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

Great. Thanks, everybody, for joining today. I'm Doug Anmuth, Internet Analyst at JPMorgan. It's our pleasure to have with us today Peloton's CFO, Jill Woodworth. So Peloton is the largest interactive fitness platform in the world with 5.4 million-plus members across the U.S., U.K., Germany and Canada. Peloton focuses on the entire member journey through its vertically integrated model, which allows the company to deliver on its members' first mission, and drives a passionate and highly engaged member base. We project $4 billion in revenue in fiscal '21 and expect the company to end the year with nearly 2.3 million connected fitness subscribers and more than 1 million digital subs. Jill joined Peloton as CFO in April of 2018. Prior to that, she was a Managing Director in JPMorgan's Equity Capital Markets division, focusing on the retail and consumer products sector. And prior to that, she spent 11 years at Morgan Stanley as an investment banker. So welcome, Jill.

Welcome to you. Nice to see you, and thanks for having me.

Absolutely. So I should mention just quickly to the audience, and I think a lot of people have been doing sessions over the last day or so, but please feel free to use the blue ask-a-question feature in the conference session page, and I'll do my best to work some of those questions into the discussion. But let's kick off. You had some exciting news yesterday that Peloton is building its first U.S. factory. You're investing $400 million into a facility in Ohio through the opening in 2023. I'll just open that up to you. How should we think about this investment? The facility? And what does it mean about your view of demand over the next several years?

So we're excited about this new facility. We're calling it Peloton Output Park. And we're excited because this is going to position us for growth over a very long-term horizon. So I think over the next decade or two. And to us, scaling our domestic manufacturing is really going to help us derisk our supply chain and greatly simplify our shipping and logistics, which I think you can appreciate over the last 15 months. Some of the challenges we had at the beginning of COVID around building up manufacturing capacity and then that shifted to logistics with the port congestion. So we're really excited about this initiative. We're also excited because it fits really nicely with our strategy with Precor, and Precor is really serving sort of 2 functions here as it relates to Peloton Output Park. One is Precor has a great talented R&D and manufacturing team. So really the learnings and that team is going to really help accelerate this investment for us. And two, we mentioned, I know on our last earnings call, that by the end of this calendar year, we will be building bikes and treads out of the Precor facility. So we are excited that this is going to help us bridge as this facility won't be open for years. And also just note, this doesn't mean that we're going to stop manufacturing in Taiwan. Both at our own facilities as well with contract partners. So again, we're thinking about the long term, and we really believe that the state-of-the-art manufacturing facility we're going to be able to build and the automation will allow us to be even more efficient and more scaled as we grow, which is really important as we think about the accessibility of our products and price points over time.

So it sounds like we should think about the facility as incremental to your Asia manufacturing footprint rather than shifting any of it, at least for now?

Yes.

Okay. And then what does it mean to have a good portion? I think those were the words in the release, but a good portion of your manufacturing on U.S. soil?

Well, for us, it's actually going to be incredibly helpful, right? It -- first of all, is going to allow us, we believe, to bring products to the market more quickly, right? Allow us to, I think, shave time off of our product development time lines. Right now, we work with teams out of Taiwan, around quality assurance, and other tooling as we develop products. And so for us, having this state side is going to be, I believe, something that's going to help us bring products to market more quickly. The other interesting element here is that we're going to be able to service our member base much more easily by having a domestic manufacturing footprint. And we think that, that is incredibly strategic, right? When you think about, right now, as we deal with port congestion, we're writing purchase orders for products now 6 months out, right? Because we have to account for travel time. So truncating that in a matter of weeks and getting product off the line and into members' homes within days and weeks is a much different proposition than what we're faced right now. And I don't believe that port congestion is going to get any better for a long period of time, and that's what we're planning for over the next several months. So I think this is incredibly strategic and will ultimately benefit our members.

Okay. Great. So it's been -- let's take a step back. It's been an eventful, I'd say a few weeks, but it's really been past couple of months and really for the last year plus for Peloton . You reported strong 3Q numbers where you pulled forward a lot of deliveries from the fourth quarter. And at the same time, you maintained your full year Connected Fitness subscriber number. Albeit with some higher costs related to the Tread recalls. How are you just feeling about the business toward your fiscal year end?

