Peloton Interactive, Inc. (PTON) Earnings Call Transcript & Summary

Yes. We -- I know there's chatter of -- we are a stay-at-home stock, and we get back to normal and Peloton dies or whatever the anxiety would be. We obviously are taking the other side of that. And I'll tell people -- I'll tell everyone on the call that for 20 years, 25 years, every year in the U.S., there's been 5 million treadmills sold. 5 million treadmills sold in the U.S. every year, pre-COVID. So it's not like working out at home was a COVID thing. It has always been a thing. It's just the products have been dopey and not connected. So when you think about your -- when you had a what you could call a dumb phone, the phone you and I grew up with, it was connected to the wall in the kitchen where your grandma would call you.

Sure.

That was a dumb phone. Now that there's smartphones, you can't imagine going back to a dumb phone, right?

Yes.

Smartphones are here to stay. Now that you have -- now that there's awareness of Peloton and, more than anything, COVID has accelerated the awareness that a smart bike and a smart treadmill exist, and they're connected, and there's content, and there's music, and there's programming, and there's millions of people high-fiving you and supporting you. You can do video chat. You can get on hyper groups. You can have your University of Alabama alumni group, and you can high-five them and ride with them in the morning. That type of connection and interactivity is creating a smart fitness category, right, that Peloton pioneered. The awareness of that is now very high, thankfully. And when you go next year to buy a treadmill or a bike, first of all, a lot of the places you used to go to look at those, that fitness equipment, they're going away. When you think about Modelle's and Sports Authority and Sports Chalet and Sears and all the bankruptcies of traditional retailers that traditionally sold fitness equipment. I see a world 2 years from now, Heath, that the only place you can go to look at a treadmill or a bike and future products that we're going to bring to market is a Peloton store. And we have 118 of them globally right now. We plan to continue investing in them. I don't know whether we're going to talk about this convertible note we did this week. But we now have over $3 billion on the balance sheet, and we have a lot of plans to invest it. One of the things is more stores, more manufacturing, more content, more innovation, more software engineers, more markets. So we're going to continue to be one of the great growth stories of the next decade. I'm very confident.

I always save the balance sheet stuff for the end, but we'll definitely get there. So a big part of that calculus, and it's probably no coincidence is that maybe right about the time that we're going to be seeing a more meaningful reopening, you're launching your treadmill in the new lower-cost treadmill in the U.S. You've been out with that treadmill for 2 months already in the U.K. I guess what are you seeing there? And what does it tell you about what the U.S. launch is going to look like?

Well, it tells us that there is fantastic demand for that product. And I can tell you my wife loves our treadmill. We are both here in the West Village. My wife loves our new lower priced tread more than she loves the Peloton Bike+, which says a lot because we're addicted to the bike. It is just such a fantastic platform. Heath, it is boot camp classes on demand or running classes. It's the community. It's the software. I mean, in a fun way, we had second-mover advantage on ourselves and said, okay, what about -- what's perfect about the Peloton bike? What's perfect about the Bike+? Let's make this new treadmill even better, even more engaging, more full-body fitness with the boot camp on and off. It goes so fast. The instructors are incredible. We've been cutting our teeth and perfecting the content with our Tread+ over the last couple of years. So we've been in the market with the trend. Now we're coming with the lower price. We're calling it the kind of the Honda Accord skew or the -- or our iPhone effectively because we think this thing is going to sell like crazy. And to your question, Heath, we're seeing that in the U.K., which crushed our highest expectations. And this week, our launch in Canada crushed our highest expectations, both such strong data points of how this thing is going to sell. And that kind of informed, that plus the fact that we are frustrated, like our members are frustrated, that our order to delivery on the bike line is too high right now. So we are going to build more inventory. We're going to make sure we can service and delight our members in the U.K. and Canada that are buying treads today. And so we bought ourselves a few weeks launching in late May here in the states because we see it's going to be fantastic demand. One of the wild things, and I'm not sure all of the people on the call will notice, but I think it's an important framing to understand, we will have, call it, by summer, call it, 2 million members, 2 million subscribers, let's say, over 1.5 million of them will be in the states. Those members that have largely have bikes, say, 90% have bikes. If they buy a Peloton tread, they get that tread for under $2,500, and then they don't pay an incremental of $39. So it allows them a second piece of fitness equipment in their home, allows them to scale their membership, their $39 membership. They're only -- they're already getting yoga. They're already getting stretching and Pilates and bar and Fit Family Fun and Dance Cardio and all the different styles of content we launch. But if they get a Peloton tread, a lower-priced tread, they also get boot camp classes and running classes and all that stuff for the same $39 membership. So I bring it up in the context of how many of these trends we're going to sell, just think about how many we're going to sell to existing Peloton members who are in love with the Peloton bike and have been waiting for us to come out with this tread. And it is everything they want it to be and more. It is a 10 out of 10. So the challenge there is going to be trying to make them fast enough and make millions and millions, going to tens of millions in the coming years.

And so with your experience here, with the Precor acquisition as well as just knowing that you're a big bootcamp fan yourself, how do you think about other hardware opportunities, especially within that strength category?

