Peloton Interactive, Inc. (PTON) is a leading global fitness company with a highly engaged community of 6.6 million Members as of March 31, 2024. The company has pioneered connected, technology-enabled fitness with its interactive fitness equipment and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere.

Business Overview

Peloton's financial profile has been characterized by recurring revenue and efficient customer acquisition. The company's low Average Net Monthly Connected Fitness Churn, together with its high Subscription Gross Profit and Subscription Contribution Margin, yields an attractive lifetime value (LTV) for its Connected Fitness Subscriptions well in excess of its customer acquisition costs (CAC). Maintaining an attractive LTV/CAC ratio is a primary goal of Peloton's customer acquisition strategy.

Financials

For the fiscal year ended June 30, 2023, Peloton reported annual revenue of $2.8 billion, a net loss of $1.26 billion, annual operating cash flow of -$387.6 million, and annual free cash flow of -$470 million. The company's quarterly results for the third quarter of fiscal year 2024 showed revenue of $717.7 million, a net loss of $167.3 million, and positive free cash flow of $8.6 million, marking the first quarter of positive free cash flow in over 13 quarters.

Connected Fitness Products Segment

Peloton's Connected Fitness Products segment, which includes the company's portfolio of Connected Fitness Products and related accessories, delivery and installation services, branded apparel, and extended warranty agreements, generated revenue of $279.9 million in the third quarter of fiscal year 2024, a decrease of 13.6% compared to the same period in the prior year. This decrease was primarily attributable to fewer Bike, Accessories, and Row deliveries driven by less demand, partially offset by higher demand from Peloton's rental program and Tread+.

Subscription Segment

The company's Subscription segment, which includes revenue generated from its monthly Connected Fitness Subscription and Paid App Subscription, generated revenue of $437.8 million in the third quarter of fiscal year 2024, an increase of 3.1% compared to the same period in the prior year. This increase was primarily attributable to continued growth in Peloton's Connected Fitness Subscriptions, driven by the number of Connected Fitness Products delivered during the fiscal year ended June 30, 2023, and the six months ended December 31, 2023, under new Subscriptions, as well as other subscription revenue, and the company's low Average Net Monthly Paid Connected Fitness Subscription Churn of 1.2%.

Gross Profit and Margins

Peloton's third quarter fiscal year 2024 total gross profit was $309.7 million, resulting in a gross margin of 43.1%, roughly 60 basis points ahead of the company's 42.5% guidance. The Connected Fitness Segment gross margin was 4.2%, in line with internal expectations, while the Subscription segment gross margin was 68.1%, also in line with expectations and up 80 basis points quarter-over-quarter.

Adjusted EBITDA and Free Cash Flow

The company's Adjusted EBITDA for the third quarter of fiscal year 2024 was $6 million, exceeding the high-end of its guidance range by roughly $26 million due to lower operating expenses across multiple areas, including sales and marketing, general and administrative, and research and development.

Peloton generated $9 million in free cash flow in the third quarter of fiscal year 2024, the first quarter of positive free cash flow in 13 quarters. Free cash flow exceeded the company's expectations, with the majority of the performance reflecting permanent savings, though some timing savings are expected to shift into the fourth quarter.

Liquidity

The company ended the third quarter of fiscal year 2024 with $795 million in unrestricted cash and cash equivalents and access to a $400 million revolving credit facility, which remains undrawn to-date.

Outlook

Peloton's third quarter fiscal year 2024 performance reflects the company's continued leadership in the Connected Fitness category and the strength of its subscription business, as well as the tremendous progress it has made in re-architecting its cost structure, as evidenced by its achievement of positive free cash flow for the first time in over three years.

Looking ahead, Peloton is lowering its outlook for ending paid Connected Fitness subscriptions by 30,000, or 1% at the guidance midpoint, to 2.97 million. The company is also lowering its outlook for ending paid app subscriptions by 150,000, or 19% at the guidance midpoint, to 605,000. As a result of these trends, Peloton is lowering its full-year revenue guidance by $25 million, or 1% at the guidance midpoint, to $2.687 billion.

However, the company is raising its full-year outlook for total gross margin by 50 basis points to 44.5%, primarily due to a revenue mix shift towards its higher-margin Subscription segment. Peloton is also raising its full-year adjusted EBITDA guidance by $37 million at the guidance midpoint to negative $13 million, largely driven by outperformance in the third quarter combined with lower media spend and cost reductions from its recently announced restructuring plan.

While the company expects to deliver modest positive free cash flow in the fourth quarter, it does anticipate having both positive and negative quarters within fiscal year 2025 due to working capital impacts from the timing of inventory purchases and seasonality of marketing spend. Nonetheless, Peloton is confident that the cost optimization measures announced will enable it to drive meaningful free cash flow for the 2025 fiscal year.

Recent Developments

Peloton's new restructuring plan, announced on April 22, 2024, will position the company for sustained, positive free cash flow, while enabling it to continue investing in software, hardware, and content innovation, improvements to its member support experience, and optimizations to marketing efforts to scale the business. The plan includes a reduction in global headcount by approximately 15%, impacting roughly 400 Peloton team members, as well as continued closures of the company's retail locations.

In connection with the 2024 Restructuring Plan, Peloton recognized charges of $45 million during the third quarter of fiscal 2024, consisting of $32.5 million in cash charges for severance and other personnel costs, and $12.5 million in non-cash charges related to asset write-downs and stock-based compensation. The company estimates it will incur an additional $45 million in cash charges, primarily for lease termination and other exit costs, and $20 million in non-cash charges, primarily for non-inventory asset impairments, by the end of fiscal year 2025.

Upon full implementation, Peloton expects the 2024 Restructuring Plan to result in reduced annual run-rate expenses of more than $200 million by the end of its 2025 fiscal year. The company believes these cost-saving measures will not impair its ability to conduct its key business functions, though it acknowledges the challenges in realizing the anticipated benefits and the potential for greater-than-expected costs.

Peloton's leadership transition, with Karen Boone and Chris Bruzzo serving as Interim Co-CEOs, and the company's search for a permanent CEO, signals a pivotal moment as the business shifts its focus to architecting and executing a vision for profitable growth. The new leadership team is committed to leveraging Peloton's strong executive talent, loyal member base, and innovative product and content offerings to drive the company's next phase of transformation.

Conclusion

Despite the near-term headwinds, Peloton remains optimistic about its path forward. The company's achievement of positive free cash flow, its progress in restructuring its debt, and the improvements in member satisfaction and product innovation provide a solid foundation for the business to return to sustainable, profitable growth. With a talented team, a loyal community, and a relentless focus on delivering best-in-class fitness experiences, Peloton is well-positioned to capitalize on the growing demand for connected fitness and wellness solutions.