Well, we're feeling great. We've made so much progress on what we set out to do at the beginning of this calendar year, which is deal with supply constraints and then deal with the logistics challenges of the port congestion. So pretty exciting that several weeks back, we were able then with that expedited shipping investment to get the bike OTD back to 1 to 3 weeks and essentially pre-COVID levels. We have a little more work to do on Bike+, but we think we're going to get back to that 1 to 3-week period over the next 6 weeks or so. So we're just happy that we're in a good place from an OTD perspective. Mostly because it's now allowed us to do what is in the core DNA of Peloton, and that is performance marketing. And so over the last several weeks, we've been able to resume marketing and get back to what we did best prior to COVID. And of course, I would be remiss if I didn't mention that we are excited to launch the lower-priced Tread later this summer, and we are feeling very good about our product pipeline in '22 and beyond.

Okay. Great. Let's talk more about Tread, which we viewed as a very large opportunity for Peloton just what gives you the confidence that you can launch in the U.S. this summer? And you kind of specifically said 1Q, your quarter ending September on the earnings call. If you could talk more about that.

Sure. Well, I think it's just helpful to level set on the 2 Tread products and how different they are. The Trend+ is our premium slat belt product that has been sold exclusively in the U.S. for the past couple of years. It's a great product, but it's always been a smaller part of the ultimate treadmill opportunity that we see in front of us. We recently implemented a pin code over-the-air last week as part of the safety enhancements that we plan to do, but it will take likely many months before we are able to get that product back on the market as we're looking and exploring different hardware enhancements to improve the safety of the Tread+ and working with the CPSC on that. Tread, our newer, lower-priced product with a traditional belt running surface was we started selling that product in the U.K. and Germany -- sorry, in the U.K. and Canada earlier this year. And of course, it was set to launch 2 days from now in the U.S. We are really excited about this product. Obviously, with that price point and the quality and the content and the member experience. We were excited how well the product was received in the U.K. and Canada. In fact, for a very young product, we had an 85 NPS score so far. So people loved it. Obviously, as part of the recall of Tread+, we also recalled the Tread for, call it, 0.2%, of the members in the U.K. who would purchase the unit. There was a minor quality issue with the screws that attached to the console, which is the touchscreen to the machine, causing the console in a handful of instances to detach from the unit. So we believe we have a remedy. We're eager to resume sales, but we do have to go through the CPSC approval process, which we understand typically takes 6 to 8 weeks, and we're presenting a solution to them in the coming days. So when I kind of get to that math, it gets me to Q1 and we're excited to get that product launched for sure.

Okay. Great. All right. So what have you -- maybe can you just talk, when you talk about the 85 NPS in the U.K. and Canada. Just what have you learned from the early Tread launches in those markets? And then I guess, in particular, how should we think about overlap of Tread sales among existing Peloton Connected Fitness subscribers?

Yes. So interestingly, I'll just go back to Tread+ in the U.S. where when we initially launched Tread+, as you can imagine, about 80% of our existing members were the new purchasers of the Tread+. And what we saw, overtime, was that we were able to, through growing the awareness of the product... [Technical Difficulty]

Just give us 1 moment.

I'm sorry. Sorry, I don't know where -- sorry. I don't know where I lost you. Apologies for that.

Yes. It's probably just 20 seconds or so.

Okay. So should I just start again with...

Canada, U.K., sure. You said 16%.

So in the U.K., it was very similar to Tread+ where the initial purchasers were primarily existing bike customers. In Canada, what was interesting, and I think it's space constraints. We obviously have a lot of members in the greater Toronto area. We actually saw a much higher mix of initial incremental subs and people who didn't already own the bike. We think it might just be space constraints. But again, we thought that was a little bit different than what we had expected. Clearly with a more mass product with the lower-priced Tread. We potentially will see a greater audience. We're obviously also going to do a lot more media investments behind the lower price Tread than we ever did for the Tread+. So I think that will -- while we'll have a large number of initial members. I want to Tread from the get-go, we think that, that will dissipate over time as we broaden the awareness of the product through marketing.

Okay. What are some of the advantages of launching in the September quarter as opposed to May. I mean, it's a push of a couple of months what are those? And then, I guess, how materially can your inventory situation change in that period of time?

Well, I think it's important to note that because we think the fix is just related to the screws, we have continued production of Tread, right? Throughout this time period. And so if there is a silver lining in this situation, I would say, it's allowing us to amass a bigger initial inventory for when we do launch. And so we think that, that will bode well for order to delivery as we continue to expect that there's going to be high demand for the product.

Okay. And then maybe could you just talk a little bit more about the marketing. Just given the shift in timing and then also as you kind of get some more distance in terms of headlines from the recalls, just how does the marketing strategy shift around the Tread launch? And then how do you think about that marketing kind of as you head toward the holidays and into a much heavier seasonal period?

