Liz Coddington: I think you actually explained it quite well, Barry. The only thing that I will add is there was a comment in there on Eric’s question about seasonal cadence. And I just want to say that from a modeling perspective, we still expect that our revenue for the year is going to most closely resemble that of fiscal ’22.
Barry McCarthy: Let me just drive home the point to read too much hype into this call. But today, we have as many subs as we’re forecasting we’re going to have at the end of the quarter. We have seen plenty of churn historically, particularly at the end of the seasonal rush. And so we’re forecasting that whatever incremental growth we have, we will get back in the form of churn. We’re not forecasting a spike in the churn rate, it’s just the math, to be clear. But it could be right, it could be wrong. We’re going to find out.
Operator: Thank you. Our next question comes from the line of Shweta Khajuria with Evercore ISI. Your line is now open. Shweta, your line is open, please check your mute button.
Shweta Khajuria: I’m sorry about that. I guess I have a quick question on free cash flow. You got two positive free cash flow this quarter, excluding some of the supply-related costs. How should we think about the magnitude of each of the key drivers of getting to positive free cash flow in fiscal year ’24? So specifically, I’m talking about the cost cuts you’ve made have an impact supplier contracts, you’ve renegotiated have an impact, but also inventory drawdown has an offsetting impact. So could you help us in terms of what will be driving the trajectory of sustainable positive free cash flow? Thank you.
Liz Coddington: Sure. So, Shweta’s question is really about like what is going to drive sustainable free cash flow into fiscal 2024. So, you mentioned inventory. Inventory will continue to be a tailwind for us in fiscal ’24. So that is a benefit. And then it’s really all about being very conscious about our OpEx and making sure that we are as efficient as we possibly can be. And then doing that LTV to CAC analysis to make sure that we are acquiring subscribers efficiently. And then it’s about growth. We have to continue to figure out how to grow the business so that we have enough cash inflow to cover our operating expenses over time now of the fact that we’ve already bought a lot of the inventory and have a lot of it on hand already.
So it’s really just about operating the business in an efficient way to maintain that positive free cash flow or break-even free cash flow ideally. And yes, the key is really figuring out how to continue to grow the business. And by the way, as we grow the app part of the business, that is a higher gross margin business that is good for us over time as well.
Barry McCarthy: Let me jump in and add that let’s talk about maybe some of the changes in the year ahead compared with the past year in terms of savings. So we saw a significant reduction in head count in the past year and savings commensurate with that. Will we see more of that on a go-forward basis? No, we won’t. I made it clear in a previous call that as far as I concerned, we’re done with headcount reductions. And let me reaffirm that to all of our employees who are listening on the call. But we have significant opportunities for additional expense reduction in the business, and I expect that we will realize those in the next one or two years. They’re in middle mile, they’re in last mile. They’re in all of the operating systems we use.
ERP, warehouse, order management system, which has resulted in lots of manual processes. We still have a lot of inventory, and we pay a lot of money in storage costs. And as we work down our inventory positions, we have substantial additional savings to be realized by limiting those storage costs just as we have in the past year. So the only offsets important to bear in mind, is the trade-off between growth and cash flow and savings. So if we lean back into international growth by way of example, we’re going to lose more money. We’ll grow faster, and we’ll only grow if the LTV to CAC shows net profit over time. But as you add new subscribers, you lose money. It’s true with Netflix, it’s true with Spotify, it’s true with Peloton. And so we just need to figure out what — partially what the appropriate balance is.
Shweta Khajuria: Okay. Thank you, Barry, thank you, Liz.
Operator: Thank you. Our next question comes from the line of Ron Josey with Citi. Your line is now open.
Ron Josey: Great. Thanks for taking the question. Maybe, Barry, I wanted to follow up on your comments on churn just now. And understood there’s no real change and you have maybe a little bit higher churn on seasonality, just given the holiday. But do you think this 1.1% churn is, call it, the new normal for maybe full members now that we’re in three quarters into the price hike? And maybe any insights on the churn around FaaS subscribers. I think we added shoes and some benefits to the program this quarter that might have brought churn down for these FaaS subscribers. So any insights there would be helpful on churn? And then Liz, I think from a guidance perspective, because we’re assuming greater FaaS and 3P distribution sales, and I think it’s more fast than CPO. Talk to us about how that role flows through the P&L. Thank you.
Barry McCarthy: Let’s talk about the overall churn number. Let me talk about fast. So SaaS has a higher churn rate than the typical all access customer. It’s running about 4.5%, 4.7%. That should not alarm you. And here’s why. The sub base is still quite young. And over time, if you were to look at individual cohorts, the question that we need to answer for ourselves and for you is, what’s the shape of the retention curve, the churn curve looks like. So — and as the sub base ages, the average churn rate, which is what the 4.5, 4.7 represents will come — of course, will come down. The question is what’s — where does it turn asymptotic and at what rate does it turn asymptotic? It’s going to be 1% or is it going to be 3%? Based on our understanding of consumer behavior to date, we think the payback for fast customers who receive a new bike is that 18 months.
And for customers who receive a used bike is 12 to 14 months, which is as good as we hoped, I thought. Worst case, it’d be two years, and we need to go back and reengineer the numbers to get to a better outcome. And the best we could possibly hope for would be a 12-month payback. So looks to us at least we initially like the program that’s working. And by the way, we’re still not doing any kind of credit check verification on the front end to identify customers and shouldn’t be doing business with, all of which would contribute to a better lifetime experience. So we’re still learning how to operate the program. But at least initially, based on the churn behavior we’re seeing so far, and we’re only talking about 20 — roughly 24,000 FaaS customers in total.
I think there’s reason to be optimistic about it. Now — it is — have some negative adverse consequences for cash flow because it’s — from a cash flow perspective, you’re not selling hardware upfront. So you’re not recouping that investment in working capital as quickly, but we are seeing faster growth as a consequence. So I just want to remind everybody that the program is really successful, growing really fast with attractive paybacks, then we’re going to have to also figure out what the financing strategy is going to be for it because it will have different working capital attributes than the core business currently have. But we should be so lucky to have that challenge. And if we have it and I’m pretty confident in our ability to figure it out.
Liz, do you want to talk about churn?
Liz Coddington: Yes, sure. I just wanted to add one thing that for the quarter for Q2, we were actually closer to 28,000 FaaS subscribers at the end of Q2. It was about double the number that we had in Q1. So really, really great growth, great for FaaS.
Barry McCarthy: The CEO doesn’t know the numbers. Sorry about that, folks.
