Connected fitness company Peloton seems to be making progress in its quest to turn things around. In a February 1, 2023 letter to shareholders, Peloton said they “significantly outperformed” their expectations for the second quarter of fiscal year 2023 in the following categories: connected fitness subscriptions, connected fitness unit (CFU) orders, hardware revenue, subscription revenue, total revenue, adjusted EBITDA, and free cash flow (FCF). They say the quarter’s results show that the changes they’ve made are working.
Quarterly financial highlights
Peloton shared the following financial highlights for the second quarter of fiscal year 2023 which ended December 31, 2022:
- Peloton had 6.7 million members at the end of the quarter, a 1% decrease year-over-year.
- The company ended the quarter with 3.033 million connected fitness subscriptions, a 10% increase year-over-year.
- The average net monthly connected fitness churn rate is 1.1%.
- The company has 852,000 members end their app subscriptions, a decrease of 3% year-over-year.
- Total connected fitness product revenue was $381.4 million, a 52% decrease year-over-year.
- Subscription revenue, however, was up 22% to $411.3 million. Subscription revenue represents 51.9% of total revenue.
- Total revenue was $792.7 million, a 30% decrease year-over-year.
- Connected fitness products gross profit was $(42.8) million and gross fitness products gross margin was (11.2)%.
- Subscription gross profit was $277.9 million, a 21% increase year-over-year, and subscription gross margin was 67.6%.
- Total gross profit was $235.0 million and total gross margin was 29.7%.
- Overall, the company reported a net loss of $(335.4) million, a 24% improvement year-over-year.
- Free cash flow was $(94.4) million, an 83% improvement year-over-year.
“This was by far our best quarterly performance in my 12 months with Peloton. Most of the executive team is also relatively new to Peloton and new to their teams. Given what we’ve already accomplished, imagine what’s possible once the team finds its groove,” said Barry McCarthy, Peloton CEO and president.
To turn things around, McCarthy said he focused on three primary areas last May:
- Stabilizing cash flow
- Hiring the right executive team
- Reigniting growth
“We won’t have the wind at our back every quarter, but we continue to do what’s necessary to ensure this trend continues. As a result, we once again control our own destiny. Our goal remains the same, reach free cash-flow breakeven by year-end FY23,” McCarthy said of the stabilization of cash flow.
In terms of reigniting growth, the company has changed their product strategy with the Peloton app, Peloton certified-refurbished bikes, bike rentals and premium-priced CFUs, along with partnerships with Amazon, Dick’s Sporting Goods and Hilton.
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Year one highlights
McCarthy shared highlights of what he and his team have accomplished in his first year with the company. Among the company’s highlights in the last 12 months was reducing free cash flow from $(747) million to $(94) million. In June 2022, the company lowered prices of their bikes and treadmills, and raised prices for their all-access membership in North America. Here are few more highlights:
- Changed up the company’s leadership team with a new CEO and four other new hires
- Restructured the organization, cutting staff from 9,000 to nearly 4,000
- Outsourced the manufacture of CFUs and last-mile delivery
- Reduced gross inventory, excluding reserves, by $580 million between Q2FY22 and Q2FY23
- Reduced annual run rate expenses by $830 million between Q2FY22 and Q2FY23
- Launched Fitness as a Service (FaaS) and Peloton certified-refurbished
- Launched Row and Guide and related content
- Launched third-party sales via Amazon and Dick’s Sporting Goods
Year two goals
In McCarthy’s second year, the company’s goals include the following:
- Return to year-over-year revenue growth
- Reach sustained cash flow breakeven
- Attract at least 1 million prospective members to try the Peloton app
- Continue to reduce inventory and restructure the company’s retail footprint
- Improve member support and the overall CFU experience
- Sell Ohio manufacturing facility
- Maximize value of Precor by operating it as a stand-alone business
“To our members I would like to say that, notwithstanding our progress this year, we know we still have issues to fix, particularly in last-mile delivery and member support, and I commit to you we are working hard to fix both,” McCarthy said.
“Of course, this has been a challenging year. The restructuring of our business touched the lives of many associates and friends, current and former team members, and investors alike, and not in a good way. We understand how fortunate we are to have come this far, this fast. And I know I speak for all of our employee team members when I say we’re committed to becoming the best version of ourselves so we can continue to empower our members to become the become the best version of themselves,” concluded McCarthy.
Third quarter guidance
Peloton provided the following guidance for the third quarter of fiscal year 2023.
- The company estimated that ending connected fitness subscriptions would range between 3.08 million and 3.09 million, a 4% change year-over-year.
- Total revenue between $690 million and $715 million, a decrease of 27% year-over-year
- Total gross margin of about 39%
The company said that they will have lower connected fitness until sales after the holiday season and the end of certain promotions. It is hard to predict how consumers will react to the economy and spending, so they believe the sales of connected fitness hardware will continue to be challenged. They anticipate churn in connected fitness to be similar to the second quarter.
Peloton stock
Investors must have had a good feeling about the second quarter results, because on January 31, Peloton stock was valued at $12.93 per share and it increased to $16.28 per share as of 7:59 p.m. EST on February 3.
Insider Take
The numbers are definitely headed in the right direction, but is Peloton in the clear yet? Probably not. The company made major changes, including massive layoffs, but they have had a significant impact in the last year. McCarthy and his team have made progress, but there is more work to do. Subscription revenue increased 22%, but connected fitness product revenue decreased by more than double that at 52%. With a weak economy and people making different spending choices, connected fitness product sales do not seem to rebound in the next few quarters. That said, we have to give credit where credit is due.
Takeaway for subscription companies: Peloton rode the wave of the pandemic, seeing significant increases in product and subscription sales, but they didn’t adjust quickly enough as sales began to level off. Fortunately, because the company’s model is based on products and services, they were able to pivot toward subscriptions while they reworked their product strategy and distribution partnerships. The lesson here is that if you are willing to make hard choices and you have the right team, you can turn things around. It won’t be easy, and the road is long, but progress is possible.
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