Barry McCarthy: Yes. I’ll do part of it and Liz will take part. Well, as you mentioned, engagement was up 6%. The Connected Fitness engagement was up 4% year-over-year, and the app was up 7% year-over-year. We have not really made significant progress yet in personalization. I should say it differently, we’ve made good progress, but we can run a lot faster and we can do significantly better. And I am tremendously excited about the work that we are doing now and the insights that Nick Caldwell brings to the table. And I think a year from now, we’re going to be in a significantly better place and it will have a really positive impact on engagement, and we know that engagement is a big driver of churn. So churn was down in the quarter and engagement was up.
And I think there are opportunities to continue to broaden engagement plus we’re doing some really interesting things in the content team on different platforms that are contributing to the overall improvement in the user experience. I’m thinking by a way of example, in entertainment with YouTube Video and the NBA League Pass. Just by a way of example, and we’ve seen a very substantial increase in engagement in that content amongst Tread users by a way of example. So we’ve come a long way, but we’re going to come a lot further faster in the foreseeable future. And certainly, AI will play an important role here.
Liz Coddington: Yes. A few things to add about our outperformance in Q2. So some of the areas that really worked well for us were our Bike rental and FaaS, the third-party and our refurbished inventory sales or Bike sales. Those all outperformed our internal expectations in the quarter, which is great. And our Bike rental also benefited from the fact that we’ve had — we had lower churn, so that helped with subscribers. And also, we launched self-service buyouts on our platform, which was a really great win because we saw 11% of our rental members buy out in the quarter, which also contributed to some of the outperformance. There are other — there are some other factors that are impacting our subscriber growth for the quarter.
As we mentioned, our hardware demand was a bit lower overall than we forecasted, but we had some offsetting tailwinds that benefited us. First, our supply chain team did a great job and outperformed in terms of delivery efficiency. That means we had a bit of a pull forward in our deliveries into Q2 that we had expected to have in Q3. We also had faster subscription activations in the quarter than we expected. Sometimes over the holidays, people lag a bit with activating their subscriptions. And we saw that was faster than we expected too, so that helped with subscribers. And then another benefit that we had is we had lower new subscription passes in the quarter and higher-than-expected reactivations from a pass state than we expected. So that helped overall retention and is one of the drivers of our better-than-expected Q2 churn results.
Another thing that is also really important to understand about our performance in the quarter is the secondary market. That continues to outperform our expectations and was a key contributor to subscriber growth in the quarter.
Operator: Thank you. One moment for our next question. And that will come from the line of Andrew Boone with JMP Securities. Your line is open.
Andrew Boone: Thanks so much for taking my questions. I wanted to ask about the increase in media spend that you guys called out in the letter. As we get further away from the re-launch of the digital app, how should we think about marketing, especially as you just mentioned, the pullback in overall demand for hardware. And then, Liz, is there anything you can call out in terms of Connected business gross margins going forward, that stepped up in the quarter. How do we think about that for the back half of the year and then going forward? Thanks so much.
Liz Coddington: So to the first question, it sounds like it was about increase in media spend that we saw in Q2. So we always generally are typically see an increase in our media spending in Q2 because it is our holiday quarter and we use that as a way to drive leads and demand for our hardware products and our app on all of our products. In the back half of the year, we do expect to spend less in media just seasonally. So we do expect lower quarterly media spending going forward. Now remember, another thing to understand about our business, I would really come back to this on these calls is to talk about LTV to CAC. And so we’re trying to optimize for that for the business. And so when we look at our media spending, we are trying to make sure that our media spending is efficient and drives an efficient LTV to CAC, definitely over one.
Ideally, we want to be in the 2x to 3x range. We were not there for Q2, but we were above one, and our goal is to move towards more increasing media efficiency. Now on the Connected Fitness gross margins, we do expect — we don’t guide specifically to Connected Fitness gross margin, but we do expect some improvement in the back half of the year, in part because our Tread+ deliveries which actually just started will benefit gross margin in the back half. That — that will be — we do see a little bit of pressure from areas like Bike rental as that continues to take share, that will put a little bit of pressure on our Connected Fitness gross margin, but we do expect sequential quarterly improvement. Now it is important to note, though, with gross margin coming back to the LTV to CAC feet piece.
