Peloton Interactive, Inc. (PTON) Earnings Call Transcript & Summary
February 11, 2020
Earnings Call Speaker Segments
Heath Terry
analystSo we'll go ahead and get started. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. Thank you all for joining us. Really, excited to have with us today, Jill Woodworth, Chief Financial Officer at Peloton. Jill, I know this is a incredibly busy time of year for you. So thank you for taking the time to travel across country and be here with us.
Jill Woodworth
executiveThank you. Thanks for having me.
Heath Terry
analystSo Jill, for people in the room that maybe know you best through your products, what's the right way to think about what Peloton is as a company, and what you and the team there are building?
Jill Woodworth
executiveGreat. Well, thank you. I would love to actually take the opportunity to ask how many of you are Peloton owners? Well.
Heath Terry
analystIt's pretty good.
Jill Woodworth
executiveThat's amazing. So to his question, what I'm going to try to do is just reframe it because you, obviously, many of you are very familiar with the product, but from an investor standpoint, it's a pure and simple mission. It is -- we are a vertically integrated technology platform that is aiming to create the best fitness experience for our members in the world. For us, everything we do at Peloton is to get you to use your Peloton bike, or tread, or our content as much as possible. So engagement and low churn or everything that matters to us. When you think about from an investor perspective, what are the things though that are really interesting and compelling about our model is, obviously, we're growing very rapidly. We think we're still at the very early innings of what is a very long growth curve for us. We think we have a pretty massive opportunity especially when you look at how many people globally participate in the fitness industry and pay hard money month after month for fitness memberships. We think that number is approaching 190 million people. And in the 4 markets we're currently in, which is the U.S., U.K., Canada and Germany, over 90 million of those, call it, 180 million, 190 million, have gym membership. So we're in all the largest markets in the world. So we think we have a tremendous growth runway. What we also love about our business is our unit economic model. We have very rapid payback of our subscriber model, meaning that when we sell a bike or tread with the gross profit margin earned on that bike or trade, we are able to pay back the sales and marketing expense to acquire that subscriber. And for those of you who have studied our metrics, I believe our engagement is as strong as anything in fitness and that has led to a really low churn, which for me is the underpinning of the very strong lifetime value that we have for our subscriber base. So I could go on forever talking about all the wonderful aspects of Peloton, but I tried to do it in a nutshell.
Heath Terry
analystYes. No, that's a good place to start. With the most recent results, you've effectively doubled the size of your connected fitness subscriber versus where we were at this time last year, what would you say have been the primary drivers of that growth?
Jill Woodworth
executiveSo in the U.S., and it's great. I just had a gentleman come up to me just now and talk about how much he loves the Peloton and how it's been such an engaging and motivating experience for him. And for us, what I love is that when you create a product that someone loves, they want to tell people about it. And so for us, I think, obviously, we spend a lot of our sales and marketing dollars educating consumers because we've created a new category, right? So we had to, for many years, explain, well, what is this thing. It's a bike with a TV monitor, no one's ever seen this. How does this work? And so clearly, that has propelled our results because we've invested a lot behind building our brand and our product awareness. But what's even more important is you have to create an experience that people love. And what that's created for us is that our #1 sales channel is actually people that use the Peloton bike and want to tell their friends and family to buy a Peloton bike. So when we ask people, once they've bought a Peloton bike on our website, we say where did you first hear about a Peloton. And about 2 years ago, it used to be TV, and now it's from a friend or from a family member. So I think it's the combination of all of those things. The other thing, of course, over time, when we think about creating a long-term, high-growth sustainable algorithm, it's about new products. So we're excited about our tread launch 1.5 years ago. We were really excited for U.K. which was our first international market. And then, of course, Germany, we just launched in November, which is our first foreign language market. Again, with every launch, exceeding our expectations around the reception of our product. But still very early days. We are changing behavior with the Peloton in terms of the way people have approached fitness. So we know that with growing brand and product awareness will ultimately drive that purchase intent and demand for our products. So it's a combination of a lot of those things.
Heath Terry
analystYou touched on some of the numbers earlier, just in terms of the size of the gym user market. But the Peloton's a lot easier to use than going to a gym. It's a lot more engaging than a typical piece of home fitness equipment has been, historically. And so how do you think about how much bigger the fitness category is getting because of what you're doing?
