Peloton Interactive, Inc. ($PTON)

Well, good afternoon. Thank you all for joining us. So my name is Brian Nagel. I'm the senior equity green research analyst here at Oppenheimer covering consumer growth and e-commerce. This is our 26th Annual Oppenheimer Consumer Growth and E-Commerce Conference which held virtually. So again, thank you all for joining us. So I'm very pleased to have with us our next presenting company, Peloton. The company is still new CEO, Peter Stern. So Peter, thank you for joining us.

It's my pleasure to be here, Brian.

So we're going to structure this as an informal fireside chat with me asking questions, and Peter respond to those questions. To the extent, there are questions from the audience, just please send them through the chat function. I'll be happy to work them into our conversation. And Peter, thank you. So the first question I want to ask, Peter, your story, as I mentioned in my quick opening there, you're still relatively new to Peloton. So maybe before we start talking about some of the specifics of the company, we can discuss kind of your impressions. You joined the company not that long ago. There's been a lot going on since you've joined. But I guess the second -- the question is, any surprises, positive or negative? And how you view the company and importantly, it's brand evolving right now.

Yes. I mean the company is -- it's so unique. It has this magic formula of equipment, software, content and community that makes it -- it's not a pure hardware business. It's not a pure software business. It's not a pure services company. It's an integrated experiences business. And that's what's in many ways, so appealing to me about it because when you bring those things together in the very particular way that Peloton does, it solves the biggest problem in the fitness industry, which is how do you sustain commitment on the part of a member. I like to study these sorts of things. I'm a little bit of a nerd about it. But when we look at what drives habit formation, right, it's that something needs to be obvious, easy, attractive and rewarding. And in many ways, when you look at Peloton, you see that we've got this obvious equipment steering in the face every day. Our software makes it really easy to get into the right work out for you. The content is attractive and the experience being in a community is part of what makes it so rewarding. And so you pull all that together and you actually -- you get an experience that's worth $50 a month or $600 a year to a member. And we, as a company, get some really meaningful lifetime value in return from that. So you asked about -- so that's my impression of this company. You asked, Brian, about surprises, positive, negative surprises here. I think really actually opposite sides of the same coin. So when I joined Peloton, we didn't have a hardware road map. There were almost no changes to our frames or new pieces of equipment that were in our pipeline. So that's a negative, but we were able to overhaul our entire product line within the first year with the launch of the cross-training series. That's more of an incremental change, but we more recently announced the launch of our commercial series that's coming later this year, and there's a lot more behind that. And so the positive side of my surprise is that we have is absolutely world-class product organization that was just waiting for a bit of permission. They pulled it off overhead and I have great confidence in our future.

That's very helpful. So I wanted -- one of my key questions here is to discuss further commercial amendment products. But before we do that, I do want to just kind of pick your brain, so to say, given your seat here as a CEO of Peloton on the consumer backdrop. So we've done a lot of work on what we view as to be a softer consumer backdrop and some of the risks that lie out there, gas price is probably the most notable. And the question I want to ask you, as you're thinking about Peloton, and particularly at this stage where it's almost like we're restarting growth here. How do you view the consumer backdrop? And is that -- is there any type of headwind there for Peloton on the initiatives of the company?

Yes. We can look at this on multiple dimensions. In terms of the impact, let's say, of a softer economy, we've studied the historical data. Obviously, the COVID financial crisis is not instructive because it lit the home exercise market on fire. But we've gone back and looked at things like the 2008 financial crisis. And what we found in general is that fitness spend on point of gyms was one of the least impacted categories during a pretty tough time for a lot of people. So our takeaway is that fitness is not one of the top places that people are going to scale back when times are tough. That all being said, there is very high price elasticity around fitness equipment. We certainly experienced that. So the business is very responsive to discounts as an example. And we have a lot of tools in our tool chest to be able to help out with that. Not the least of which is that more than 50% of our subscriber growth additions come from the secondary market. And in that case, many of the transactions are happening in the hundreds of dollars, not the thousands of dollars for our equipment as individuals buy and sell equipment from each other. And you couple that with things like 0% financing or what we've been able to do with refurbished units, we're able to somewhat address short-term dislocation from consumers that, of course, we can always -- with reasonable confidence depend on our large subscription business, which generates more than 60% of our revenue and over 90% of our profit. Taking a longer view, looking at the consumer, of course, we don't know how AI is going to play out, but -- and what that will do for the job market or job security. But what we do see in our case is that magic formula, I described, that combines equipment plus human coaching as such fundamental elements of what we do means that this is not a product that's really likely to be replaced by AI. So we feel pretty good about that longer-term impact on the consumer. So I think, in general, this is a pretty common port in the storm.

