Barry McCarthy speaks during an interview with CNBC on floor of the New York Stock Exchange (NYSE), October 28, 2019.
Brendan McDermid | Reuters
Peloton CEO Barry McCarthy told investors Wednesday he doesn’t care that the company is losing money on its Bike, Tread and Row equipment. The business’s “path to the promised land,” he said, is its mobile app.
Peloton posted negative margins during the holiday quarter for its pricey connected fitness products, but McCarthy said he’s more concerned with aggregate margins, which were in the positive thanks to the company’s subscription revenue.
“We take a holistic view of the revenue stream and the expenses associated with both the hardware and the subscription associated with it. So from my part, I don’t particularly care about the hardware margin,” McCarthy said during the company’s earnings call.
“I care about it on an aggregate basis, and I care about the relationship between the lifetime value of the customer relative to the cost of acquisition,” he said.
In Peloton’s fiscal second quarter of 2023, ended Dec. 31, the exercise equipment company lost $42.8 million on its connected fitness products, bringing the division’s gross margin to negative 11.2%.
The company’s overall gross margin of 29.7% was kept afloat by the $277.9 million Peloton made from its subscription business, at a margin of 67.6%.
While subscription revenue was effectively flat quarter over quarter, it exceeded sales from Peloton’s connected fitness products for the third quarter in a row. McCarthy told CNBC it signals a possible “turning point” for the company.
When asked about how the app, which features on-demand workout classes from the company’s pseudo-celebrity instructors, fits into the exercise equipment company’s overall strategy, McCarthy said his primary goal is to expand Peloton’s total market share by reaching a user base that it hasn’t been able to access before.
The cost of the app, which doesn’t require any Peloton equipment, is $12.99 per month compared with the $44 monthly cost for the company’s all-access membership that can be used on its connected fitness equipment.
“I think of it as its own endgame,” McCarthy said.
Brody Longo works out on his Peloton exercise bike on April 16, 2021 in Brick, New Jersey.
Michael Loccisano | Getty Images
Peloton said Wednesday its net loss narrowed year over year, and, for the third quarter in a row, subscriptions revenue was higher than sales of the company’s connected fitness products.
CEO Barry McCarthy called the results a possible “turning point” for the business, which has spent much of the past year executing an aggressive turnaround strategy.
The fitness equipment company’s fiscal second quarter revenue beat Wall Street’s expectations, but the company posted wider losses per share than expected. Peloton’s stock jumped about 7% in premarket trading.
Here’s how Peloton did in the three months that ended Dec. 31 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:
Loss per share: 98 cents vs. 64 cents expected
Revenue: $792.7 million vs. $710 million expected
The company’s reported net loss for the three-month period that ended Dec. 31 was $335.4 million, or 98 cents per share, compared with a loss of $439.4 million, or $1.39 per share, a year earlier. While it’s the eighth quarter in a row the exercise company has reported losses, it’s the narrowest loss Peloton has marked since its 2021 fiscal fourth quarter.
Revenue dropped 30% compared to the year ago period but exceeded the company’s expected range of $700 to $725 million. Connected fitness product sales, which are typically strong during Peloton’s holiday quarter, dropped 52% year-over-year while subscription revenue jumped 22%.
“This is the time of year when, if we’re going to sell a lot of hardware, we have so you would expect there to be lots of hardware related revenue, and you would expect that maybe that revenue would exceed subscription,” McCarthy told CNBC. “It didn’t. It’s why in the letter [to investors], I call it out, as it may be a turning point.”
In his letter to investors, McCarthy said he expects the trend to continue.
The company ended the quarter with 6.7 million total members and 3.03 million connected fitness subscriptions, which is a 10% jump compared to the year ago period. The company counted 852,000 subscribers to its app, a 1% drop compared to the year ago period. It has a goal of getting 1 million people to sign up for trials of its app over the next year.
Peloton is losing money on Bikes, Treads and other machines, but its subscription business has once again kept its overall margins above water. Gross margins for its connected fitness products were negative 11.2%, but gross margins for subscription sales were 67.6%. The total gross margin was 29.7%, up from 24.8% in the year ago period. It declined from the previous quarter, however, driven in part by increased promotions in the holiday quarter.
Peloton expects revenue to be lower but margins higher in the next quarter. The company is forecasting sales between $690 million to $715 million and a total gross margin of about 39%. Wall Street analysts pegged their revenue estimate for the quarter at $692.1 million.
The company is also expecting connected fitness subscribers to be between 3.08 million and 3.09 million.
Next phase of the turnaround
Peloton, which boomed during the earlier days of the pandemic, has been in the midst of a broad turnaround strategy under McCarthy, who took the helm of the business a year ago.
The company’s stock is up about 62% so far this year, closing at $12.93 on Tuesday, giving it a market value of about $4.4 billion. Shares are well off their 52-week high of $40.35, which they hit around the time McCarthy became CEO.
