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

Hi, everyone. Thank you for joining us today. Very pleased to have Jill Woodworth, CFO of Peloton, here for a Q&A session, and it is virtual. So if you do want to submit questions via Veracast, we'll try to get to them. Hi, Jill, how are you doing today?

I'm great. How are you, Justin? Thanks for having me.

Good. Are you in the home office?

I am.

Great. Myself as well. So great to have you here.

Why don't we start with the big picture question on the market opportunity. I think it's very interesting. Of course, there's 180 global gym members, but I think about half of your members, pre-pandemic, were not gym members, maybe someone in their family was. But how are you thinking about that opportunity today post pandemic? Anything changed there? And where are you on that opportunity?

Yes. So I think, first and foremost, nothing has changed about our thesis, right? We believe that the future of fitness is home connected fitness, better experience, better location, which, by the way, we think is even more relevant as our lives get busier coming out of COVID, and better value. You saw last quarter that our subscribers were working out with us 26x on average per month. So incredible value versus other fitness alternatives. We've tackled the addressable market in 2 different ways, right? You've seen our bottoms-up work that we've done to calculate TAM and SAM, which is about 20 million units in the 4 markets that we're currently in, which represents about 15 million households. But obviously, we think that SAM will grow considerably over time, not only as we expand into new geographies, but launch new products and, of course, as we grow our brand awareness and purchase intent. And to your point, we always like the stat that 180 million people around the globe at least pre-pandemic belong to a gym, but we think it understates the opportunity. Many people, when we know from our members, were not comfortable or the gym didn't work for them. They weren't comfortable in the gym environment. And so we actually think the addressable market is a lot bigger than the 180 million people that belong to a gym. And also what's interesting is that the 4 markets that we're in today, the U.S., Canada, U.K. and Germany, represent 90 million of those 100 -- I think it's 182 million gym memberships globally. So we think there's a massive opportunity ahead of us. We think the 180 million memberships could understate the opportunity. But the opportunity is unchanged since COVID, and we're more excited than ever now that we've begun marketing our products again, and we have the upcoming Tread launch towards the end of the summer.

Great. I think there might be a little concern that stay-at-home mandates brought forward demand and -- for subscription companies, not just Peloton, but how are you thinking about the sustainability of very strong 2021 -- fiscal '21 trends for you into fiscal '22?

Well, I think we're fundamentally a different company than we were pre-pandemic. We now have 2 products in the Bike portfolio. Remember, we weren't marketing for many months there when we were supply-constrained, certainly due to the benefits that we had from a sales perspective given the lockdowns. But we're just fundamentally, I think, a different company. Our content offering is incredibly different. I think the value prop, as you think about the different fitness modalities that we've added during COVID, like bar and Pilates. We've relaunched yoga. We've significantly grown our content in our international markets as well. So we have such a different story to tell than I think we did pre-pandemic. And we also -- since launching the Bike+, when we did the simultaneous price drop of our original Bike, we haven't even had a meaningful opportunity to really market that $49 a month bike on financing. And so we're really excited going into next fiscal year. We're going to be focused on growing our Bike sales, of course. We're going to be focused on launching new products. In particular, we think Tread will be a meaningful portion of fiscal '22. So there's a lot to be excited about, and we'll update everyone in August when we announce our Q4.

Great. Joanna and my team tracks your bike delivery times to the day often and very on it. So we have seen the bike time down to 1 to 3 weeks, which you promised and the Bike+ has come down recently. So how do we think about the lower lead times helping consumers get their products sooner? And could that actually benefit demand as we move forward?

Well, actually, we also just made some additional progress that you may have seen yesterday. We did change our Bike+ delivery time frame to 1 to 3 weeks. So we are incredibly happy that the over $100 million that we spent in expedited shipping actually solved the problem of getting around port congestion, which we think is going to be an issue for several months to come. So we're excited about this. What this means is that we're going to be able to market both products, both products in the portfolio and -- because we know clearly that with longer OTDs, right, we did leave some sales on the table. And so now we're sort of in a perfect world as it relates to OTD with bikes. So I think we're going to learn a lot over the next few months as we resume marketing. But that, to me, we're just excited that, that investment paid off. And it was the right thing to do from a member experience as well. Obviously, the idea pained us greatly that people had to wait several weeks or months during certain times in the pandemic for their bikes. So we're incredibly proud of that.