Jill Woodworth
executiveWell, I think, 1 thing that's really encouraging to me is that, yes, with the 190 million gym memberships globally and the 90 million in our markets, I'm cutting off the whole segment of the population that actually doesn't belong to a gym and maybe never will. And I think about the fact that boutique fitness, there's a reason why there's been exponential growth in boutique fitness. It's because it's instructor-led, it's motivating, it's engaging, there's a community aspect to it. And these are all the things that Peloton aimed to do in replicating that experience with digital streaming content. And boutique fitness is not only cost-prohibitive for a lot of people, but it's also incredibly intimidating. I would challenge each of you who have never been on our Facebook page, just to see the very broad demographic. You have people that have never worked out before, never set foot in the gym to people who are really fit and to professional athletes that use the Peloton to stay in the best shape of their life. So for us, you're 100% right. I mean we can't just cut it off at those that are currently paying for fitness in their life. We think we're a much less intimidating but really effective in an entertaining way for people that have never been able to stick with the fitness regime to stick with one. A little bit of a dirty secret on gyms is that they actually don't want everybody to show up all the time. There is a cost of use. And so I think Peloton, everything we do is to get people to ride more and engage more with our products and be the best version of themselves. And so I think it's a huge distinguishing difference between us and any other fitness offering.
Heath Terry
analystWithin that -- your comment on boutique fitness, there's also a massive difference between the quality of the boutique fitness you get, if you live in San Francisco or Manhattan versus 90% of the rest of the country, rest of the world. I would imagine you see this in the demographics of sort of where your customers are, obviously, you're very popular in big cities, but some of your fastest-growing areas, where do you see your customers coming from?
Jill Woodworth
executiveI mean, certainly, it was easy in the early days, right, to have the early adopters come out of these urban markets where they understood what we were doing, right? Well, I get it. Boutique fitness in the home. But one of our favorite stats is the fact that, on average, we sell a bike to every state, every day, which means places, to your point, where they don't have either access to boutique fitness because you don't have a sole cycle or a various boot camp up in North Dakota to -- it's cost-prohibitive, right? It is something where we take it very seriously, but we really do believe we are democratizing access to boutique fitness. And then just to hit the point on affordability, I know there's headlines with respect to what it costs to own a Peloton bike. But if you look at financing our bike and our monthly membership of $39 a month, and on average, those that have a bike or tread are sharing that bike or tread with at least someone else in their household. So we have, on average, 2 members for our connected fitness membership. When you do the math, that averages out to about $48 a month, and our members are collectively working out per subscription 12 times a month, which is pretty good value. If you look at the average gym membership, which is for an individual, that on average in the U.S. is around $58 a month. So we need to continue, and we'll continue to pound that value proposition. And for those of you who are Peloton members and don't know, we have 10 fitness verticals available in our digital product. So when you are a bike or tread purchaser, you get yoga, meditation, strength and other forms of workouts that can complement the cardio workouts that you're doing on the bike or tread. So our aim is to, over time, for that same $39 a month is add more and more and more value, and help you replace all of the things that you're doing in your life for fitness and finding them all at Peloton.
Heath Terry
analystYes. And since you mentioned the usage stat 12 times a month now, what have you seen in that trend over time?
Jill Woodworth
executiveI mean, clearly, it's one of our metrics that has significantly increased year-over-year. You do have to look at our engagement metrics seasonally. Meaning that you have to look at it on a quarterly year-over-year basis because there are certain times of year, and we're in one of those periods right now where everybody is trying to go towards their new year's resolution. I will venture to say...
Heath Terry
analystIt's already February?
Jill Woodworth
executiveI know. I know. They're already over. I actually read a stat the other day that 92% of fitness resolutions end within 6 weeks. And I'm excited to say that the -- that our average 12-month retention for our Peloton member is 93%. So again, it just shows you what community and entertainment and motivation and frankly, gamification, right? We have a leader board where people can compete against each other. We also have the community aspect of giving people high fives, especially if it's a century ride, that means they got to 100 rides and celebrating some of these milestones. We're really, really excited about it.
Heath Terry
analystYou mentioned churn before you reported earnings last week, churn was down significantly when, I think, at least based on your guidance, that wasn't something we're necessarily expecting for people that maybe weren't as deep into the numbers. What were the drivers behind that churn? Where -- what is churn at now implying about the lifetime value of your customers?
