Peloton Interactive, Inc. (NASDAQ:PTON) Q3 2023 Earnings Call Transcript

Peloton Interactive, Inc. (NASDAQ:PTON) Q3 2023 Earnings Call Transcript May 4, 2023

Operator: Good day, and welcome to the Peloton Interactive Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After a few brief opening remarks, we will be immediately going into our Q&A session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Peter Stabler, Head of Investor Relations. Please go ahead, sir.

Peter Stabler: Thank you, Sherry. Good morning and welcome to Peloton’s fiscal third quarter conference call. Joining today’s call are CEO, Barry McCarthy; and CFO, Liz Coddington. Our comments and responses to your questions reflect management’s views as of today only, and will include statements related to our business that are forward-looking statements under federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements, due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today’s shareholder letter, both of which can be found on our Investor Relations website.

During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today’s shareholder letter. I’ll now turn the call over to the operator for our first question.

Operator: Thank you. And that will come from the line of Doug Anmuth with JPMorgan. Your line is open.

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Doug Anmuth: Thanks so much for taking the questions. I just wanted to ask Barry, if you could talk more about the upcoming changes in brand positioning and just a little bit more about what you think is misunderstood around the brand, the products and how people use them and how those changes in brand positioning can help drive growth going forward? And then also perhaps Liz, if you could just talk about the potential, I know that the DISH settlement will weigh on free cash flow in 4Q, can you just update us on your path deposit of free cash flow ex that settlement? Thank you.

Barry McCarthy: Good morning, Doug. Thanks everybody for making time to join us this morning. I’m not going to say too much about the brand repositioning. I want everybody to experience it along with the consumers at the same time. In the letter I spoke about the fact that we’re primarily known as a bike company. But the behaviors of our members extend well beyond that into many different categories of exercise and a large percentage of folks use no hardware at all. I’ve done a very good job of communicating that prospective members. And we’re looking to improve upon that. I think the advertising can be more inclusive than it has been historically. And then lastly, of course, we have been promising to be introduced the app at moment is soon to be upon us and that will receive considerable focus in marketing relaunch as well.

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Q&A Session

Liz Coddington: And Doug, to address your question about free cash flow. As Barry mentioned in the shareholder letter, the DISH settlement and related expenses associated with that settlement we’ll put pressure on our free cash flow in Q4. So if you exclude those items, we actually are pretty close, but within striking distance of achieving free cash flow break in. And we are very — the progress that we’ve made is that we’ll get — is very positive, continues to be positive.

Operator: Thank you. One moment for our next question, and that will come from the line of Ron Josie with Citi. Your line is open.

Ron Josey: Great. Thanks for taking the question. Barry, I wanted to ask about FAAS in Peloton and PCR given both I think accounted for about three quarter of new subs this quarter. And so talk just a little bit more just how these products are going? How you’re going to market with these products and how they’re being differentiated relative to the full membership understood there’s nuances in between? And then Liz, I think this quarter guidance calls for a little bit of a decline in subs, it’s a seasonally slower quarter. Would love to hear more insights in terms of what you’re seeing there as well? Thank you very much.

Barry McCarthy: Let Liz take the guidance piece and I’ll talk about FAAS and then the refurbished bikes. From a marketing perspective, we’re doing nothing to basically in support of those products. So people are finding them on their own. In some instances, there is a banner across the top of our homepage with steers towards one or the other. For the most part, you have to discover FAAS by clicking down a couple of layers on the web. So think of it mostly as organic pull-through. Liz, do you want to talk about the guidance, please?

Liz Coddington: Sure. Yes. So Ron, you alluded to the fact that we are guiding down on connected fitness subs for Q4. A few comments on that, so the fourth quarter is seasonally our toughest or rather our least efficient quarter for us to grow subscribers. Even with our best-in-class retention, we need a base level of growth additions to offset our churn, which, while still quite low, also tends to be seasonally highest in Q4. Also important to understand that we are committed to growing our subscribers efficiently. And while we have — as we expect to target a lower LTV to CAC ratio in Q4 than we did in Q3, our Q3 LTV to CAC was actually above a 2. Our forecast assumes that we will maintain a strong financial discipline, and we will not overspend either via media spending or by cutting prices or flashing them to acquire unprofitable subscribers.

