Gross margin and promotional activity, obviously, that affects gross margin. And so we’re optimizing for LTV to CAC. And if we see the opportunity is better to reduce our LTV by reducing our gross margin and optimizing our media spend accordingly, we’ll make that trade-off and evaluate it as we go.
Barry McCarthy: I would say at a high level, I’m pretty optimistic about our ability to try to bring more efficiency out of the marketing spend, and we’re making some structural changes in the way that we run the business that will help contribute to increased operating leverage. And I’m being — I realized I’m being vague, but I’m being intentionally vague, but it’s among the reasons why I have some optimism about the go-forward performance.
Operator: Thank you. One moment for our next question. That will come from the line of Shweta Khajuria with Evercore ISI. Your line is open.
Shweta Khajuria: Thanks a lot for taking my questions. I have two, please. One, Liz, could you please talk about the free cash flow. So your guidance now calls for lower expectations than what you talked about last quarter, you expect to be positive free cash flow in the fourth quarter and not for the full year. So help us think about why the change and what drove that? And then the second question is on how to think about the impact from TikTok and lululemon. Is $10 million a quarter that you quantified last time, did it come in better than expected? How should we think about it going forward? And then the impact of TikTok on P&L, please. Thank you.
Liz Coddington: Sure. So let’s start with the free cash flow question. Why is our free cash flow outlook lower than we had previously expected. So, for Q2, while our paid subscriptions for Connected Fitness outperformed our expectations, our hardware sales, as I mentioned earlier, were a bit softer than we expected. So we’re projecting that softness from a trend perspective to continue into Q3 and Q4, and that creates a bit of a cash headwind for us. We’re also continuing to see that mix shift into Bike rental or FaaS and that puts pressure on our cash because, again, we don’t collect all of that hardware revenue upfront. And then if you put that together, it means we have a bit of a cash headwind from inventory compared to our prior forecast.
And that’s mainly coming from our Bikes. We also had a few payment timing benefits that pushed from Q2 into Q3 that helped Q2 cash flow, but will impact us a bit in Q3. Now the other question was about TikTok and lululemon. I can probably take the lulu piece, Barry, I don’t know if you want to talk about that.
Barry McCarthy: She was anchored on $10 million and I think wanted confirmation on that.
Liz Coddington: Oh, yes. So, yes, our lululemon partnership, at least we’re talking about the Studio — the Studio All-Access Members that have the, what was firmly known as the Mirror hardware product. That performed as expected, actually a slightly bit better than we expected. So that is on track. And then TikTok, that is really a marketing relationship with TikTok that we — it’s early days. We don’t have a lot of explicit assumptions around how that is going to provide upside to our financials going forward in Q3 and Q4.
Barry McCarthy: Yes. We’re in the third week of the TikTok deal, and we’ve seen a very substantial increase in the number of pieces of content in those three weeks. If we compare to week one, I think it was about a 50% increase, and we’ve seen a 3x increase in total views, but it’s much too early to know where that’s going to land. We’re excited, our first live class had over 130,000 views, which is a pretty good start, but I’m sure we can do much better than that. The important thing to note is we’re reaching a demo that’s much younger and TikTok is proving to be an enormously effective platform to help us do that. So we want to lean into that. I think that if we do it well, it has implications for growth in app. But it’s way too early to have any meaningful insights yet.
The other thing I’d say is, for those of you who saw the headline yesterday that TikTok squared off with Universal over music rights, but I want you to know that doesn’t implicate our marketing agreement, our content on TikTok is fully licensed with the labels.
Liz Coddington: There is one thing I wanted to comment on with regard to the $10 million from lululemon for the Studio All-Access Members. That was just reflective of November and December. So that was just two months in Q2, and it will be obviously a full quarter in Q3 and beyond.
Barry McCarthy: Coming back to the cash flow thing here is what I would say. Let’s remind ourselves what the two objectives for the business, one is stop the bleeding. The other is grow the business. I’d hope that we would generate more cash flow in the second half of the year than we currently think we’re going to. But the important thing is we still think we will cross the finish line and get cash flow positive in Q4. And if you look at our balance sheet, that the business is not going away, which for a long time was a systemic threat. So because of that, we’re able to focus on renewed growth. Now what have we accomplished in the last two years to assist with that. Well, there’s been very little product innovation. We reintroduced an existing product, Tread+, and we launched the Row, which mostly we sell to existing subscribers and a little bit to new members.