Knowing John, I bet he -- it bothered him a little bit. I'm glad to see you're over with that.

Yes.

So you've already mentioned some of the drivers next year, but there's a lot. And so can you walk us through how you're thinking about the following 4 growth drivers? I don't know if you want to rank them or -- just big picture, and I'll just throw some out there, but you've got new products, return of marketing spend, international expansion and maybe even refurbished. I don't know, time frame maybe. But there's 4 big drivers there. How would you think about those in a framework?

Well, I think you probably did a fairly good job ranking them yourself, but I think new products and obviously, getting back to what's in our DNA and marketing are going to be huge drivers for us next year. So of course, first and foremost, we are focused on growing our core Bike portfolio business, right? We have 2 million Connected Fitness subs today compared to a 15 million household SAM, which we know will grow over time. So we are still in the very, very early innings even based off of what we think is a conservative addressable market. But product evolution is everything to us. We've made a lot of great tuck-in acquisitions over the course of the last several months to really accelerate our investments in R&D and new products. We have a lot of exciting things sitting in our R&D lab. But of course, for next year, as I mentioned, we're very excited about getting the Tread launch, which we know is a 2 to 3x bigger market than Bike. And just to also put it in the context, what is really resonating with our members is our boot camp content, really, which is very akin to a Barry's Bootcamp and an Orangetheory, right? So we know that, that full body workout is so efficient and something that our members are really loving. So we're really excited about product evolution. We also, during homecoming, launched the Strive Score. One of the complaints or asks very early on with Tread was how do I stay tethered to this experience and get credit when I'm off the Tread? So Strive Score with a heart rate monitor allows someone to feel very tethered and helps really increase their accountability when they're not on the Tread. So super excited about products. Strength as well is something I know we've alluded to a lot. It is a massive opportunity. It is something that people have done at home for decades. And so that is a category that you will see us dip our toe in even more than we do today with all the great improvements that we've made to our Strength content over the course of the last several months. So super exciting, nothing to announce today. But we will win in Strength as we will win in Cardio, which includes our Bike and Tread. Market expansion, we talked a lot about. We are getting into Australia pretty soon here in the coming months, which we're really excited about. And we have global ambitions, but we want to be smart about it. So we probably will target 1 to 2 markets a year. And really need to make sure that as we go to these smaller markets, we evaluate the ability for Peloton to drive meaningful sales, which means we have to look at a lot of different elements of those different countries and how we can fit into that and what part of our vertical stack we actually use. For example, in Australia, we will be starting off using third-party logistics, right? We did full stack in U.K. and Germany given the size of the opportunity. But we certainly will -- you will see us announce new markets over the course of the next several quarters. And then lastly, channel, right? We have historically been a direct-to-consumer company. Commercial has been an afterthought. Certainly with Precor, that has incredibly strong and big sales force into various commercial channels will be something that we'll leverage to get further into hospitality, colleges, universities. And they also have a service network, right, which was something we were missing because we never wanted commercial to be a detriment to the brand, right? If you walk in somewhere, and we're not able to make sure that a bike is properly looked after, right, it may create a negative first impression or experience with Peloton. So that is a huge step for us in our ability to get into commercial. And then lastly, corporate wellness and obviously working directly with health care providers because we do have the tools and the data that will allow them to better hopefully manage their premiums over time. So we're super excited about some partnerships we can do there. It's obviously been on our minds for many, many months. But in a supply-constrained world, these are things that we haven't been able to focus on until now. So super excited about it. And then you mentioned refurbished. Of course, it's always in the back of our minds, but we need product in order to do that, and we still don't have enough certified pre-owned product to viably pursue the strategy at this time, but it is 100% on the road map, and we think will be an incredible way to drive accessibility at a lower price point for our products over time. So super excited about it. But that's probably a little further down the road for us.

All right. A lot going on there.

Yes.

I think also, earlier this month, you announced a new U.S. factory, and I know there's also some Precor excitement. So how does that fit into your supply chain down the road? I know it's several years away. And what does that mean for Precor?

