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

All right. Great. Thank you, everybody. Thank you for joining. I'm Ron Josey. I cover the Internet sector here at JMP. And thrilled, pleased, excited to have Jill Woodworth with us today, Peloton CFO. I think you all know what Peloton is. If you don't, then you can watch on it live or whatever. So we'll skip that. But Jill, welcome. Thank you for being here today. We've got a lot to talk about. So it's exciting. A lot going on.

Great. Thanks, Ron, for having me. Appreciate it.

Of course. Of course. One of the things that I wanted to ask that we don't get as much airtime, I feel, on like the quarterly calls and what have you, it's just organizationally and how you manage growth. Subscribers grew, what, 134% in the last quarter. Revenue -- or sorry, subscribers grew -- revenue 128%. EBITDA margins reached 11%. We were projecting at the time of launch, about 1 million subs, I think, for this past quarter. And the real number like is 1.7 million. So it's been amazing what's happening here. So I just wanted to ask operationally how the team is managing this. Obviously, there's a lot of resources going into the supply chain and logistics and getting that working, which we'll get into. But maybe you can talk about just organizationally how everything has evolved throughout the year because you're managing this accelerated growth that is incredibly hard to do.

Yes. Well, I don't think 6 months after we went public, we would have envisioned the COVID-19 pandemic hitting. And certainly, it has fast tracked a lot of growth. And I think as you point out, supply chain has, of course, been one of our massive areas of focus as well as growth in our logistics platform. But as you know, in a highly vertically integrated business, we've had to grow every single part of our organization. So obviously, continue to fast track investments in our products. So obviously, R&D and hardware and software development, more content development. We were very nascent in Germany a few months prior to the pandemic as well. And I think one of the things we don't talk a lot about are all of the investments we need to do in IT systems, frankly, in my finance area, our member support teams as well to handle the types of volumes that we've organically seen for nearly 1 year now. But for us, what we really believe is that we are still very much in the top of the first inning. And so that means that over the last year, we continue to invest in growing our sales and marketing teams, our international teams, so really across the board. And it's really hard to do with the majority of our teammates all working from home. So in normal times, managing this kind of growth is hard, but compounding that is obviously the challenging backdrop of the pandemic. But that's what we've been able to do over the last year. And now we have a lot of this supply chain and capacity issues behind us and just solely now for the logistics of getting our inventories back into the U.S.

Right. And that's why we're excited for that, too, as I know you all are. Let's see. I wanted to touch a little bit, before we get into supply chain, because I know that's maybe something that more operationally and excitement around the Tread. The biggest question we're getting is just around what can the rollout look like. It was delayed here in the U.S. by a month or 2, by a few months, I guess, 2 months. It's now live in a few markets overall. Just can you talk about just the strategy in general, rolling up into May? Given a few markets are now live, should we expect newer -- some markets to be turned on as we get into May? Or is it a big bang sort of theory? And what is the -- what would be the governor here as new markets launch, if they do?

Yes. So what you're referring to is we had a very small limited rollout of some Tread inventory that we had in the U.S. already. As you know, we decided to change our course a little bit with the launch, and that we've delayed it by a couple of months after looking at some of the trend, learnings from the U.K. Clearly, it exceeded our expectations. We did, as planned, launched Canada. And that market rollout is going very well. So we wanted to make sure we have the inventories and the resources available in those markets to make sure that we're delivering on that member promise and making that experience as best as it can possibly be. In terms of our May launch, that will be a full national launch. So we're not launching by market, we are doing a full-scale national launch. And so we're hopeful that the additional 2 months that we will have to build inventory levels, seeing what we saw happen in the U.K., that will be very prepared on launch, and we hope average wait times will be to start at least well below 4 weeks. But again, we're really excited about the early reviews of the new Tread. So I don't think you could have a more exciting company to launch a new product. And obviously, we hope to let the world know about that through a very robust marketing program as well. And just to remind, we haven't really been on air in a year. So obviously, getting our OTDs down and keeping them down is a massive priority so that we can continue to set brand awareness of our new Tread on the right trajectory.

There's a lot to go here, and there's a lot to do as you launch. So you mentioned the U.K. success on the call, you mentioned it just now. Tell us, what was it in the success? So I think we've heard originally existing members drove a lot of the demand, but maybe that's now newer members. I'm curious if you can talk about just what do you deem as success or how do you define that. And then how newer subscribers may have come on because of the Tread, if that makes sense?