I also want to point out that we do have some uncertainties in our Q4 guidance. As Barry mentioned, we’re in the letter, and as we’ve talked about already on the call, we are relaunching the brand to better communicate our value proposition, and we do expect that to widen our channels with time. And we’re also reintroducing the app. And we don’t know the impact that these launches are going to have on our Connected Fitness hub growth in Q4. We’re cautiously optimistic about that, but we have not baked any of that optimism into our guidance forecast.

Barry McCarthy: And when you speak about efficiency, you’re talking about the long-term value to CAC ratio.

Liz Coddington: LTV to CAC ratio, exactly.

Operator: Thank you. One moment for our next question, that will come from the line of Justin Post with Bank of America. Your line is open.

Justin Post: Great. Maybe one for Liz and one for Barry. First, on – Liz, when you think about the app pricing and the tiering, how do you protect the Connected Fitness price, but also offer a very robust app that people can use on other devices. How do we think about that? And then, Barry, maybe a big picture question added about 120,000 subs this year. I know there’s a lot of macro and competitive headwinds and execution with the new team. How do you think about the right rate of growth for the company on subs as you look past this year? Was this an unusually challenging year and you’re optimistic? Or is this kind of the new baseline? How do we think about sub growth from here? Thank you.

Liz Coddington: Do you want me to take the first part of the question first?

Barry McCarthy: Yes.

Liz Coddington: So Justin, we’re not sharing today any details about our new app tiers and the pricing associated with them. But the way to think about it is that they aren’t all going to offer the same offering to consumers. So for example, what we offer for Connected Fitness is all of our content on our hardware along with access to the app, you kind of get everything is all accessed. The different app tiers will have different amounts of content experiences available to you at different price points. So that’s how we’re protecting the all access membership in that regard.

Barry McCarthy: Well, let me talk about the current environment and then try to share with you how I think about the new baseline, what some of the vectors for growth would be in a super challenging year. I think, since I walked in the door, we — in restructurings and revaluations and write-down, something like $1.7 billion. And so there’s been a tremendous amount of effort invested in, let’s say, restructuring the business, rebuilding the lead team, the rest of it. And as a leadership team, we are still finding our rhythm building relationships and trust, all the soft tissue relationships that make teams great. That only happen over time. And so if we manage that process well, we will execute faster and the business will perform better with the passage of time.

At least it’s been my observation at my previous company. Here are a couple of aspects — vectors of growth. There are a couple of aspects of the business that we have been in the process of restructuring and we are only just beginning to see glimmers of the benefits of some of those efforts that we’ve invested. I’m thinking particularly about the commercial and corporate wellness business, we’re starting to see some good momentum there. We’re starting to see some good momentum in 3P. And we know we have a lot of learning to do, to become a good partner in a B2B relationship, but that’s showing signs of life. International, I think, we’ll provide opportunities for growth for us. Also, we introduced new hardware platforms this past year. Let’s take the row by example, still only has a 4% unaided brand awareness guide is at 1%.

The app is at 5%, I think we have opportunities to improve all of those significantly. Let’s take the app by way of example. Even before we invested in making it better, the Net Promoter Score is 20% higher than our next highest rated product, which is bike plus, which has been quite successful for us, but only 5% of people even know it exists, which makes it 10 times lower than bike. So there’s lots of opportunity for us to lean into that, and we’ll have a full-year of row at some point in our future, I anticipate we’ll have a second treadmill product that was two years ago roughly that we withdrew to us from the marketplace. We don’t control the timing on that, but we have invested a lot in our relationship with the government, and that relationship has dramatically improved since Tammy and her team have invested time in that with our engineering team.

So I think that will be a vector for both. So new platforms, new businesses, commercial, international, of course, we have new marketing leadership and we’ll be leaning in aggressively to support them as they grow the business. And then lastly, Sam Cotter and her team have really, I think, join signs of great progress for us in turning around our accessories and our apparel business. I think the apparel business, in particular, can be significantly more meaningful than it has been. And I’m excited about some of the initiatives that she’s pursuing that we haven’t discussed publicly that we’ll unlock some growth opportunities there. So sorry to be so long-winded, but that’s kind of how I’m thinking about the new baseline and the vectors of growth.