Executive Summary / Key Takeaways

• Peloton is undergoing a significant transformation, shifting focus from rapid, pandemic-fueled expansion to establishing a sustainable, profitable foundation through rigorous cost discipline and operational efficiency.
• Recent financial results demonstrate meaningful progress, with improved gross margins, substantially reduced operating expenses, and consistent positive Adjusted EBITDA and Free Cash Flow generation, significantly strengthening the balance sheet through deleveraging.
• The company is strategically investing in innovation, particularly in software and content (AI-powered personalization, new modalities like Strength and Tread, social features), and exploring new distribution channels (commercial, third-party retail, micro-stores) to enhance member value and expand reach.
• While top-line growth is not anticipated in fiscal year 2025 due to strategic choices prioritizing profitability and an uncertain macro environment, management is building the necessary financial and operational base to position Peloton for potential revenue growth in fiscal year 2026 and beyond.
• Key factors for investors to monitor include the successful execution of new growth initiatives, the impact of technological enhancements on member engagement and retention, continued progress in deleveraging, and the ability to navigate macroeconomic headwinds and competitive pressures.

Setting the Scene: A Connected Fitness Leader's Evolution

Peloton Interactive, Inc. emerged as a category innovator, seamlessly blending hardware, software, and exclusive content to create a unique connected fitness experience. Its business model, centered on selling high-end fitness equipment coupled with recurring content subscriptions, captured significant market attention, particularly during the surge in at-home fitness demand from 2020 to 2021. This period of hyper-growth, however, brought operational complexities, including supply chain challenges, excess inventory, and increased costs, leading to financial strain and a necessary strategic pivot.

The company is now in a phase of deliberate transformation, focusing on building a more sustainable and profitable business model. The overarching strategy, articulated by leadership, revolves around four key objectives: improving member outcomes, expanding presence to meet members everywhere, deepening connections to create members for life, and operating with business excellence. This strategic shift is grounded in the recognition that establishing a solid financial and operational foundation is paramount before pursuing aggressive top-line growth.

Central to Peloton's differentiated offering is its integrated technology platform. This includes innovative hardware like the Bike, Bike+, Tread, Tread+, Guide, and Row, seamlessly connected to a digital ecosystem. The software layer provides access to a vast library of live and on-demand classes led by world-renowned instructors. Recent technological advancements are leveraging AI and machine learning to enhance the member experience. Personalized Plans, for instance, use AI to tailor workout routines based on individual goals, leading to increased workout frequency and engagement across multiple disciplines. AI is also being deployed to improve operational efficiency, such as powering intelligent agents in call centers to enhance member support, and for content localization through AI-powered subtitles, enabling translation of approximately 100 classes per day into languages like Spanish and German. Features like Pace Targets on the Tread offer personalized intensity guidance, while social features like Find Friends and Teams (Team Feed, Community Teams) aim to deepen member connections and foster a supportive community, which management believes drives retention. This technological integration and ongoing innovation are designed to create a sticky ecosystem, enhancing the value proposition and contributing to a competitive moat.

In the competitive landscape, Peloton operates within the broader fitness industry, facing direct competition from other connected fitness providers like Nautilus (NLS) with brands like BowFlex, companies that have integrated technology through acquisition like lululemon (LULU) with Mirror, and tech giants offering fitness apps like Nike (NKE). It also competes indirectly with traditional gyms like Planet Fitness (PLNT) and various free or low-cost fitness apps. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Peloton is positioned as a leader in connected cardio and, notably, identifies itself as the largest strength subscription service globally. Compared to some hardware-focused competitors like Nautilus, Peloton's strength lies in its integrated ecosystem, premium brand, and community. However, it has historically faced challenges with a higher cost structure compared to more asset-light or value-focused models like Planet Fitness or app-only providers. The company's strategy to expand into commercial settings via Precor and leverage third-party retail aims to broaden its reach and address some of these competitive dynamics, while its focus on cost optimization directly targets its historical inefficiencies.

Recent Financial Performance: A Foundation Takes Shape

The strategic pivot towards profitability and operational efficiency is clearly reflected in Peloton's recent financial performance. For the three months ended March 31, 2025 (Q3 FY25), total revenue was $624.0 million, a decrease of 13.1% compared to $717.7 million in the prior year period. This was primarily driven by a 26.6% decrease in Connected Fitness Products revenue to $205.5 million, largely attributable to lower demand and fewer deliveries. Subscription revenue also saw a modest decrease of 4.4% to $418.5 million, mainly due to a decline in paid subscribers, partially offset by revenue from the new Used Equipment Activation Fee and content licensing deals.