Yes. Well, success is the review of the product, right? So the early reviews are really positive. And just again, another way for us to motivate our members to live healthier and happier lives. And so that is our biggest benchmark. And honestly, people are using their equipment. And as you know, we look at engagement a thousand different ways. That's the most important barometer for our success over time. But you're correct, in the beginning, about 2/3 of our customers in the U.K. were existing Bike customers. But a lot of that just stems from the fact that they're aware of it, right? We've got their e-mail address. And obviously, they're already bought into Peloton. And so super -- while we are excited. I want to make it clear though, of course, our #1 priority is to grow our subscriber base. We do love 2-product households. They are more engaged than people who had have 1 piece of equipment, if you can believe it. So we're super excited about the fact that a lot of our existing owners have bought the Tread. One interesting thing to note is that with Canada, it's actually skewing more to new members, which is interesting. But we do expect new members to take a larger percentage of sales over time, which is what we saw with Tread+ in the U.S.

Does the Canada new members versus U.K. have anything with that a marketing change or different marketing approach that led to that?

Well, we think it could be. I mean it could be a lot of different factors. But I think we tend -- obviously, the Toronto metro area is a big geography for us up in Canada. And I think there's some spatial requirements. So I think most people only have room for 1 piece of equipment, and so it's TBD. There's a lot of different reasons. But again, we're just super excited that the reception in Canada has followed the U.K.

Okay, that's great. I forgot to mention at the onset for those on the webcast, if you would like to ask a question, we're seeing questions already come in, which is wonderful. [Operator Instructions] I got a few of them in now, and a lot of them -- some of them relate to the Tread. So Jill, I'll just ask 1 and sort of switch it up, I guess. One of them asked in 2H of '21, do you think revs will be bigger from Tread or Tread+? So I guess this is a volume question, not sure what you can ask the -- answer, but I guess the mix of Tread versus Tread+ is the question.

Yes. So I think in the longer term, it's hard to comment too much about this calendar year. But obviously, we believe that the lower price Tread is a more accessible price point. It is a smaller form factor than Tread+. We've been very pleased, actually, since we announced the lower price Tread coming to market, that Tread+ sales have been exceptionally strong. And I believe Tread+ is the best value in fitness. But we think of our lower-priced Tread, a few years from now, is probably being our best value product. And this goes back to what we think the addressable market is. For Tread over Bike with 2 to 3 aftermarket opportunity, so we certainly have our eyes on that. But I would definitely expect the lower price Tread to outsell certainly over time.

That's helpful. That's great. Let's see. Let's talk about supply chain and manufacturing and logistics here just because that is the topic. I think the biggest question we get is whatever normalization means. And so we're investing $100 million to accelerate the shipping. And so any insight on what normalization might be as the more Tread comes through -- sorry, more products come through either by air or shipping or what have you. And then what does this mean, I guess, as we go forward, post the $100 million sort of buildup as you have more products located here domestically?

Yes. Well, the good news is that us, building up inventory, we don't have a perishable or a seasonal product, right? So the good news is building up inventory which can only benefit us from bringing down OTDs over time, which we're super excited about. What is going to be the new normal? We hope by late spring, we get into a more normalized range, which is a few weeks, right? We want someone to be able to place an order for a product like everything else, right, and not have to wait more than 1 month, right? Hopefully, 2 to 3 weeks, which was pre-pandemic levels and even tighter OTD at certain times. And it is a little bit geographically dependent. But we're getting much better at predicting that demand by micro region. So we're holding that 3- to 4-week period by late spring across products is an achievable goal.

So we're hearing anecdotes. So this means that, not many, but we're hearing anecdotes that things are coming in faster. So at least a little by little, we're getting where we see that.

Yes. I mean that was a -- look, it's a lot of money to commit to spend. But leapfrogging that Pacific Ocean and all of the bottlenecks that you've seen with port issues, it's across the board. It's affecting every company which is -- from Asia. And so we felt that our #1 priority has to be our new members. And so we felt like it was a requisite investment that we needed to make in order to improve that initial experience. We hate having people wait. The other thing that's super important is we're ramping marketing spend. And in order to ramp marketing spend, we don't want someone to get excited about purchasing our product and then have to wait for weeks. So the 2 really go hand-in-hand.

One of the things that stuck with me, and this is something that doesn't come up as often. But at the Analyst Day back in September, I think there was -- John talked about 100 NPS was sort of like the goal here. Have you seen any impacts to NPS as a result of the delays?