That's very helpful. So let's talk about the commercial business. You mentioned a few moments ago, I know we've studied it quite a bit. Definitely, I would say a reinvigorate -- I would view it as a kind of a reinvigorated effort on the part of Peloton. So I guess you mentioned the new products. But I guess the [indiscernible] the question is what's Peloton doing now to really position the company the brand better for that commercial opportunity? And as investors, how should we think about the timing of when this is going in to start to take shape?

Yes. Well, let me provide a little bit of context on this one. If you go back a few years ago before Peloton bought Precor because the foundation of our commercial business unit is Precor, which we own. That business historically had somewhere we estimate around 5% to 6% share of the commercial fitness equipment market. Fast forward to today, we think we have only about a 3% share of what's about a $10 billion or so market growing pretty healthily, mid-single digits at least. So we actually know what the formula was to be at the old 5% to 6% share from Precor, right? And that was the right level of investment in the sales team and account management and ensuring that we were refreshing the product and delivering equipment that gym operators considered cutting edge. We never lost the focus on producing really high-quality, trustworthy equipment, and that's foundational because it means that we never lost the trust of the gym operators. But we've got to get back to the right, having the right-sized sales team, giving them the right sales support and ensuring that we're continuing to innovate on the product. So that's a lot of the focus on the Precor side. But then we have the ability to also turbocharge our commercial business with the Peloton brand. And that's where this announcement we made 2, 3 months ago about the Peloton Commercial series comes in. We've never had commercial-grade Peloton equipment before, designed for heavy-duty gym usage. We're talking about 10-plus hours per day of usage with people constantly adjusting the seat, for example, on the bike and using the tread almost without stopping. But that's Precor sweet spot. What gym operators have said since I joined the company was well, we love what Precor does for us, but there's only one brand of equipment that our members or prospective gym goers ask for by name, and that's Peloton. If you could give us the Precor industrial-grade equipment with a Peloton experience, we'd love that. And so we announced the commercial series, we will launch that later this calendar year. And at that point, I think you can look to the combination of the revitalized Precor plus Peloton to start to really accelerate the growth of that business. Now we had a terrific Q3. 14% growth. I have indicated, including in our earnings at the end of Q3 that we had some really tough comparables in particular, in our Q4, the quarter that will end at the end of this month. That was a consequence a year ago of many gym operators trying to get orders in before the increased tariff rates kicked in. So this was, if you recall, a couple of months after Liberation Day. And so there was a rush to purchase equipment at that time a year ago. But as we fast forward to later this calendar year, I think we can feel really good about the growth prospects for the commercial business unit.

It's helpful. Helped us to understand the -- if you think about the customer, so you build out this serves commercial network, gym, as you mentioned. Is that what I say is it the same customer there that may have a Peloton device at their home or is this a new customer? And then how would you think about the usage there?

Yes. It's a little bit of both. So what we know most recently from our research is that just under about 1 in 5 Peloton residential members also belong to a paid gym. And so there's definitely overlap between those categories. And that's terrific, right? Those are people who are really taking care of themselves. They're probably doing cardio at home, sometimes outside, and they're probably doing strength training in a gym, using equipment that's there. They're may be swimming. We encourage all forms of activity. But there are also a lot of people, right? We've only got just under 6 million members at Peloton. There are a lot more people who belong to gyms than that. And so it's a huge population of people that we would love to expose to a Peloton experience, not because we have any belief that they would leave their gym or any desire for them to do so. but rather because we think that having Peloton become part of their diet would lead to a healthier diet overall.