Jill Woodworth
executiveSo our churn for Q2, just, I guess, for everyone to be on the same page was -- we report it for our connected fitness subscribers of which we ended the quarter with 712,000. And our average net monthly churn for those subscribers was 0.74% for the month. We believe versus most other consumer-facing subscriptions that we have some of the lowest churn out there, and, certainly, bucks the trend when you look at attrition in bricks-and-mortar gyms and boutique. So it is probably the one metric that we're absolutely the most proud of. There were a couple of things driving it. I mean, of course, one of the things was we just saw better-than-expected hard churn, meaning that fewer people turned off our subscription service than we had expected. But we have a couple of drivers that are naturally moving our churn up a little bit over time and came in better than expectation to your point. So in September, many of you might know that we had a program change in that, we now allow our new members to try our bike for 30 days risk-free, meaning that if they're not satisfied with their Peloton bike within 30 days, they can return it, we'll come pick it up, all on us, and we'll even rebate them the subscription fee that they paid for the month. So because of the way that we account for churned members, obviously, when we deliver a bike and they activate their subscription, they're a member or they're a subscriber. And so if in a month later, they decided to return the bike, that would have a synthetic negative impact on our churn. What we were really excited about more than anything with respect to the home trial program is that we were, obviously, eliminating a purchase barrier of am I going to use this. And I think the most encouraging stat there was the fact that our return rate stayed really, really low, low single digit. And so for us, we obviously benefited from that from a churn perspective, but more so what we loved was that once people got the bike in their home, they understood it. And they understood the value and how they were going to fit it into their life. And so whereas maybe we had forecasted return rates to be a bit belt and suspenders about it. We were really excited that, that rate came in really low. It meant that people loved the product.
Heath Terry
analystHow do you think about price as a tool to accelerate your growth to grow the audience that you have?
Jill Woodworth
executiveI mean, I would say up until this year, right, given our growth rates, and I frankly would say in some prior periods, our demand was outstripping supply in some ways. And so it's been a bit academic for us just given our rearview growth rate. But that being said, we're -- we -- I guess, what I would say what we know is that we have the best fitness experience possible in the home. And I think, over time, we will also be the best price and value for that same fitness experience. So for us, we want to keep great unit economics intact, but we're not beholden to a specific gross margin target on our connected fitness. We love the fact that our unit economics allow for that margin. So we care about the dollars, right, that we get from that connected fitness sale to help offset sales and marketing. But if we're, at some point in the future, deciding to reduce our price and broaden our market that will grow our top line, create more dollars to help us offset those marketing costs. So for me, it will be a continuum on how we think about continuing to expand our market, but we will be the low-cost Peloton too, over time. So we know that, that will be an important lever over time. And again, it comes down to continuing to find ways to fuel our ultimate goal, which is to grow subs and engage and retain the ones that we have, and we think that will be an important tool for us over time.
Heath Terry
analystYes. And how does that your hardware supply chain -- especially now that you have bought one of your contract manufacturers, how does that hardware supply chain sort of play a role in your ability to use pricing as one of those levers?
Jill Woodworth
executiveI do think -- one of our principles is, we're not going to have dozens of SKUs, right? We're going to build the best bikes, the best treads, and we're not going to proliferate on tons of different iterations of SKU. And one of the benefits of being -- having very tight portfolios is the fact that you get great economies of scale from a supply chain perspective. I mean, if you look at -- I mean, I guess it's evidenced, if you look at our gross margin over the last few years, I mean, we've been able to take out over 1,000 basis points in our bike and touchscreen manufacturing since we launched the bike. And there is a time where it makes sense, back to the earlier question, to put a dollar in the pocket of the consumer of that benefit that we've gained as opposed to an advertiser and that would in turn fuel more growth. But for us, again producing that scale in those efficiencies, we think as we launch new products, there will naturally be impacts to the gross margin as we scale and grow into new products. But ultimately, the acquisition of Tonic was highly strategic. For us, we want to be very solidly footed and able to produce millions of bikes and treads in any given year. And we felt it was critically important to own one of our manufacturers to help inform and control that outcome. And again, it comes down to you need to make significant investments, whether it's robotics, whether it's capacity and more sophisticated ways of doing and by owning at least one of our manufacturers. It's allowing us to partner with them to make those investments so that we can secure that supply chain when we're at the point where it's millions per year. And we obviously, complement that with really strong partnerships with other third-party manufacturers, we're dual sourced on everything.
Heath Terry
analystYes. You referenced new products. How are you thinking about sort of the pipeline for new products, the low-cost tread has obviously been something that you've talked about already? How should investors think about that from a timing perspective? And then what would the decisioning process look like for the pipeline beyond that? Just to give an outset, anything you want to announce today. We'll keep it offline.
