the retention rates. For 2025, subscriber trends are influenced by macroeconomic factors, COVID impact tapering off, and business decisions to focus on profitable growth. We expect a broad range of outcomes for subscriber growth, influenced by pricing, promotional strategies, and new initiatives.
Q: How much white space is left in the Connected Fitness market for Peloton to attack, and how does this inform the attributes you're looking for in your next CEO? Can you unpack the meaningful Connected Fitness gross margin improvements expected in 2025?
A: Karen Boone (Interim Co-CEO): There is significant white space in areas like Tread, strength, and international markets. We are focused on reducing losses and optimizing our go-to-market strategy. Chris Bruzzo (Interim Co-CEO): We are planting seeds for growth and becoming more effective in marketing. Liz Coddington (CFO): We expect substantial improvement in Connected Fitness gross margins in 2025 due to reduced inventory write-offs, better pricing, and less promotional activity. Our goal is to get margins back into the low double-digit range and improve over time.
Q: What are you looking for in the next CEO, and how could the strategy change with the new CEO? Which top two strategies do you think will have the most impact in the near to midterm?
A: Karen Boone (Interim Co-CEO): We are far along in the CEO search process and have narrowed it down to highly qualified candidates. The new CEO will weigh in on the strategy, but current initiatives like judicious spending and improving unit economics are no-brainers. Chris Bruzzo (Interim Co-CEO): We are preparing the way for the next leader by putting the company on solid financial footing and planting seeds for growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