Yes. So as you know, prior to COVID, we did have very seasonal sales, right? The big periods for us tended to be from around Black Friday all the way through February as people bought our gifts. Again, I think Peloton might be some of the only fitness equipment, you can buy your partner, spouse and not get in trouble over the holidays because it's something that people want. But we also benefit from New Year's resolutions as well. And typically, we see these quarters that span what is our second and third quarter. Can be 60% to 65% of our sales in a given year. So I think pushing a little bit later in the summer, we're obviously -- there's a few important things that we need to do. One, we need to make sure that there isn't confusion about the Tread+ product and the lower price Tread. The belt tread does have a rear guard. It's very low profile. It's not as heavy as the Tread+. So I think we need to do a really good job in making sure that people understand what the product is. And then, I think, secondly, I think it really is, in our view, a portal to a full-body workout. We now have proliferated our content around boot camp. Of course, all the standard running and walking content on the Tread. But in our view, the Tread presents to us a massive market, not only because we know Tread-oriented boutique fitness outnumbers cycling fitness by a factor of 10, it's the most common product that people purchase for their home. But I really think when people understand the content differentiation and software around boot camp and it being a portal to a full-body workout is going to be a game changer. And also, we just, at homecoming, launched Strive, this Strive Score where you can wear a heart rate monitor. And now you are tethered to that experience throughout the entire boot camp class, whether you're on the Tread or off the Tread. So very excited to get that obviously behind us in time for the Tread launch.

Got it. Yes, it's always been one of those things, I know, members have wanted when you step off the Tread and you still want those points. You want the recognition for that workout you do on the floor...

100% and you can't rest anymore, right? You can't lay down and pass out, you've got to keep going. So it's -- I think it's great. And again, it speaks to the fact that people love that gamified aspect of our programming where they want a PR, they want to do better, they want to increase their score overtime. And so and that's the most important thing because it's effective. What we do is effective, and it's giving people the fitness that they need.

Okay. So last one, Tread-related for the moment. Just quickly on Tread+. So you just rolled out the Tread Lock, the 4-digit passcode last week. So certainly a good step. But you mentioned a few minutes ago that you think the hardware safety fix is more like many months. So I guess the question is, is this a product that you think you'll definitely sell to consumers again? Or could you move it into commercial channels more through Precor?

Nothing's changed in our approach to Tread+. It is the best treadmill. And then in terms of slat belt incredible value versus other treads that are out there. And we always had intended to offer it as a premium product, and nothing's changed with that. It's a key aspect of our better, best strategy of our Tread line. In terms of commercial, you're right, I think we've had a lot of reverse inquiry for this product in a commercial setting. But obviously, we'll have to wait until we have a hardware solution, safety enhancement solution that is approved by the CPSC before we can get it into that channel. But that is absolutely a very interesting possibility for us.

Okay. All right. So let's talk about bikes. So overall, just a strong 3Q, 414,000 Connected Fitness net adds in the quarter. Just as you work through more of your backlog and pull forward, as I mentioned, some of those deliveries from 4Q. So what was the biggest factor in accelerating those deliveries? Should we -- it sounds like it's more the investments in expedited shipping, just given some of your earlier comments about the ports and ongoing delays, basically. But if you could talk more about that?

Yes, you're 100% right, Doug. We knew we had to spend some money to fix the OTD situation. And thankfully, that investment paid off and the expedited shipping that we did, especially with the bike, was able for us to reduce OTDs by several weeks within a span of a couple of months. U.S. port congestion remains acute. I'm sure we're all feeling it with delays on back orders of things that we've purchased. It feels like it's not going to go away. And obviously, it allowed us to leapfrog the congestion issues that remain in the West Coast ports that we use. So I would say in terms of what was pulled forward, again, I think the investments paid off a little bit better than we had expected, and it ended up being a little more weighted to Q3 than Q4. But we're excited about that because that means our members who are waiting for their bikes, got them earlier. And so I would encourage you and others to just look at the second half of the year in totality, given that we definitely exceeded our own internal expectations by a lot. But again, to get people on our platform and get their products in their home sooner was something we would take all day long.

Right. And I guess, so much so that you're adding another $15 million basically to that?

