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

Well, good afternoon, everybody. My name is Ed Yruma. I am KeyBanc's Internet and e-commerce analyst. Welcome to my Peloton actually or at least my Zoom background that day I figure out have a little bit of fun since we're not altogether in San Francisco like we normally would be. I'm really excited about this next conversation. Peloton has been, in our opinion, one of the most compelling growth opportunities, both pre-COVID and certainly in this new environment. More importantly, Jill and I have known each other for, I think, 14 years, something like that. We were former colleagues before. And it's been amazing to watch you and the team grow this amazing business. So thank you very much for joining us today.

Thanks for having me, Ed. I always love to speak to you, and of course, the KeyBanc family. So thanks for having us.

So I guess, first, Jill, to kind of drill in. The question that we've gotten kind of most frequently as of late is around manufacturing strategy. I guess to step back, could you kind of dimensionalize how you think about the mix of in-house versus ODM. And specifically, if you could talk a little bit about Shin Ji?

Of course. So as you know, in the past, we haven't broken out our mix of our own production versus production that we leverage from third parties. We do leverage in dual source for both Bike and Tread. So that is important to know that we try to derisk that supply chain. With the capacity at Shin Ji though and Precor, which is not yet closed, we are significantly increasing, however, our own capacity. And of course, this is to have more control over our own destiny. But I will say third-party manufacturing will be critical for us, and that's not going to change. But certainly, Shin Ji, when it's up and running, we've talked about it producing up to 1.5 million Connected Fitness products per year. We're starting first with Bike, but we're hopeful Shin Ji will be a producer of a lower-priced Tread in the months to come as well. So it's obviously adding ample capacity for us. Precor, which is exciting, we do have a lot of potential with Precor to really advance us and fast track our ability to domestically produce our products. And while we don't currently have a ramp schedule for that, we have planned by the end of this calendar year to begin producing our products at Precor. Most importantly, they have the facilities and certainly, the teams that have deep manufacturing expertise to help us with our domestic production ambitions. So we're super excited about it. But I'd just leave you with this. We remain convinced of our long-term potential and plan to continue to rapidly grow for many, many years to come. And we know that, that requires a very large supply chain, both abroad with 3PLs with our own manufacturing as well as domestically. So I mean, I guess, to put it simply to sell millions of products a year, we need to make millions of products a year, and that's our ambition.

I know it's still early innings, but have you been surprised at the number of customers that have upgraded from Bike to Bike+. You can actually see the Bike+ in my background. And do you think this kind of changes -- I would say that if we go back to some of the initial framework, people really thought hardware might have been one and done. And maybe there's a kind of reoccurring or at least more episodic hardware purchase stream.

So we've been really pleased with the success of Bike+. And we're not surprised by the number of upgrades of our existing members from the original Bike to Bike+. But do keep in mind, many of the new features that we launched on Bike+ were really based on feedback from our very loyal but vocal member base. So again, it's not surprising that people wanted to see the features that we launched with the Bike+ and the success of that. One of the exciting things, I think, as you personally know is that Bike+ allows us to really open up the world of floor-based content, whether that's Bike Bootcamp or you go from a bike ride, you swivel your screen, which is a new feature on Bike+ to enjoy perhaps a yoga class and then a stretching class. So we're super excited about that because, obviously, we're really excited for people to take advantage of all the fitness verticals that we offer. And so our goal, though, isn't really to have a replacement cycle for our products. What we hope is that these products last for years and years and years because ultimately, what we are focused on is driving long-term value of that subscriber base, and we want those products to last. I would note, our logistics footprint is sort of a hidden competitive advantage here because that really affords us the ability to service those products so we can keep our members riding and running. So the hope is that these products work for a decade or more. And what we hope is maybe members will adopt multiple products over time, not necessarily upgrade their existing products. As you know, we use software and content to dramatically change the experience from week to week. And so that's really the driver of keeping that product that you bought, fresh and new and upgraded over time. So the one thing I would caveat all of this with is that our tablets are likely to have a slightly shorter life span, call it, 4-plus years, maybe a little bit more. But that's really just based on the software updates and the fast pace of technology advances in touchscreens, but that might be something that needs a replacement on a more regular cadence.