Well, I think in the short term, of course, right? Unfortunately, we had people wait, but it was not just the waiting. It was having to reschedule because we weren't able to get containers unloaded at the ports and on trucks and then into our warehouses and eventually into their homes. And so it were really so hard for us, right? Because to your point, we have a goal of making every member happy. It's why we're so vertically integrated, right? It's why we ended up having our own logistics platform because in the very early days, when that was fully outsourced, it was a massive hit to our customer satisfaction. And so from our standpoint, that's our goal. We're getting back there, things are looking better every day. And again, it's another reason for us to have spent the money this quarter and next to inform that we're not doing any mass reschedules, and we're taking down that initial purchase OTD as well.

Got it. That's great. Super helpful. I've got a bunch of questions coming in, maybe 1 more. As you mentioned marketing, and then we'll get to like the questions that my screen's over here has been pointing at. But on the marketing side, you mentioned ramping up marketing, whatever. Do you -- as new products hit and the OTD comes down, but do you foresee marketing ever getting back to, call it, the 2019 levels as a percentage of spend? Does it need to be? Because you have the brand awareness. How should we think about that?

Yes. I mean obviously, we've had the benefit over the last year of growing revenue a lot. So when I look in the rear-view of marketing and small -- sales and marketing spend as a percent of revenue, we're going to continue to see leverage, right, for a lot of different reasons. One is we have multiple products now, right? To your point, we've made significant progress in driving brand awareness of our Bike. But we have so many opportunities with advertising, not only our new Tread, but our original Bike in the $49 a month price point, which we haven't since September, when we increased the price and [indiscernible] found out, they're talking to people about that. And then just driving a portfolio of products, we should be able to see efficiency when someone sees a Tread advertisement, they may come to the web, "Oh, I like the Bike," right? They might find multiple products. So I do think, ultimately, having a portfolio is going to drive a much more efficiency than we've had in the past. So I'll continue to say we're going to see a lot of leverage on that line, even when we get up and increase our spending over the next Q3, Q4, not only with Bike OTD coming down now to get that message out, but also with new Tread, we certainly want to tell people about it.

Makes a lot of sense. So thank you for that. Let me see if we can turn to some of the questions in the queue here. Let's see. A topic that we get often now, and you're seeing it, how do you answer -- this is from the queue. How do you answer people who say the vaccine will hurt Peloton?

Unequivocally, we want COVID-19 to end more than any company in the world. We long have believed and held the view that fitness is moving to the home. If you have a better experience at a better value, with better instructors at a better time, there's no better place to work out than the home. And I think there are a lot of people, over the last year, frankly, a lot of our new members probably never had any purchase intent towards a Peloton. They were happy with their gym memberships. And when you look at our engagement data, people have found a way not only to replicate exercising outside of the home, but enjoy it more and perhaps are doing even more than they were even pre-pandemic. So I feel like this is a trend that's here to stay. COVID just accelerated that trend. And I think as you look out with respect to what our growth algorithm looks like in a post-COVID world, it's continuing to further penetrate the markets we're in, it's new international markets, it's new products. There are just so many vectors for us to grow. And we're so little penetrated into our sand that we're just going to be doing it through what we've known how to do it for ages and ages, which is performance, marketing, and the word of mouth and doing our best to create the member experience that makes people tell their friends and family to buy a Peloton product.

Understood. Here's another one from the queue. Talking about newer brands, newer distribution models, we have a question. What are the opportunities in corporate wellness? Peloton has clearly added to the corporate wellness team from a hiring perspective. Any insights? And I think you've talked about that on calls in the past.

Yes, we think there's a massive opportunity in corporate wellness. And so it is certainly something that is on our radar to explore in much greater detail over the next couple of years, nothing really to announce today. But if you think about subsidies and of course, the tracking and usage to bring down health care costs, Peloton could be an enormous tool for companies to improve the health and physical and mental fitness of their employees. And we believe that, that is a massive opportunity for us. So nothing to announce today, but it's something we're incredibly excited about because I think it's a massive market.

So let's go -- let's keep on going, some of my questions and we'll sprinkle in some as well. Let's see. So you mentioned -- just so much to work on, new international, new products, so many vectors to grow. Let's talk about categories of fitness and verticals. You can imagine a Tread, a Bike, a Cross trainer, you see the benefits in Barre or at least the adoption across it and everything in the current member base. So can you talk a little bit more just about how you view these content vertical? Strength is one that we've heard more and more about. Any insights on how to think about this as new verticals launch?