Thanks for asking. We are really excited about our domestic manufacturing. So first off, I would say we're very committed to Taiwan and our third-party manufacturing partners there. They have been incredibly valued partners, and we're going to continue to invest in Tonic, which is our owned facility within Taiwan. But we're so excited. First off, I would say this was really a 2-step process. Precor to us was really twofold. One, it was the commercial opportunity that I just mentioned. But two, they have a combined hundreds of years of R&D and manufacturing capabilities that have really allowed us to take this idea of going stateside and turning it into a reality with a lot of their knowledge base. So we're really excited because over time, right, we know if we're stateside, first of all, we're eliminating a lot of the logistical challenges that we've had over the course of the last several months. We think through scale and automation because we're always going to have a pruned portfolio. We're not like other fitness equipment manufacturers that have dozens and dozens of SKUs. Our goal is to make our products accessible and take those price points down over time. And in order to do that, you have to have scaled efficient manufacturing. And so we're just super excited about what we're going to be able to do there, and it's going to serve us for the next couple of decades. So we're really excited about it in Precor. We will be producing bikes out of the Precor facility by the end of this calendar year. So we're really, again, excited about the steps that we've taken to get here. But I think it's going to bode well for prices down the road for our consumers and broadening our audience.

Got it. Okay. Let's move over to the Tread recalls and maybe just give us process with the CPSC and where you are on approvals at this point? And then maybe could you talk about the potential buildup of lower-priced Tread inventory?

So 2 quick things I just want to clarify. There were 2 different, very different recalls. And I'm going to talk about lower price Tread since that is more imminent for us here. But that was a product that was launched in the U.K. in December and Canada in February, and we had planned to launch that product in May in the United States. We had some minor quality issues of the screw that attaches the console to the tread. And so because it is a minor issue, but that it happened in coincidence with our Trend+ recall, we did decide to recall that tread as well. But the time line has not changed from what we've communicated on our last earnings call, which is, we believe, in mid- to late July that we will be able to relaunch in the U.K. and Canada and go ahead with our launch in the U.S. Tread+ is going to take a little more time. We've already implemented the over-the-air PIN code a few weeks ago that helps deter unauthorized access or use of the unit. But in terms of the hardware solution, to be a leader in safety in this industry, it's going to take us several months to come up with a great solution. And so I can't actually put a pinpoint time frame on that, but it's several months away. But of course, it's a very different situation than the lower-priced Tread.

Great. Thanks for that update. When we think about the opportunity for the lower-priced Tread, what does your research tell you about that when you enter the market? And what do you think the Peloton advantage is in Tread versus quite a few other treadmills already out there?

Well, I think it's the integrated experience, right? And what we did for the bike with the combination of hardware, software and content, and really, the software part is really the secret behind it, right? Anybody can produce content, although I happen to think we produce the best fitness content in the world, anyone can produce a really great bike or tread. But it's really how do you tie that experience together, right, tether someone to the experience, create it, make it entertaining, allow someone to feel surrounded by the community. I think what we're doing now with tread is really replicating what we did with bike. And so to my knowledge, there isn't another product that does that. And so we think at the accessible price point that we're offering that we think with the interactivity in the community and everything that we did to the bike, we're now bringing to the tread, which we, again, think is a 2 to 3x bigger market? And one little thing that I always like to remind people of is that 4 out of 5 people that bought a Peloton bike pre-pandemic were not in the market for fitness equipment. We've created really an experience more so than a product that people love, that people get immersed in, that people are entertained by. And the same will go for the tread. I think it's just a completely different animal from the tread that's sitting in your basement where you can watch the little dots go around the track. It's just a completely different immersive experience that we're super excited about. And again, I would emphasize it's not just running, walking and hiking. These boot camp classes are incredibly effective and really mirroring the growth that you've seen in boutique fitness from Orangetheory, Barry's Bootcamp. It's just incredibly efficient ways to work out and our members are responding.

All right. Okay. I know the company is really excited about the Tread. And presumably, the percentage of treads will be going up relative to bike. How do we think about that for gross margins? A lot of new products coming and especially the Tread next year.