Can we click down a little bit on, I guess, what you're now calling Tread in the U.K? I know I had the opportunity to go to one of your studios here in New York and run on it, and it was amazing. What's your experience been thus far? Is it -- are they normally new to Peloton, are they existing bike owners? And then, I think…

That’s such a great -- yes. That's a great question. Yes, go ahead.

Well, And then as you think about Tread broadly, do you think there's a halo that you then kind of get interest in kind of Tread+ as well?

Yes. I mean, first of all, the products are very, very different, right? The first of all, the form factor of the new tread that we've already launched in the U.K. and Canada and obviously coming in the next couple of months in the U.S. The form factor is much smaller. It's lighter weight. It's a slightly smaller running surface, but it's an incredible Tread product. Tread+ is a slat belt technology, and it's a much heavier piece of equipment. You do need more space, you need more head clearance. And so -- and it's a more expensive product, but we think one of the best values in fitness when you compare it to other slat belt treads. In terms of mix, it's been really, first of all, terrific to see the response in the U.K. and now Canada with our new tread. And the reception and reviews have been phenomenal. In terms of early sales, and it's still very early, but as expected in the U.K., interestingly, it is a rich mix of our current bike owners who have purchased the tread. Call it, 2/3 of sales are going to existing members, but it's not different from what we saw with respect to Tread+ in the U.S. where initially, when we started taking preorders on that product, it was about 80% of existing members, but we weren't broadly marketing the Tread+ product in the U.S., whereas in the U.K. and Canada, we can afford given the capacity and supply that we have of treads to market it. So it's not surprising. It's a bit lower off the bat. But what we expect over time and what we saw with Tread is it's now like 30% to 40% of new buyers are existing members in the U.S. And so that percentage has obviously come down a lot over time. One point to note in Canada, we actually see the opposite happening, which is pretty interesting. It has been in showrooms for longer. And so we are -- the majority of our treads that are being sold in Canada are to new members. But suffice to say, we believe both Tread and Tread+ over time are going to be incredibly additive to our sub base.

Great to hear and I look forward to getting one for myself. We did a group ride to kick off the conference earlier and it reminded me kind of this idea that you were early in a leader in gamification in social networking component of fitness. I guess as you think about your roadmap, how important is this for long-term success? And do you think this makes Peloton a stickier service? And then as a follow-up, I know you launched a beta on Sessions, you're doing schedule class. How do we think about innovation in the social network component?

Yes. We have hundreds of features that we have on road map that we want to roll out over time. And we love adding new features because it just gives us so many different levers to drive engagement. Obviously, it's great -- it starts with great hardware and great classes and content, but software and ultimately, how software can help bring the community together is huge for us. And obviously, Sessions is a great example of hopefully taking what is a massive leaderboard now with the 4-plus million members that are on the platform and making it a little bit more personal, a little bit more intimate. So you don't feel like you're riding on a leaderboard with 30,000, 40,000, 50,000 people. The goal, as you know, is to make that platform incrementally better every time. But I do think our software and community advantage is a hugely underestimated piece of the Peloton advantage. And the fact that we're so focused, we have teams of software engineers whose sole focus is, and obviously, with member input as well, to build more and more software features to make our platform that much more engaging over time. And you point out Sessions and Scheduling are great examples of recent innovations, but so many more in the works. And with respect to the community, we see enormous potential to make that platform more personalized. And I think more than any other fitness company in the world, our biggest desire is to increase engagement over time with our platform so that people get more and more value for that $39 a month membership from Peloton.

So we were googling late one night and we saw some news reports about a potential rollout in Australia. I imagine you're not going to announce a country launch here today, but just how do we think about the longer term international strategy? And we've received the question frequently from investors on whether you have a China opportunity and kind of what would the challenges be in kind of executing against that?