Yes. I mean, there's been, obviously, since we announced the original investment, there's been a couple of other things like the Suez Canal issue, getting some product over to the U.K. and Germany. And again, it's -- we just don't see this issue is going away. But with that said, what we now have done, right, is elongated our supply chain planning process, right? So if we were going through time and it was November last year before we really saw how acute the port issues were getting. We might have estimated, in our model, that we were going to get product from Taiwan to the states in a matter of 5 weeks, right? Now, right, what the port congestion has done is elongate that time on the ocean, whether they're sitting on a boat outside of the port or whether the container is not loaded or not unloaded, and so now what we're doing is we're building that into the planning process to avoid air shipping in the future. It doesn't mean that we'll never ever do it, but I think the rearview mirror of what we've done, we won't see again.

So what's your current thinking just on OTD windows? And whether you'll be able to return to normal, basically, by the end of 4Q. I guess the latest we've seen is on Bike+ is in kind of the 3 to 5-week range. Just how are you thinking about that?

Yes. We're getting there. We're -- again, it's just a function of bikes on boats and continuing to spend in expedited ocean. And some limited air shipping that we have left to do in the quarter. But our goal is to get Bike+ at parity with Bike, right? We think, overall, from a portfolio perspective, that's the most efficient way to market our products, right, is to market products that people can buy and receive in their home within a matter of a couple of weeks. And so it remains our top priority to get that OTD down as quickly as possible, and our expectation is that Bike+, as you've seen us come down, and we're getting there and should be in a really good place by the end of this quarter.

So does -- I guess, the question is how much is bringing down that OTD inherently increase Bike+ demand. Or is it more just kind of on the margins? And then just, in general, what are your thoughts here on current Bike+ demand? You made the comment at earnings that demand is up 3x from where it was 2 years ago. Just how do you get people comfortable with where bike demand is heading into warmer weather and into strong reopening?

Well, first, I would say, and I think we said this after the launch of Bike+ is that truly the technology and the innovation that we've brought with the Bike+ has been incredibly well received. And so I think we continue to see Bike+ exceeding our expectations on mix. And so with that said, the comments that I made around bike demand in Q4 is that we all know that COVID was a little bit of an anomaly last year in terms of sales. And so when you look at Q4 of last year, and everybody -- I mean, I was the most bikes or treads that we had ever sold in such a short period of time, it's a tough comparable for us, right? And at this juncture, it's not relevant. So what I was trying to do was, okay, well, let's look back to where we were in Q4 of '19 and where we expect to be in terms of bike in Q4 of this year. And I was trying to make the point that, yes, we've lapped COVID now. But bike sales or bike demand is still over 3x where it was a couple of years ago, which when you look at that CAGR over a 2-year period, we still see a ton of demand. And what's so interesting about our company today, versus 2 years ago, is that we now have the portfolio of products, right? We have the lower price bike at $49 a month. We have Bike+ which I've said is doing very well. We also are back marketing, again, which is something we haven't done and we were purely organic for so many months because we didn't want to exacerbate the OTD situation. And so there's a lot -- and then in terms of the warmer weather and getting back, we're always going to be seasonal, right? Now that COVID is behind us and people aren't locked indoors. There's always going to be some summer seasonality to the business. But with that said, I actually think that there are habits and things that people are now considering that they perhaps would not have considered before. And I do think working out at home, whether or not they had a Peloton bike, is something that is on the radar. I mean, we're also going to get busier again and so it goes back to the original reason why we grew so quickly prior to COVID because people were recognizing in their busy lives bidding in a 20 or 30-minute workout is really, really hard to do. Most people don't go to the gym 7 days a week, but I know a lot of people that ride their Peloton bike 7 days a week for 20 or 30 minutes. Since -- so I actually think as we get back to normal and busier, and that's potentially some things we can talk about in our marketing, right? We can highlight other aspects it's not about just being at home. It's about the value convenience and efficiency of the workout experience that we provide. And that doesn't change with COVID.

Got it. Okay. That's helpful. Let's shift in just talking about international markets a little bit. Just how would you characterize the launches overall in the U.K. and in Germany and Canada thus far? And what are some of the hurdles or challenges just as you think about it like relative to the U.S. market, for example?