We think about them a lot. We have crazy stuff in our R&D lab, as you can imagine. We say we're going to win strength, and we're going to win strength. And whether we need hardware or not, it doesn't matter. We're going to make sure that we win, whether hardware is required or not. So it could be just a content play. It could be a combination with our tread or it could be a hardware product that we would be working on that we're excited about. So it's not clear how strength is going to win. So we are going to have several bets, and we're going to see which ones resonate with our members.

No. That will be great to see. I know another big important area for you is affordability. And you've talked a lot about the impact that your most recent price cuts had there, the potential impact that a used model could -- certified pre-owned model could have there as well as your financing relationships. How do you feel about where affordability is now and where that's going?

I feel great about it. For the entirety of Peloton's existence, pricing has largely been academic. We have always been able to sell everything we can make. So we've been largely a supply-constrained business since we launched. So when you're selling everything you can make for, call it, $2,000 a pop, it would be kind of academic to lower the price, right? You would just eat into your own margins and create too much demand for an already popular product. But we do -- we're not cavalier about it. As we think about our goal of 100 million subscribers globally, we don't think that, that's going to be at necessarily a $1,900 price point, which is our lowest price point for V1. That said, the financing of $49 a month, which is the $1,900 V1 product, which is the award-winning original Peloton bike, $49 a month divided by 2, start $24 a month for you and your live-in partner, starts to be a pretty affordable price point as you know, for the hardware, and then you're paying the $39. But we -- one interesting thing I think we've talked about before, Heath, is roughly, and you could see this in our S-1 18 months ago. But roughly against a $2,000 price point, we had about $1,000 of margin -- of gross margin on average, and we don't break it out by product line. So it's a little blurry, but let's just talk theoretically. So we had $1,000 of margin. As we lower the price, we also lower the CAC. So when you think about what we were saying is we would spend up to $1,000 in CAC because that was all the margin in the hardware. And then we would breakeven that first day on the hardware sale. If you lowered the price point of the bike beyond $2,000 or beyond $1,900, you could see your marketing being more efficient and that CAC would come down. And what we saw, Heath, is that it's almost dollar-for-dollar where you still have the same margin structure at lower price points because your marketing is more efficient, and the TAM gets bigger. So we have a lot of options of growing our business, and price is one lever that we just really haven't had to pull yet, but we are getting ready and back to why manufacturing matters so much. The efficiency of our manufacturing that increases our margin through the supply chain will allow us to have pricing options.

That's great. When -- you're in 4 markets now. How do you think about -- I can only imagine the stories that you have of people buying Pelotons and bringing them across border. You'll have to let us know when somebody tries to sneak the first tread across the Canadian border. But I'm curious how you think about geographic expansion. Are we doing this market by market? When will Peloton be global?

Yes. We are doing it right now market by market. Unfortunately, we care too much about the member experience. And we like the multichannel marketing with the stores and the television and the PR and the vans on the streets where you have a bespoke delivery experience that we have found members really care about. So to answer your question, we are going to be announcing new markets in the coming years. We're going to be announcing more languages in the coming quarters, which we're excited about. So one caveat on the -- is it market-by-market or global. One caveat is that you could. And we debate this, by the way, to be totally honest. You could open up your digital business faster than your hardware business. You have to have music licensing rights. There are some things you have to do, to do that. And I think it's interesting. We will probably explore the idea and test the idea. But unfortunately, for our core business, we care so much about the consumer experience that we want to go into a market and do it right, like we've done with the U.K. and Germany. I will say with the U.K. and Germany, we've cut our teeth there. We got -- we were very good at launching the U.K. We were even better at Germany. So with each market, we get smarter and better. And Kevin Cornils, who is one of the best leaders of Peloton, who runs international for us. And Manu, who he brought in from Amazon, who was one of the early folks in Europe at Amazon. He's responsible for operations globally, and they're just a killer team. And then you've got Darren who runs retail internationally. I think it's going to be a very special growth story. And it's going to -- as we chip away at it, they will continue to be a competitive moat. Interestingly, Heath, I come from software and Internet. And probably not as deep as understanding Internet companies as you are, but I did probably about 20 years on that space. But when you think about Salesforce.com and you think about who's second to Salesforce? It used to be sugar CRM. There's not really an answer. Salesforce is Salesforce because they out invested in growth and in software. And they have the best platform, and now everyone is on it. We plan -- we're treating this as a potentially winner-take-all global opportunity, too. So we're investing in software. We're investing in experience. We're growing as fast as any large-cap consumer tech company in the world, I think, faster, and we're going to continue to try to do that for years and years to come because we feel that this global opportunity is so big, and it's ours to lose, and that's -- we're not going to lose it.

Well, that investment leads into -- leads perfectly into the balance sheet question. Now you have raised -- you did raise $1 billion nearly in -- through a convertible financing here recently. How do you think about that kind of investment and what the leverage that you have on your balance sheet potentially gives you the capabilities to do?