It is -- gym is the big commercial opportunity because I've also -- I've noticed personally that Peloton [indiscernible] is not the commercial grade at times we have [indiscernible] in a number of hotels. So as you think about where the commercial opportunity you mentioned, gym, is it hotels and other type of, I guess, commercial settings as well?

Yes. Our Commercial business unit serves everything from residential multiple dwelling units, so think apartments, condos, where you have the shared facility to hotels, to universities to workplace gyms, all the way up to big box commercial gyms that have near constant usage of the equipment. And historically, we've really only had on the Peloton side, the same residential equipment to put in that full array of locations. But as we look forward, we have what we call the Peloton Pro series, which is terrific for a multiple dwelling unit, even the right kind of hotel environment. But then as we get to those heavier usage locations, those really call for an industrial-grade solution. And that's where the expertise of Precor comes in so valuably because we can combine essentially the Peloton body with the frame and the experience of Peloton and you get the best of both worlds.

Right. So shifting a little bit, talking about the commercial opportunity, but then where are we just on the overall development of products. So here, we're having a number of enhancements in new products launched recently. So from your perspective, kind of where are you in the development products and what should we be expecting to come out here in the not too distribute?

Well, I probably won't do a major product announced here, but I'll try to give you at least a sense of how we look at this. So first of all, what we really offer is an integrated experience that cuts across, as I said, earlier, hardware and software and content from our instructors and our community. So what are some of the things that we have done, right? I talked about launching the cross-training series. That was basically a very deliberate pivot on our part to embrace the trend toward people doing more and more strength training in addition to cardio, which we think is really the optimal combination, right? People should be doing both. So making sure that we had the benefit of pivoting or pure wanting screen on every piece of equipment that we ship, making sure that on our plus series of equipment, we're introducing computer vision that can count your reps, monitor your form and actually give you form feedback as you're lifting waits and even suggest when it's time to go up in weights or if your form is breaking down maybe even to drop down a weight. So that was a pretty big advance and a combination of hardware and software to enable that. We also launched something called Peloton IQ a few months ago, and that's us using AI to augment what our instructors do. One way to sort of look at what we have at Peloton, right, is you've got 6-ish million members, and you've got just under 60 instructors. So we've got a ratio of about 100,000 to 1. Every one of our members deserves to have a personalized plan from us. And so Peloton IQ allows us to add this element of deep personalization on top of what our human instructors do so that every member is getting a plan and getting feedback about how they're doing. And that system is continuing to evolve. So I think what you can expect on the software side there is to see ever more flexibility in how we interact with the member. Right now, the input method is a fixed list of goals, for example, from a member, but that should be an unstructured open dialogue with a member and one that can more dynamically change over time. In terms of content, we've been investing in more, what I would call, more strength and structures, focusing on sort of soft strength. Over the last few months, we added 3 instructors in areas like pilates and bar also, we've been experimenting a lot with things like kettlebells, making sure that we double down on strength at this time when that's so important for many of our members. In terms of what to expect, I won't give you too much except I will point you to a little announcement we made last week, and I just -- I'll try to contextualize this. We acquired a startup relative -- they've actually been around for a few years, but we still had small numbers of equipment out there in the pilates space. Again, not here to make a big announcement of it, but what we've -- in this category. But what we've realized is that there is a potential we think, to deliver experiences in the pilates space that are similarly revolutionary to those that we've delivered in the cardio spaces of cycling and running and rowing. We're still in the R&D stage there, but we've got some great now technology to augment what our internal teams are working on. And so I'm really excited about our future.

What about pricing? You took a price adjustment not that long ago. I guess I'll phrase the question to how do you think about pricing now? That was -- if I remember correct, there was the first price adjustment you had taken -- I'm talking about membership, first price adjustment you've taken a while, but how do you think about pricing now and going forward?