Yes. So the U.K. launch, as we've talked about a lot, and then the Germany launch and Canada launch. What's exciting is that when we launched in these markets, we'd already had a fairly well-developed playbook of how to approach the business model, right? In the U.S., it took us years, right, what mix of showrooms do you need? How do you performance -- market this product. And so because we had a more evolved playbook on go-to-market strategy when we dropped into the U.K. and then into Canada and Germany, we were able to leverage kind of a more fleshed out playbook. And so as a result of that, our expectations were high, right? Our expectations were that we would look at an accelerated growth path relative to what we saw in the U.S. in the early days, and that's definitely been true in the U.K. And Canada being so proximate to the U.S., we'd already had a little bit of brand awareness there. So we're really pleased with the performance in Canada. And Germany is following an even better trajectory than the U.K. So we're just perfecting our way as we go and refining that playbook. And so it's obviously numerous challenges associated with launching new markets, and that's why we're really disciplined about it and why we're not going into 10 countries a year because localization is really important. And we also have to get right that member experience, right? How much do we rely on third parties versus where do we build ourselves, where do we want to strategically place our showrooms, how do we want to approach logistics. And so far in each of our markets, we wanted to do our full vertically integrated strategy, but we know that overtime, right, in some of the smaller market opportunities. We're probably going to have to shift our focus on precisely how we go to market.

Okay, which it sounds like you're doing with Australia a little bit, launching digital-first and seeding the market there. Okay. Let's talk about strength. You've been focused there for a few years. You've built up a lot of content across strength classes and boot camps. Can you just update us on how the company is thinking about a piece of hardware for strength? And is there any risk that just the longer you wait, the tougher it becomes to impact the market?

So we always have said that to win in home fitness, we need to win in cardio, which we will do with the bike and the tread, and we need to win in strength. And so what I -- what we see in strength is really an opportunity if you look at the platform that we've created with the bike and the tread is to reimagine home fitness as it relates to strength as well. And we know that strength training is a massive TAM opportunity. In fact, more people actually do strength training at home than cardio. And certainly, there are products that some competitors have on the market that are great. But we're excited about our development pipeline. And to us, speed to market is less important than what we're trying to do, which is build the right member experience, which does take some time. And also, if you think about the strength category, it's the most fragmented of all categories, right? When you get on the treadmill, there's only a certain number of things you're going to be able to do, right? And I think we even reinvented that with boot camp. And same with cycling, but strength, everybody has different needs, different levels, different ways in which they like to strength train, whether that's body weight, whether that's resistance bands, whether that's dumbbells, or heavyweights. And so it actually is a much more fragmented market. And you might see us try multiple different things, right, to try to capture the biggest TAM.

So -- and then just how do you think about kind of the concepts of like cables and pullies versus something that's more AI or 3D-sensor driven for strength?

Yes. I mean, I can't really comment on that. But I think you can -- rest assured that we're going to come up with the important hardware and what I would say, more importantly, I think, software that is going to transform that strength and experience for our members.

Okay. We've got 1 minute. I just want to hit on Precor real quickly. And then we're going to do a quick word association, which I know you love. Just Precor, can you just help us size the commercial opportunity here. And we know, obviously, the manufacturing benefits, what else excites you as you get the businesses integrated more in the back half of the year, back half of the calendar year?

So we're excited Precor's DNA, right, is commercial sales. And they know how to sell commercially and sell commercially in a lot of markets all over the globe today. So we have inherited an amazing commercial sales team. As you know, prior to the Precor acquisition, the commercial business was a little more of an afterthought to us. But what's so interesting about commercial to us is that it has a two-pronged opportunity for us. One is obviously the bikes that we're placing, whether it be a hotel and in the future, hopefully, colleges, universities and corporate campuses and residential buildings. But we sell, right? We sell bikes by putting those bikes in hotels. We sell bikes to consumers who trial in the hotel, and then they go home and they purchase. In fact, I think the latest I saw was that for every bike we placed in a hotel, we sold at least 7 bikes to a consumer as a result of that. So it's hard to size the opportunity when you look at those signs of that. And so again, we now have a dedicated sales force. So that's great. To your point, we have the bike product today. I think while we're not -- we're several months away from this, I think both treads also could be important commercial products. And then outside of hospitality, some of the other channels that I named, I think could be really important. So I think it could be really big and a much bigger piece of the pie as we move forward.

Okay, great. All right quick word association, 10 words, first thought for each. Ohio.

Park, Peloton Outlet Park.

Order to delivery windows.

Shortening.

Tread.

Excellent product.

Precor.

Commercial.

Bike demand.

Strong.

Marketing.

Resumed.

That works. NPS.

High.

TAM and SAM.

Growing.

Robin or Ali?

Both.

And strength.

We're going to win.

All right. Cool. We're going to leave it there. Thank you, Jill. Appreciate it. Thanks, everybody, for joining.

Thank you. Bye.