So if you go back in history to the Bike, when we first launched our Bike 5, 6 years ago, right, in meaningful quantity, let's say, on an index basis, it cost us $1 to make a bike. It now costs us $0.40, right? And the same goes for any new product, right? It's going to take us a while to get cost efficiencies. And so the same goes for the Tread. So the Tread is certainly going to have inefficiencies on 2 parts of the spectrum. One, it's going to carry a lower gross margin than our Bike portfolio. But again, I have a lot of confidence that we're going to be able to take costs out over time. And then two, right, when you launch a new product, your media spend is going to be less efficient, right? The other thing we've observed with Bike over time is that our CAC has consistently gone down every year, even absent the pandemic, where, obviously, we weren't spending marketing dollars. Before that, we had consistently taken down our CAC on our bike sales consistently year-over-year-over-year. So while we will have a period of inefficiencies, both on cost structure and marketing, again, because we think this in a few years could be our biggest selling SKU, we no doubt feel that both of those levers will go in the right way, the way they did for Bike as well. So yes, it will have a negative impact on margin. But again, what we care about is gross profit margin dollars offsetting our marketing spend and less so the blended gross profit margin in Connected Fitness. It's the dollars we care about.

Got it. That's definitely helpful. And then one more thing about the summer. I know the Tread launch is coming, but seasonality, you really didn't have it last year. You were completely capacity constrained and trying to meet demand. This year could be a little different. But how do we think about seasonality for Peloton? Maybe give us a little history lesson going back a couple of years here.

Sure. Well, pre-pandemic, what you would see, and again, for those of you, just to remind you, our fiscal year is June 30. So when I talk quarters, Q2 and Q3 are September to December and January to March. But Q2 and Q3 were typically our heaviest sales quarters. About 60% to 65% of our revenue was generated in those 2 quarters. And that was really driven by -- we would oftentimes do a Black Friday promotion. I do think regardless of the ad controversy, Peloton is a gift that you can give your partner or spouse. And so we do see a lot of gift giving and a lot of buying around the holidays. And then lastly, Q3 is New Year's resolutions, right? That's when people really are thinking hard about what their new fitness routine will be for the year. And so those 2 quarters typically represent the majority of our revenue. In this -- and also engagement follows, right? Because it's all so cold out, people want to work out in doors versus out. And then the true -- and then the same is true. The reverse is true for Q4 and Q1, 35% to 40% of sales, warmer weather, people are going on vacation, they're traveling, engagement tends to be a little lower, and sales are not as robust as they are in fiscal Q2 and 3.

Got it. Got it. Do you think there's a point maybe like a Netflix subscription where people turn it off for a couple of months and then come back? I doubt you're seeing any of that given the engagement numbers now. But do you think eventually that could happen?

Well, we've offered that for the last couple of years, and it is a really, really, really small number of people that take us up on that. It is in the low thousands on a base of 2 million. So it is a very, very small number. So that's actually not particularly relevant. And of course, what we're just focused on is keeping engagement high, keeping the content fresh, engaging with our members, giving them new challenges, new programs, and that's really something that we hope will keep churn low over time.

Got it. Got it. Let's go on to marketing. You've mentioned that a couple of times kind of excited to resume that. How do we think about the customer acquisition costs as gyms start to reopen and we kind of have the reopening. How do you think about that?

Well, we started marketing again several weeks ago as our bike order-to-delivery time frame started coming down. And obviously, we were off air for many, many months during the pandemic just due to the supply constraints. But we're really excited to get back to it. I mean that was really the DNA of the company, right? We are performance marketers. And so I would say we have an incredibly talented team that is now back figuring out how to use data to best target those new consumers and actually attract a whole new audience to the Peloton platform. If you think about it, the last 15 months, all of our sales were essentially word-of-mouth and organic, right? So now what's exciting is employing all of the different tactics that we had before, but now we have multiple products, right? We have the Tread launch, we have Bike+ in market. We just have more news to communicate And I think it's going to allow us to broaden our membership as we get our brand awareness to grow again and purchase intent to grow. So it's something that we're really particularly excited about. Certainly, you're not going to see leverage over last year's marketing costs in our P&L next year because, of course, for us, the most important thing right now is to keep growing subs. And the way to do that is to introduce the Peloton concept and educate consumers on our product offering, on what we offer. So marketing is obviously an incredibly effective way to do that in addition to word-of-mouth and keeping NPS high in order to do that.