Jill Woodworth
executiveWell, yes -- that's not going to happen. We, obviously, are excited about making a tread product that will be accessible and similar to the price point of our bike. And in fact, we think about that across fitness verticals. And obviously, we cannot talk about timing or specifics around any new products, but it is something that we're really excited about. I mean when you think about what we love about the tread category is no matter which way you slice it, it is a massive category for us. And so coming to market with a product, now I will say our current tread is probably the most fantastic tread you'll ever run on value for money. So for those of you that can afford the $4,000 tread, I highly recommend it, and you'll only pay one connected fitness membership, if you have a bike and a tread, which is a nice little selling point, but it is a phenomenal product, but most of the time, people are not running on flat belt treads. It is incredibly cushioning, but most people run on a belt tread. So you can assume that, that would be -- what we would be pursuing there. But yes, it's going to be critically important, we think, tread -- we know even today that there are 30 million treads in basements in homes in America. We know that boot camp and running classes and cross fit because we know boot camp is an important class element that we can have with the tread, way out number cycling studios. So whichever way we cut it, we know that running and boot camp are major, major product categories for us. So we're really excited about it. Sorry, I can't be more specific.
Heath Terry
analystYes. Next time. So one of the big areas that you are investing in on the CapEx side is new studios. So you've got the new studio in New York, launching in March. You've got the new studio in the U.K., I believe, in November. How do you think about the return on investment that you're getting out of those because those are, obviously, very big CapEx outlays. How do you think about the returns that you see on that? And from a product standpoint, what does that enable for you that you haven't been able to do?
Jill Woodworth
executiveYes. That's a really great question. I would, though, put it in perspective. I mean, we are -- I -- it's a moderately sized investment for content. And 1 that is highly leverageable. We are building 7 studios under 2 roofs currently. We're going to be opening fairly soon our New York studio, which is 4 studios under one roof. What we're doing now is producing tread content and some additional fitness vertical content out of a tread studio in Greenwich Village, and we have in Chelsea, a studio that was built from the ground up for, I think, $1.5 million. So probably wasn't the optimal place to produce live filmed fitness classes. So we really started from scratch and really put a lot of effort and time into really mapping out what the best fitness studio in the world would look like. And that's what we're about to open up. Again, 4 studios under one roof, and I'll get back to what that's going to allow us to do. And then we're also doing the same thing in Europe. We're building a 3 studio under one roof in Covent Garden in London, which we're really excited about coming later this year, early next year. But what we're going to be able to do? I mean, right now, we're already producing 950 classes a month out of, what I would call, more temporary type studios. I think I believe our content will -- the cinematic value of the content will certainly improve. The amount of content that we're able to produce right now, it's around 950 classes a month. I think that could probably grow by at least 50%. And with these additional studios, right now, we're sort of doing yoga and strength and some of these other verticals that, we think, could be very big and very great value drivers for our connected fitness members. We're going to have dedicated studios to produce strength, future products that we might come out with and yoga and really do it in the right way. And actually, I think one of the secrets to why our content is -- does draw people in, is that most of our classes are filmed in front of a live-participating audience. I think that gives the person at home, a different energy about them feeling like they're sort of in it with everybody in the class. And so it's going to be really exciting. I think, in some of these other fitness verticals to take that recipe, whether that's yoga or strength, and open those classes up to the public and really hone how to better that content. Because right now, I think there's a long way we can go to improve it, even though, I think, it's pretty great today, and I think, our usage stats in those other fitness verticals show that the adoption rate is very high, but we want to be everything and anything to our members for that $39 a month, and we believe if we can win in yoga and in strength then people will not need a membership outside of Peloton.
Heath Terry
analystYes. Great. So we do have time for a few questions from the audience. We've got a mic up here. Any others? Guy behind you.
Unknown Analyst
analyst[indiscernible] I'm curious, why don't we lead more with digital? I mean, there's so much content on there across the various [indiscernible] lower than cost of getting somebody [indiscernible] even the weakest market, the bike of the [indiscernible] or why not be [indiscernible]?