Yes. it, the price that we charge needs to reflect the value that we deliver. And we -- as you noted, Brian, we hadn't taken a price increase in more than 3 years. That was despite the fact that there had been really substantial improvements in our product during that time great investments in content, including the addition of dozens of new programs. As I mentioned earlier, hiring new instructors to focus on areas that were demanded by our members, the introduction of Peloton IQ, which I talked about earlier, and which we made available to 100% of our members regardless of when they bought their equipment. And so we felt like at that point, given everything that had transpired over the prior few years, including quite a lot of inflation on top of those improvements in the value we delivered that it was appropriate. And we're only going to do price increases when we feel like we've delivered a real step change in value for our members. So that was the case. And it's not something that we're going to signal in advance, but you need to expect big improvements before we were to do something like that again.

Now on the top of conversations, you mentioned just a few moments ago, the overlap, you have some [indiscernible]. Your members and then those who have memberships have physical gyms as well. So one of the questions I get a lot from clients is we are looking at Peloton and the revitalization of the brand of the company. It goes down, what does Peloton fit in this, either Health Cloud more broadly wellness landscape and who does Pelton really compete with? So I'll love your perspective on that.

Yes. We -- as I -- I think I indicated with our magic formula, we're pretty unique. There are lots of hardware companies out there, lots of companies making gym equipment, but that's just one of the things that we do. There are lots of companies that make software for fitness, let's say, apps but that's a really small part of what we do. There are plenty of trainers out there in the world. Again, we've got the best of them, but it's just part of what we do. There are companies that make apps that bring people together in terms of fitness communities. We do that, too, but no one brings it all together. So what -- we're this integrated experiences company that doesn't actually have anyone else in our class. It also, because of the uniqueness of what we do and the relationship we've built with our members, we think it opens up the opportunity for us to become what we're referring to as a total wellness provider. And what I mean by that is not forsaking being the world's best connected fitness company. Of course, that's the foundation for anything that we'll do, but it means evolving into a connected wellness company as well and helping our members in all of the domains that can make a difference in the quality of their years on this earth, in addition to the quantity of those years. So it's addressing all of the areas that we can behaviorally influence, cardio, strength, nutrition and supplementation, sleep, recovery. These are all areas where a mental wellbeing. These are all areas where we can make a difference for our members, and they can also act as ways -- new ways for us to meet new members and bring them into the Peloton community because not everyone is going to find us through running or cycling or rowing. Some people, for example, in the future, will find us through strength. And that's terrific. Any positive behavioral change any positive activity is something that we want to play a role in encouraging and making a difference in people's lives at scale.

I'll discuss a bit in your marketing. So I've noticed -- I personally noticed what I think are some fresh TV commercials. So maybe you can talk about that. But then also just how you -- the messaging and the kind of means of what you're talking to potential or even existing numbers this point.

Let's divide that into potential versus existing members as you framed it, Brian. So for potential members, I think we're really getting now sharp on what we stand for, right? And we stand for the joy of movement. And you could see that in the recent campaign that we just did featuring Hudson Williams that garnered more than 60 million organic social views. I mean it put us back in the center of the [ Zycast ], which is where we belong. Now I do want to note that at the same time that we're really reconnecting with that sense of fun and joy that is what not only gets people to start an exercise regimen, but to more importantly, stick with it, we remain really disciplined about our approach to marketing. So the formula we use is pretty simple here, which is that we'll spend up to or at least close to the point where the last marginal customer that we acquire has a higher lifetime value than the amount we paid to acquire the customer. Spinning up to that amount, we think, is the way to drive our business most efficiently, but spending anything beyond that number is just irrational. So we're not going to do it. And when you look at how that played out mathematically actually in Q3, the last reported quarter, we were able to deliver an average. So this is not the last marginal customer required because we had to do that at the campaign level. But on average, it resulted in an LTV to CAC ratio that was 2x. So in a pretty healthy range certainly what we're targeting. Now the other part of the equation is what do we do with existing members. And for the existing members, we don't have to spend a lot of money marketing to them because we know who they are, and we know how to reach them. So the really important thing there is for us to make sure that we're delivering relevant messages and constantly re-earning their trust. And so we've put in place a strategy to move from what most companies do, which usually is called CRM, right? That's customer relationship management to something that we're calling PWM, coining acronyms here, it's what we're calling personal wellness management. And the idea is that once you become a member of ours, every communication we do to you should be helpful to you and personalized. It shouldn't be about us. It should be about you and how we help you achieve your goals and become a better version of yourself. And we're still relatively early in this journey, but AI makes this possible because it enables us to deliver dynamic personalization at scale. So long as it sits on top of the mountain of human judgment and ultimately, the respect for every individual in our community and ultimately, right, is built on the idea that we're humans on both sides of that communication.