Got it. I know you've got this question since the IPO, and I'll just ask again. But -- there's a trade-off between marketing, but if you lower cost, you'd probably save on marketing. How does the company think about that trade-off?

We are always thinking about that trade-off, right? So it's all about the marginal dollar that you can spend in marketing and is it worth it versus putting a dollar in the pocket of the consumer. So we're always thinking about the interplay of price and marketing spend. And so it's -- again, for us, we have this beauty of this net customer acquisition cost concept. So when we acquire a subscriber, and I'll put the pandemic aside because we were actually making a lot of money without spending marketing dollars, right, applying the gross profit margin. But we aim to sort of keep net cap neutral, right, meaning that we won our gross profit dollars on our Connected Fitness equipment as a portfolio to offset the sales and marketing expense. And that's how we kind of want to manage the P&L going forward. And that's still going to be true. But what's so great about that is when you look at it from a customer acquisition cost perspective, we get this incredibly high-margin, long lifetime value subscriber. One could argue we could be in the -- we could actually spend more marketing dollars than we're generating in Connected Fitness, but we want some fiscal discipline as we grow. But yes, we are -- that is the way we intend to grow over the next several quarters is to try to match the two. And of course, you can reduce price and presumably, you would get an uplift in conversion, which would then lower your CAC. So we're always thinking about that trade-off over time. But we want to make our products accessible. So it's not a bad assumption to think that in the future, we're going to continue to lower our prices.

Got it. I guess the churn around 1% gives you a lot of flexibility.

Yes.

Okay. Maybe we'll move on to the digital subscribers. I know there's some excitement around there. And we saw the uptick you announced in the last quarter, I think 20% conversion to Connected Fitness subscribers from 10%. So is that pandemic driving that? And do you think that conversion rate is sustainable? How are you thinking about that? And are you happy with how those -- how that business is trending?

Yes. So as you know, pre-pandemic, we had about 100,000 or so digital subscribers. And historically, we had seen about 10% of those subscribers convert up into Connected Fitness and purchase a bike. And when the pandemic hit, right, we had a moment, right? Everyone was at home. We wanted to do our part to help all of those people who found themselves trapped inside, and we offered a 90-day free trial for people to try Peloton. And so having over 1 million free trialers really obviously helped us jump-start our digital business. But we really think about it as a funnel or a sales channel for Connected Fitness. And so while we've seen incredible growth in digital platform, we run it at breakeven, right? We put it as part of the CAC against our Bike and Tread. And really, the improvement in conversion, I think, is a result of a couple of things. One, we're doing more targeted efforts more than we had done pre-pandemic to try to get our Connected Fitness products and market our Connected Fitness products to our digital customers, and we're trying to broaden the pool. You probably saw a couple of days ago, we also launched a student membership and health care worker membership and military membership pricing. Really for us, it's all about getting people into the funnel and whether or not they purchase a Connected Fitness unit in 6 months or 6 years, we know that they're going to fall in love with our content, our instructors and when they can eventually either afford or have the space for the Connected Fitness unit, Peloton is going to be top of mind.

Got it. I have one more, and then there are a few that we've got from investors. So maybe I'll ask mine and then I'll go to those. But I guess everyone kind of -- maybe there isn't a consensus view on the value of your brand versus your price point. So how do you think about that? It definitely seems that people who have bought the product are incredibly enthusiastic about the product. And what do you think are Peloton's sustainable competitive advantages as other products inevitably hit the market?