“The viability of the business was very much in doubt when I walked in,” said McCarthy, a former Spotify and Netflix executive. “It probably wouldn’t be an overstatement to say there were some people who didn’t expect us to survive this long.”
Since he took over, McCarthy has cut Peloton’s workforce by more than half, expanded its Bike rental program nationwide, started selling certified pre-owned Bikes, debuted a rowing machine and partnered with Amazon and Dick’s Sporting Goods to sell its Bikes and Treads.
McCarthy’s top priority was to manage cash flow and get the company out of the red, a goal he said the company has nearly accomplished. Free cash flow was negative $94.4 million, compared with negative $246.3 million in the previous quarter and negative $546.7 million in the year-ago period.
McCarthy said he’s ready to pivot from trying to keep the company alive to growing it, he told CNBC.
“Now that we’ve addressed the viability issues, let’s get back to thinking about growth and the future of the business, like full stop,” said McCarthy.
“So there are a bunch of initiatives that we’ve announced that position us to pursue growth,” he added. “And the question we need to answer for investors now that we’re not talking about viability is how fast, how profitable, where’s it coming from, and over time we’ll begin to address some of those questions.”
racing to save itself, will reject some of the most fundamental aspects of its decade-old business model.
The once-hot maker of connected fitness equipment posted losses of more than $1.2 billion in the most recent quarter as revenue plunged and the company warned it would spend more cash than it brings in for several more months. Peloton lost $2.8 billion in the year ended June 30, compared with a $189 million loss in the prior year.
Losses come as demand for Peloton’s bikes and treadmills has plunged and the company’s count of people who subscribe to its fitness classes stagnated after growing fourfold since early 2020. The company had about 3 million subscribers to its connected fitness offering at the end of the June quarter.
Peloton CEO Barry McCarthy aims to make Peloton primarily a subscription-based company.
Photo:
Kevin Dietsch/Getty Images
Peloton shares were down nearly 20% in morning trading, as the company posted steeper losses and weaker revenue than analysts had projected. Through Wednesday’s close, its share price was down 88% from a year ago.
“The naysayers will look at our [fourth-quarter] financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses. They will say these threaten the viability of the business,” Chief Executive
Barry McCarthy
said in a letter to shareholders. “But what I see is significant progress driving our comeback and Peloton’s long-term resilience.”
Peloton has long sought out an affluent base of customers with stationary bikes that cost up to $2,500, and has worked to ensure only owners of its equipment are able to connect to its popular workout classes.
Mr. McCarthy, who took over in February, said the company also will court more frugal customers and make its workout classes, often accessed through screens on Peloton equipment, compatible with competitors’ exercise products.
He said the company is also trying to bring more people in through selling equipment and clothes through Amazon.com Inc.’s e-commerce platform to letting people rent bikes through a subscription. Peloton historically has offered two subscription options, one in which courses connect to bikes and treadmills and cheaper options in which classes aren’t connected.
“You never know which initiative is going to get us where we want to go, but I am confident of the cumulative effect,” Mr. McCarthy said in a call with analysts.
The efforts come as Peloton’s finances deteriorate.
Revenue for the June quarter fell to $679 million, a nearly 30% drop from a year ago as declining exercise equipment sales more than offset higher revenue from subscriptions.
Efforts to restructure the company contributed to it burning through $412 million in cash in the latest quarter, after going through $650 million in each of the prior two periods. It ended June with $1.25 billion in cash reserves and a $500 million credit line.
Peloton is taking steps to shore up its finances, from sweeping layoffs to outsourcing manufacturing of its fitness equipment. The company said earlier this month it would cut around 800 jobs in an effort to reduce costs, after announcing in February it would lay off about 2,800 workers. Executives said cost-cutting aims to ensure the company maintains at least $1 billion in available cash.
One of the pandemic’s biggest winners, Peloton has struggled to adapt as Americans revert to prepandemic habits and tighten spending amid inflation near its highest level in decades. Americans are spending less on in-home fitness, from sales of equipment to connected workouts, as they return in droves to gyms and become increasingly cautious about spending available cash amid economic uncertainty.
SHARE YOUR THOUGHTS
How has your Peloton use changed over the course of the pandemic? Join the conversation below.
Mr. McCarthy’s predecessor, Peloton co-founder
John Foley,
spent hundreds of millions of dollars to expand the company’s manufacturing and supply, betting that demand would hold as the pandemic waned. Along with replacing Mr. Foley, the company earlier this year made changes to its board and said it would cancel plans for a $400 million factory in Ohio.
For the first time, in the most recent quarter, Peloton’s subscription revenues were greater than equipment sales. Mr. McCarthy, who previously worked at
Spotify Technology SA
and
Netflix Inc.
, aims to make Peloton primarily a subscription-based company. Subscriber revenue for the quarter was $383 million; equipment sales were $296 million.
Peloton’s subscriber count rose by just 4,000 in the quarter ended June 30 and the company predicts that the total number of subscribers will remain flat in the current quarter.