Yes. So the $1 billion in the convertible note was just at the convert market is very hot. And we got a zero coupon, so we're not paying interest on this thing for 5 years. So it's effectively free money. And the -- with the conversion premium that these guys negotiated or were able to strike leads to such a de minimis dilution for our team and for our shareholders that we know that we can put $1 billion to work and get a crazy, fantastic return, which is our jobs as shepherds of your capital is to take the money and get great returns on that invested capital. And so we didn't need the money. It was -- this was opportunistic. But with a $3 billion -- access to more than $3 billion, we can be more acquisitive. We can invest more aggressively. We can kind of use the big stack at the poker table to make sure we're leaning on any small stacks and, again, making sure that we win this winner-take-all opportunity.

That certainly makes sense. Excess demand has allowed you to really pull back on marketing as you -- almost forced you to, as you mentioned before. How do you think -- with the prospect of normal delivery times in the reasonably near future, how do you think about a return to marketing? Who are you going to be able to reach that doesn't already know Peloton? And what's your message going to be to them?

Yes. We love marketing. I think people are paying attention. Our brand matters. We're trying to be very sure footed. We care about our community. We care about what we're building beyond the media business. And brand is one of those special things that we are obsessed about. We plan to build one of the most special, one of the most influential brands of our generation. As a media company, when I say influential, unlike, I would say, an Apple that is not much of a media company yet, they are more hardware and software, obviously, Peloton has conversations. Our celebrity instructors have conversations with you. So the influence that we can have on your life and on who you are as a human being, expanding the way you think and bringing you together and uniting and with optimism and with all the stuff that's the intangible things that we try to bring into our programming. Telling that story, Heath, on -- through our television spots, I just reviewed some this morning, and we love marketing. We are, I think, a beautiful combination of brand marketers and performance marketers. And we try to thread the needle there. It's not just do big want on brand campaigns and cross our fingers. We are still kind of scrappy in that sense. They perform. We measure the CAC by spot and the ROI. And we are as disciplined. In fact, when we were going public 1.5 years ago, one of the bankers said to me that there's 2 companies in the world that are as -- that are elite in performance marketing from what we've seen, and it's Peloton and, randomly, wix.com, they were saying was they were assassins at how to acquire customers. And we are. And no one truly knows that. And right now, for 12 months, they haven't seen it, because we've been selling so many bike and treads organically through word of mouth. As we've talked about in the past, Heath, with a, call it, 90 Net Promoter Score, which is off the chart vis-à-vis just about any other consumer business or any other business in the world for that matter, B2B even. That Net Promoter Score means that people who have our products are recommending them to their friends. It sounds like a vanity metric, but it's actually a very functional tailwind for your marketing efficiency. And we've seen that through COVID like crazy, and it's been fantastic. It's been great for our margins. It's been great. But I've been anxious because I want to continue building our brand. I want to continue getting the message out there on why Peloton products are better, why they'll change your life, what is it about the spike with the screen. I've heard about it, but tell me to -- we want that storytelling and that brand building to come back, and we're looking forward to doing it right as soon as we start to get on the right side in line with OTD. So we're going to kind of just hit the bottom and then continue -- not the bottom, but try to get down below 4 weeks of OTD and then start to ramp up the marketing engine again.

I can't wait to see it. Maybe we will wrap up on what is your smallest business. But I know one that's incredibly important to you, and that's apparel. What's your strategy on the apparel side of things, particularly as your retail stores start to reopen more in mass? What does that offer for your apparel channel?

Thank you for asking, Heath. I love this business for us. You're right. We sold close to 600,000 units of branded apparel last quarter and -- which represents it's growing faster than the rest of our business. So just in the same way that class consumption is growing faster than our revenue, so is apparel. So it's really meaning that the members that discover us and get on board and our paying subscribers want to engage with us in all kinds of ways, whether that's engagement by taking more and more classes, more and more styles of classes, strength and Pilates and all that and Yoga and all the new verticals we're launching or buy more Peloton-branded apparel and say, I love Peloton. I want to show my friends. I want to wear it around town in a fun way. And I think we're going to surprise people on apparel, Heath, is we are more and more building the best quality apparel in the world. And we either partner with people and put Peloton on it, some big brands that you heard that have high-quality products or we go straight to Asia and some of the same manufacturing plants that other quality people are creating apparel in. And we are bringing it to market. We are obsessed with the fit. We're obsessed with the fabrics. We're putting Peloton on it, and we are largely charging less than other high-end retailers because we don't really need to make money on our apparel business because it's not our core business. We'd rather get our members happy with fantastic quality products that say Peloton at an affordable price. And they're happy, and we're happy. And so members are starting to notice. Nonmembers are starting to notice. We have all these stores. More and more, we're filling them with this branded apparel, and it is going to be a story. Unfortunately or fortunately, our top line is moving so fast with the growth of our core business that it's still not a big part of our top line. But it is a beautiful part of our business and part of the fabric of what we're creating if you excuse the metaphor.

It seems like a good problem to have. John, thank you so much for taking the time to join us. We really look forward to staying in touch on this and hopefully getting a chance to do this again in person sometime soon.

I'd love it, Heath. It's always good to see you. Thanks for having me.

Great to see you. Thanks, John.