Well, I think we were the pioneer in the category. So I do think we have a first-mover advantage. John Foley and his cofounders were really, I think, the first to see the massive opportunity in what digital streaming media could do to the fitness category, the way it's impacted, the way we consume movies and gaming and music, right, and book. So why not fitness, right? And so I think identifying that early, I mean we have a 6- or 7-year head start thinking about this integrated experience, right? We produce the hardware, the content and the software at the same time and thought about it holistically. If you think about other people coming into the category, of course -- and by the way, I can talk about the vertical integration, which I do think also plays a big role. But you think about traditional fitness equipment manufacturers, they're probably incredibly great at producing fitness equipment, but now they have to develop and flex different muscles, no pun intended, around thinking about content and technology and software and things that were in our DNA for several years, right? Or if you're a gym operator, right, you know how to develop a great bricks-and-mortar strategy, but how do you then develop that hybrid digital strategy to really make sure you're not losing your consumer post-pandemic. And so I just think we sort of grew up with all of these core competencies. And then, of course, the moat really for me is logistics and our own retail and our own member experience teams and the way that we try end-to-end to make sure that we have the most incredible member experience possible. We're not always perfect, but we try to be. And then I would -- I can't not mention the fact that music licensing agreements mean the world. I don't think there -- I think most people would agree that music is an incredibly important part of their fitness routine. And we have an incredible music team that has done some great partnerships and shown a ton of creativity in ways to engage our members through music that I don't think other people are sort of thinking about more holistically. And so -- and then, of course, we're the one-stop shop now, right? You can come to us for yoga and bar and cycling and tread and outdoor and boot camp, Pilates, meditation, whereas others have maybe focused on different slices of the fitness pie. We're really trying to be the membership in someone's home that would be irresponsible if you did not have one. So we are incredibly excited about our first-mover advantage, but we don't rest on our laurels. And obviously, we're always continuously working harder to make that -- make our products and make our software and content better and better and better.

Great. That's really helpful, Joe. A couple of bonus round questions from the audience. I guess the first one is, when can we expect to see more global interactive events like a Tour de Peloton? Where are you on that? We'll rifle through these?

Oh my gosh. Stay tuned. We've done some really creative things. Obviously, people probably saw the ESPN special from last summer, where a bunch of athletes competed on Peloton bikes. And obviously, this summer, we have some athletes that we're working with in conjunction with the Olympics. So there's lots of fun stuff on the road map, but nothing I can really talk to you about, but we have an incredibly engaged and creative content team that is thinking through all sorts of fun things to bring to our member base.

Got it. And last one, just where are you on Germany? Question is how are you thinking about the market opportunity? And where are you? And how are you gaining success?

Well, having entered Germany prior to the pandemic, we were obviously -- it was a huge market, right? so when you look past the U.S. and the U.K., Germany is the third largest fitness market in the world. So it, of course, made a ton of sense for us to go to Germany. And what's great is every time we enter a new market, we kind of figure out how to do it better, right? We perfect that playbook. We didn't know everything when we launched Peloton in 2014, right? We didn't know how showrooms in marketing, and all of these things have to work together to really drive sub growth in business. And so we're just -- and frankly, even know-how on content production, right? I think somebody might have a laugh looking back at one of our classes 6 or 7 years ago, right? We've progressed a lot. So we're taking a more sophisticated both process of launching a market as well as product, that we're taking to the market. And so, as we've said, we've been very pleased with the growth in Germany. It surpassed at the same point where we were in the U.K. The U.K. surpassed where we were in the U.S. And again, it's -- I think it's the product evolution, and I think it's just the evolution of our go-to-market strategy, getting better and better.

Got it. Maybe one more, just a follow-up to the question I asked earlier. It's -- why are you running hardware gross margins at 0 to accelerate subs? And I know you run things at a balance, but any thoughts on that?

That is a great question. And again, it's like the age-old debate within Peloton, right, is how do we look at net CAC, right? There is the sales and marketing aspect of it, and then there's the pricing aspect of it. And I think both play a role in driving some growth. But it's been a largely academic question over the past several years since we've grown over 100%, right? And we've also faced certain time frames of being constrained on supply. But certainly, that is a debate going into the future on how we use both of those levers, both that gross profit margin, right? And again, it's just going to be a question of putting -- put a dollar in the pocket of the consumer versus the advertiser and where are we going to see the bigger return on investment. And over time, we want to make our products accessible. So again, just know that we've focused on gross profit dollars. But we do like to have some fiscal discipline and offset our sales and marketing expense to have a really robust subscriber lifetime value model. But it's a debate, but it's been academic till now.

Okay. Well, thanks so much, Jill, for joining us today. I always enjoy spending time with you and learning about the company. So thanks a lot for joining us.

Great. Thank you. Thanks for having me.