It is a big change from the start of 2021, when Peloton’s quarterly revenue peaked at $1.2 billion, and exercise equipment comprised more than 80% of sales.
The company said it expects total revenue between $625 million and $650 million for the current quarter, which ends Sept. 30.
Mr. McCarthy, in his investor letter, likened Peloton to a dangerously tipping cargo ship he was aboard as a high-schooler when the crew managed a dramatic recovery.
“Peloton is like that cargo ship,” he said. “We’ve sounded the alarm for general quarters. Everyone’s at their station.”
plans to replace its chief executive, cut costs and overhaul its board after a slowdown in demand caused the once-hot bike maker’s value to plummet.
Peloton co-founder
John Foley,
who has led the company for its entire 10-year existence, is stepping down as CEO and will become executive chairman, the company told The Wall Street Journal.
Barry McCarthy,
the former chief financial officer of
Spotify Technology SA
and
Netflix Inc.,
will become CEO and president and join Peloton’s board.
The New York company will also cut roughly 2,800 jobs, affecting 20% of its corporate positions, to help cope with the drop-off in demand and widening losses. The cuts won’t affect Peloton’s instructor roster or content.
A little over two weeks ago, activist investor Blackwells Capital LLC called for Peloton to fire Mr. Foley and explore a sale of the company, which the Journal has reported is attracting potential suitors including Amazon.com Inc.
Blackwells reiterated its call Tuesday, saying Mr. Foley should leave the company entirely rather than become executive chairman. The company also released a 65-page presentation in which it estimated a sale could value Peloton above $65 a share. Peloton shares closed Monday at $29.75.
“We are open to exploring any opportunity that could create value for Peloton shareholders,” Mr. Foley said in an interview prior to Blackwells’s Tuesday release. Mr. Foley, a former Barnes & Noble Inc. executive who co-founded Peloton 10 years ago last month, declined to comment further.
The naming of a new CEO could indicate that Peloton sees an independent future for itself, or at least doesn’t want to sell at the current depressed share price. Any deal would likely require Mr. Foley’s support, as he and other insiders have shares that gave them control of over 80% of Peloton’s voting power as of Sept. 30, according to a securities filing.
Former Spotify CFO Barry McCarthy said his strength is a deep understanding of content-driven subscription models.
Photo:
Michael Nagle/Bloomberg News
Once a pandemic darling as homebound customers ordered its exercise equipment and streamed its virtual classes and its valuation soared, Peloton’s fortunes have recently sagged, with its stock until recently trading below its September 2019 IPO price of $29 a share as lockdowns ease and gyms start to fill up again.
The company’s shares fell 2% in early Tuesday trading. The company confirmed news of the leadership changes and reported a second-quarter net loss of $439 million. Peloton also lowered its revenue forecast for its full fiscal year to a range of $3.7 billion to $3.8 billion, down from its prior range of $4.4 billion to $4.5 billion.
The company’s value has fallen from a high of around $50 billion roughly a year ago to around $8 billion last week, before its shares rose 21% Monday on news of potential suitors.
Peloton has said it was planning cost cuts and reviewing the size of its workforce and production levels. Investors have been awaiting details of its plans.
Messrs. Foley and McCarthy said that the company had long been planning to hire a new CEO and that Mr. McCarthy entered the picture in the past few weeks.
“I have always thought there has to be a better CEO for Peloton than me,” said Mr. Foley, 51. “Barry is more perfectly suited than anybody I could’ve imagined.”
Mr. McCarthy, who is in his late 60s and plans to move from California to New York, said his strength is a deep understanding of content-driven subscription models, while Mr. Foley’s is in product development and marketing.
“Together we can make a complete grown-up and build a really remarkable business,” Mr. McCarthy said. He has consulted for Peloton investor Technology Crossover Ventures, sits on the boards of Instacart Inc. and Spotify, and was CFO of the music-streaming service until early 2020.
Peloton is making other personnel changes:
William Lynch,
the company’s president, will step down from his executive role but remain on the board;
Erik Blachford,
a director since 2015, will leave the board; and two new directors will be added.
The new directors are
Angel Mendez,
who runs a private artificial-intelligence company focused on supply-chain management, and
Jonathan Mildenhall,
the former chief marketing officer of
Airbnb Inc.
and co-founder of branding company TwentyFirstCenturyBrand.
Peloton said it expects to cut roughly $800 million in annual costs and reduce capital expenditures by roughly $150 million this year. The company will wind down the development of its Peloton Output Park, the $400 million factory that it said in May it was building in Ohio, and reduce its delivery teams as well as the amount of warehouse space it owns and operates.
“Where the company got over its skis is it built out a cost structure as if Covid was the new normal,” Mr. McCarthy said.
Mr. Foley has said the company is acting to improve its profitability and would share details with earnings. The company reported preliminary second-quarter revenue of $1.14 billion and said it ended the period with 2.77 million subscribers.