Jill Woodworth
executiveSo that's a very good question, and we've actually made a lot of recent changes to Peloton Digital. We recently changed the price from $19.49 to $12.99 for that exact reason. Because we want to get more people into the top of the funnel. We want more people to get exposure to the Peloton content, our great instructors, our great music, our great programs. And we believe that the moves that we made in December are going to really widen up that funnel out for us. And to your point, what we've seen historically is that there are digital members that organically then convert into connected fitness. Maybe they weren't sure about the product at first, and they wanted to try the content out before they actually invested behind the bike or the tread, or maybe they simply didn't have room for it, and then we're waiting until they had a bigger apartment or moved out to the suburbs and have kids before investing in the bike or tread. So we 100% think that, that's a great lead-generation tool for us over time. We still are, though, very nascent from a stand-alone product standpoint in terms of the way we think about Peloton Digital, we have a lot to learn. We obviously just made our price change about 2 months ago. And in addition, we also extended our 30-day free trial for Digital. So we'll be really excited in May when we announce our next quarter for us to give you a few more details and KPIs around how Digital is doing. But yes, it's nascent. And so I guess, it's kind of a -- maybe a different way of thinking about it, but I haven't necessarily encouraged people to really model a lot into that business. We're still really learning the effects, but right now, we are thinking about it as its content that we're already creating for our connected fitness members. There's no reason to think that we can't win in digital-only as well. But we're trying to be guardedly optimistic on it and not try to put out any stakes in the ground until we get a little bit more educated on how things are going. But with the lower price, what it is allowing us to do, to your point, on leading with digital, is we are putting a little bit more muscle around the advertising of that product.
Unknown Analyst
analystEarlier today, Jill, there was a panel discussion on AI and machine learning. You're approaching 1 million active members, I think you said an average of 12 times a month. So you're collecting copious amounts of data. How, if at all, are you using ML and AI today? And how do you see it figured into your business in the future?
Jill Woodworth
executiveReally topical question for us at Peloton, you're 100% right. I mean, if we're doing 90-plus million workouts, our members are doing that many workouts, we're collecting a ton of data. Right now, I would say we primarily use data around recommendation engine. So when you get under your Peloton home screen, I would say, currently, we have a ways to go, right? I mean, we're -- I don't know that our algorithm -- our algorithms have a lot of room to get better. Right now, they're probably a little bit overly linear. It's like you take a lot of Ally Love classes. So that's what I'm going to put in your recommendation engine. I think we're going to get smarter around recommending complementary workout. So you did 3 cycling classes, Jill, why don't you go do a yoga class and stretch, or why don't you do something that is complementary to what you've done over the last few days and really drive more proactive recommendations to continue to increase engagement. There's a lot we can do there, but that is absolutely on the forefront of where we want to get to because over time -- and by the way, on content, right, what length of class is popular? And we were constantly looking at data to analyze what music genres are popular. When Ally Love said something in a class, why did output spike the way it did. There's just so much that we're going to be able to do but right now, to me, I think our focus in that particular area is really around recommendations and really getting people to engage more, and therefore, giving them the most relevant best recommendations for them as a way of driving engagement. And then for us, on the programming side, right? How can we make our programming better? How can we have our instructors learn, frankly, from what the data is telling us as well. So there's a lot there. So hopefully, over the next couple of years, we'll be able to talk about all the fancy fun things we're doing. But I think we're in the first inning of what we will be able to do.
Heath Terry
analystWe got time for maybe one more question. There's one. Maybe just to wrap up, to dig a little bit deeper into the digital question, when you check into your hotel here, they've got a Netflix button on your remote control. Every piece of hardware that you buy in your home right now that has a screen on it has Netflix either pre-installed or easily downloaded. Is there a powered by Peloton model that allows you to significantly leverage and expand sort of the ecosystem into all of those hardware manufacturers, they completely value what you're doing, but don't necessarily want to become content creators themselves?
Jill Woodworth
executiveYes. So I would make a very big distinction between us wanting to be on every platform that allows us to be on every screen in your hand and in your home, and I guess, in your hotel, from us wanting to license out our content for other equipment manufacturers. I would just go back to what our initial conversation was, which is we believe we're bringing to life the best fitness experience in the world. It is the meshing of our products, our software, hardware and our content and instructors. And again, the idea that we would license that out on someone else's product, I'm not going to come up here and say, never say never. That is not. Right now, we build everything to be very integrated, and we're very proud of what we've built on our hardware. And I think, right now, we're sticking the course of continuing to grow bike and tread sales and exclusively with Peloton content.
Heath Terry
analystGreat. Jill, thanks so much for taking the time to be with us.
Jill Woodworth
executiveThank you.
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