That's very helpful. So I know our time is going to wind down here. I do want to -- I want to -- there's 2 financial topics I'd like to discuss, maybe one easier than the other. But first thing, on the cost controls. I mean, Peloton has done a fantastic job over the last couple, maybe 3 years now, really controlling costs well to allow the company to get back to this point of growth. So the question I ask there is if you look at the cost model now, is it where it needs to be or are there still opportunities to control costs particularly in the possibility that maybe sales remain sluggish a bit longer?

Yes. First of all, I'm so proud of what this team has done. FY '25, savings of $200 million plus on an annualized basis. By the end of this year, we are on track to deliver another $100 million of annualized run rate cost savings. And all of that has basically meant that our operating expenses have -- excluding restructuring, we have decreased by $50 million or 16% year-over-year just in Q3. And as you look at G&A, which is a particular area of focus for us, that's come down from the low to mid-20s percent of revenue to the mid-teens. So we are in a much better place now than we were. And the consequence of that, right, is what we've shared, right, that we're targeting to deliver somewhere in the vicinity of $350 million of free cash flow for FY '26. As we look forward to your question, Brian. I think the future efficiencies are likely to be more surgical, not these types of programs that we've run the last couple of years. But there is still a lot of opportunities, for example, in AI to optimize Software-as-a-Service spend. The other couple of things I'd note are, given the work that we've done over the past few years, focusing on efficiency is now ingrained in how we run our business. And so that's what enables us to feel confident in our future and know that we'll continue to find efficiencies. Also, you may not see our efficiencies manifest in the same way in the future. So a lot of what we're doing on our team right now is designing equipment that can be more cost effective. And that will result in -- I mean, if we end up selling equipment for lower prices, it may not manifest in lower spend as a percentage of revenue, but it will allow us to charge less money, which means that we're going to get more sales units, and we're going to get more customer acquisition for the same investment in people as we were making for equipment. So I think you'll see the efficiencies manifest in a different way.

That's very helpful. And then the final question is balance sheet. Another big positive for Telecom has been the balance sheet, particularly the outsized cash balance. But I know you and your team have talked recently about making the balance sheet more efficient. So I guess the question I want to ask is kind of maybe any update on that prior commentary with respect to the debt, cash, et cetera.

I mean I think the big update here is that our new CFO, Sid Thacker is starting 2 weeks from today. And we do intend to go through a credit ratings process. I think it will have a much better credit ratings process. It will be the first one, by the way, in the history of the company. We'll have a much better process because we'll have a great CFO in the seat. And so I think that's something that I look forward to supporting sit on. But I'm confident from all my conversations and Sid that we're going to be able to stick to the same framework that we've already laid out. which is that we're going to be focused on reducing our cost of capital, increasing our flexibility, reducing dilution and ensuring that we still have the capital that we need to support our operations and investment in the future. Obviously, with where we are right now, which is rapidly approaching 0 net debt and having this pretty predictable subscription part of our equation, we don't need as much cash as we have on our books. So you can count on us to make some moves here. We just want to do it the right way. And so we're being disciplined about the framework and making sure that we have a process with the right people at the table.

Well, Peter, it's nice chatting with you. I appreciate your time. Congratulations on the ongoing success here at Peloton.

Thank you so much, Brian.