Yes. So for us, we believe, to win in home fitness that we have to win in both cardio, which I think we can do with a Bike better best strategy and Tread better best strategy, but also we need to win in strength. And strength, to your point, takes on many form factors. It's Pilates, it's Barre, it's body weight, it's using weights as well. And so you're going to -- I mean I think our -- first of all, our content in strength has evolved considerably over the course of the last 18 months. In fact, it's been our fastest-growing vertical in the other content verticals that we offer. So we -- people are engaging and loving our strength content. But I think there's more we can do in strength to take the experience that we've created on the Bike and then the Tread to make it more multidimensional, right, for software, potentially, hardware sensors, AI, camera sensors. Just -- we don't know the form factor yet. There's really nothing to talk about there, but we will win in strength.

Got it. That's helpful. Back to the queue, maybe more of a finance question. There was an uptick in Q4 inventory. Is that finished goods on ocean cargo, work-in process, ramp or Tread, help us understand that?

Sorry, the inventory that's coming in?

I guess on the balance sheet, there was just more inventory.

Well, it's -- yes, it's finished goods. Yes.

Finished goods. Okay. That's helpful.

For the most part, I mean obviously, we keep some backlog of spare parts as we service our members as well.

That's helpful. That was an easy one, figure we can do that. I'd love to understand, you mentioned internationalization, international strategy. Obviously, in 4 countries now, potential for more countries to come out. But you've mentioned, Jill, in the past, how you learned quite -- Peloton learned a quite a bit how to localize or just go from English into other languages. And so tell us how you think about going international? Do you need to have a full-on presence there like you did in Germany? Or could you launch like a soft launch with the app and sort of lead in that way?

Yes. I think -- well, first of all, it's a great question. We learned a ton going to Germany because it was our first foreign language, which is, I think, now going to make it much easier as we roll out new languages on how to do that. But going into a market and doing what we do, first of all, I would say, we would want to go into new markets with our incredible hardware, right, with our Bike and now new Tread. So -- and think about it. Even there's complexity even around music rights by territory. You can't negotiate music rights which, by the way, is the most crucial and one of the things as you localize to a new market, it's incredibly important, right? You need localized instructors. You need language capability, but just the sensibility of that region. And what's great is people in Germany take a lot of English-speaking classes. But again, it's like you also have to have something that feels really, really authentic for them. And music is obviously very regionalized as well, and music rights can only be territory by territory. So what is in question, as we go to markets that frankly aren't as large as the markets that we're in today, right? We're in the 4 largest fitness markets in the world. We do have to think, do we need our own logistics platform? What should our [indiscernible] of footprint look like? How vertically integrated do we get in these markets? That's a bigger question. But I think from a product standpoint, we would not want to skip in any way, shape or form.

Got it. That's very helpful. And we're getting the hook here, so we have 1 or 2 minutes remaining. We can always talk more, I guess. Let's see. One of the questions that we get often is just the capital raised more recently with the, I think, around $1 billion convert. Can you just talk to the strategy post that? Peloton has now been -- Peloton has been growing organically for some time. So tell us about the capital raise a little bit more and maybe plans there.

Sure. It was purely opportunistic for us. I mean when you look at the strength of the capital markets right now, it was incredibly great from an opportunity standpoint to just give us a little bit more financial flexibility, allowing us to sleep a little better at night, right, further [indiscernible], supply chain, manufacturing and be opportunistic around M&A like Precor and other things that we want to do to enhance all over our vertically integrated capabilities.

Got it. That's helpful. And one last one from the audience, and then I promise we're done. Someone was asking whether you can permit integrations with VOD or Internet browsing on the screen. Why not? Why or why not?

I mean never say never, right? I mean obviously, there are people out there that want to watch Netflix, I guess is the question, while you're working out. I think right now, for us, we think really the secret to why people are getting off that couch and working out is because those instructors are motivating them to push themselves harder than they would do if you were just watching CNBC or scrolling through e-mails or -- you're not going to be working out as hard. And 20 or 30 minutes out of your day and dedicate to yourself is not the worst thing in the world. And maybe you can go sit on the couch and watch Netflix. So...

I would not be breaking any records if I was watching something else. I agree. I agree. So Jill, thank you very much for the time. Very much appreciated. And...

My pleasure. Thank you, Ron. Thanks for having us.

Absolutely. Talk to you soon. Thank you, everybody. Bye-bye.

Bye.

Bye-bye.