Despite the revenue decline, gross profit saw a modest increase of 2.7% to $318.1 million in Q3 FY25, resulting in a significant expansion of the total gross margin to 51.0% from 43.1% in the prior year. This improvement was largely fueled by the Connected Fitness Products segment, where gross margin surged to 14.3% from 4.2%, driven by lower inventory write-downs, a favorable mix shift towards higher-margin products, and reduced warehousing and transportation costs. The Subscription segment maintained a strong gross margin of 69.0%.

Operating expenses saw a substantial reduction, decreasing by 23.0% year-over-year in Q3 FY25 to $350.5 million. This was a result of broad-based cost reduction efforts, including a 37.5% decrease in Sales and marketing expense ($106.5 million) primarily from lower advertising spend, a 1.1% decrease in General and administrative expense ($151.4 million, or a 14.8% decrease excluding executive departure costs), and a 22.5% decrease in Research and development expense ($59.6 million) due to reduced personnel and product development costs. Impairment expense increased to $30.7 million, mainly related to corporate office footprint adjustments, while restructuring expense decreased significantly to $2.4 million as prior year charges related to the 2024 Restructuring Plan were higher.

The impact of these improvements is evident in the bottom line and cash flow. The net loss for Q3 FY25 narrowed significantly to $47.7 million, compared to a net loss of $167.3 million in the prior year. Adjusted EBITDA saw a dramatic improvement, reaching $89.4 million in Q3 FY25, compared to $5.8 million in Q3 FY24. Crucially, the company generated $95 million in Free Cash Flow in Q3 FY25, marking its fifth consecutive quarter of positive Free Cash Flow and Adjusted EBITDA.

Looking at the nine months ended March 31, 2025, total revenue was $1,883.9 million, down 8.4% year-over-year. However, total gross profit increased by 5.1% to $940.2 million, with the total gross margin improving to 49.9% from 43.5%. Operating expenses decreased by 26.0% to $1,006.0 million. The net loss for the nine-month period was $140.5 million, a substantial improvement from the $521.4 million loss in the prior year. Adjusted EBITDA for the nine months was $263.6 million, compared to $66.8 million in the prior year. Net cash provided by operating activities was $215.9 million, leading to Free Cash Flow of $211.3 million for the nine-month period.

Operational metrics show a mixed picture, reflecting the ongoing transition. Ending Paid Connected Fitness Subscriptions were 2.88 million as of March 31, 2025, a decrease of 6% year-over-year, but a slight increase of 5,000 sequentially, exceeding guidance. Average Net Monthly Paid Connected Fitness Subscription Churn was 1.2% in Q3 FY25, in line with the prior year and an improvement sequentially, benefiting from strong performance in cancellations, pauses, and reactivations. Ending Paid App Subscriptions were 572,775, a decrease year-over-year and sequentially, reflecting a strategic decision to limit media spend while focusing on product development. The LTV to CAC ratio improved year-over-year, reaching slightly above 2x in Q3 FY25, moving closer to the target range of 2x to 3x.

The balance sheet has also strengthened considerably. As of March 31, 2025, cash and cash equivalents stood at $914.3 million. Net debt has been significantly reduced, decreasing by 35% year-over-year to $585 million, driven by strong free cash flow generation and the successful debt refinancing in May 2024. This deleveraging has already yielded tangible benefits, resulting in a 50 basis point step-down on the term loan interest rate, equating to approximately $5 million in annualized interest expense savings.

Strategic Initiatives and Outlook

Peloton's strategy for fiscal year 2025 and beyond is centered on solidifying the financial foundation while selectively investing in initiatives designed to drive future growth. The company is ahead of schedule on its cost restructuring plan, targeting over $200 million in run-rate cost savings by the end of FY25, with additional efficiencies from reduced media spend. Management explicitly states that the priority for FY25 is delivering key financial results (revenue, gross margin, Adjusted EBITDA) and meaningful free cash flow, viewing this as essential to position the company for potential top-line growth in FY26.

Strategic initiatives are underway across all four key objectives:

• Improving Member Outcomes: Continued investment in software and content innovation is paramount. This includes leveraging AI for personalization (Personalized Plans) and content translation, enhancing existing modalities (Pace Targets for Tread), and developing new content formats and offerings (Strength+ app beta, game-inspired workouts). The goal is to increase engagement and perceived value, which is expected to drive retention.
• Meeting Members Everywhere: Peloton is actively exploring channels beyond its traditional direct-to-consumer model. This includes testing smaller, more capital-efficient micro-store retail concepts, expanding third-party retail partnerships (Costco (COST), Amazon (AMZN)), and pursuing commercial opportunities (Precor pilot in gyms, Hilton (HLT) partnership). The Used Equipment Activation Fee and the recently launched peer-to-peer marketplace are also part of this effort to engage with the secondary market and capture value from customers acquired through non-traditional channels.
• Creating Members for Life: Efforts are focused on optimizing the member journey from purchase through long-term engagement. This involves improving delivery and installation, enhancing member support through technology (AI agents, repair van pilots), and fostering community through social features (Teams).
• Operating with Business Excellence: This objective underpins the financial turnaround. It includes rigorous cost management, optimizing hardware pricing and promotional strategies to improve unit economics and expand Connected Fitness gross margins, and increasing working capital efficiency through inventory management.

For the full fiscal year 2025, management has raised its guidance midpoint for key metrics, reflecting the strong performance year-to-date and increased confidence in executing its strategy. The guidance for Ending Paid Connected Fitness Subscriptions is now a narrower range of 2.77 million to 2.79 million, incorporating Q3 outperformance and expected seasonal churn in Q4. Ending Paid App Subscriptions guidance is 540,000 to 550,000, reflecting reduced media spend. Total Revenue is projected between $2.455 billion and $2.47 billion. Total Gross Margin is expected to remain at 50%. Adjusted EBITDA guidance has been raised to a range of $330 million to $350 million. Crucially, the Free Cash Flow target has been increased significantly to the vicinity of $250 million.

The outlook acknowledges that hardware sales are expected to decline year-over-year in FY25, influenced by macro factors and strategic choices to prioritize profitability over volume at all costs. While churn is expected to modestly increase year-over-year due to mix shifts and prior-period comparisons, overall retention remains a core strength. The guidance explicitly does not assume subscriber growth from new initiatives within FY25, allowing time for testing and iteration. Management anticipates generating meaningful positive free cash flow in fiscal year 2026, albeit with a more modest working capital tailwind compared to FY25.

Risks and Challenges

Despite the positive momentum in financial stabilization, Peloton faces several risks and challenges that could impact its trajectory. Macroeconomic uncertainty remains a significant factor, potentially impacting consumer discretionary spending, particularly on high-ticket Connected Fitness hardware. The company is also exposed to tariff policies, which could affect costs for certain products and components.

Operational risks include the ongoing efforts to remediate identified material weaknesses in internal controls related to inventory and the Precor business, which could impact financial reporting accuracy if not fully addressed. While restructuring efforts are progressing well, there is always a risk that the full expected benefits may not materialize or that unforeseen costs could arise. The company also has substantial non-cancellable purchase commitments with suppliers, which could become a burden if demand significantly deviates from forecasts.

Product safety remains a sensitive area, as evidenced by past recalls and ongoing reports regarding the Bike seat post, which could lead to unexpected expenses or reputational damage. Litigation related to past issues also continues, although a settlement has been reached in certain derivative actions.

From a competitive standpoint, while Peloton has technological advantages and a strong brand, it operates in a dynamic market with well-capitalized competitors and the constant threat of disruption from new technologies or business models. Maintaining its premium positioning while expanding reach and managing costs effectively will be critical.

Conclusion

Peloton is executing a deliberate and effective turnaround strategy focused on achieving financial stability and operational efficiency. The recent financial results, marked by expanding gross margins, significantly reduced operating expenses, and consistent positive Free Cash Flow, demonstrate tangible progress in building a sustainable business model. The successful debt refinancing and subsequent deleveraging have substantially strengthened the balance sheet, providing a more solid foundation for the future.

While the near-term outlook for fiscal year 2025 prioritizes profitability and cash generation over top-line growth, the company is strategically investing in innovation across its technology platform, content offerings, and distribution channels. These investments, particularly in AI-powered personalization, new modalities like Strength and Tread, and expanded commercial/third-party partnerships, are designed to enhance the member experience, broaden reach, and plant the seeds for potential revenue growth in fiscal year 2026 and beyond.

The core investment thesis for Peloton at this juncture rests on its ability to successfully complete its financial stabilization, leverage its brand and technological differentiation to drive engagement and retention, and execute on its selective growth initiatives in a capital-efficient manner. The competitive landscape remains challenging, and macroeconomic factors introduce uncertainty, but the progress made in right-sizing the cost structure and generating cash flow positions Peloton more favorably to navigate these headwinds and capitalize on future opportunities in the evolving fitness and wellness market. Investors should closely monitor the execution of the growth strategy and the impact of new product and content initiatives on subscriber trends and engagement as key indicators of the company's long-term potential.