Peloton 2nd Quarter Earnings Call FY2024

In Peloton’s latest shareholder letter for Fiscal Year 2024, CEO Barry McCarthy kicked things off by celebrating the strides the company has made, notably in the Connected Fitness and App gross margins. 

McCarthy says, “For the second consecutive year we reported strong Q2 results, outperforming on paid subscribers to Connected Fitness and App, gross margin and free cash flow*. Q2 is our most important quarter of the year from a sales standpoint. On the road to recovery, good performance every quarter matters, but Q2 matters most of all.”

The Misses

Acknowledging there have been some misses lately, McCarthy specifically points to the bike co-branding partnership with the University of Michigan as well as shortfalls in customer service and the Member experience.  

While the partnership with the University of Michigan was met with initial excitement and promise, the sales of their co-branded bike fell quite short of expectation and Peloton overestimated the enthusiasm that alumni and boosters alike would have for the bespoke bike.  

Due to this, McCarthy said the University of Michigan bike co-branding experiment will enter its end-of-life phase and further co-branded bikes with NCAA schools will not be explored. That is not to say that future NCAA partnerships are off the table, just that any co-branded hardware will not be a part of those deals.  

Another area that McCarthy specifically called out was the Member Support experience, which has long been a complaint within the Peloton community.  McCarthy has mentioned this as an issue in past shareholder letters, however this is the first time he has called it out this strongly, specifically pointing to customer service. Particularly pointing to the customer experience over the holiday season, he noted that it was so bad that it has tarnished the brand.  In order to remedy this, McCarthy announced that multiple changes have been put into action including new leadership, new systems and new third-party vendors (delivery services), and new training.   

The Hits

With the misses acknowledged, McCarthy then turned his attention to the bright spots of the quarter, specifically pointing to Peloton continuing to outperform the connected fitness market and other successful growth initiatives.  Notably, Peloton’s partnerships with third-party retailers such as Dick’s Sporting Goods and Amazon continue to see strong sales, particularly over this past holiday season with Y/Y unit growth of 74% in Q2.  With this type of success through these third-party retailers, expect to see Peloton lean into these partnerships even more in an effort to maximize their profits on hardware sales.    

In keeping with the hardware theme, McCarthy noted that the Bike Rental Program continues to be a strong performer saying, “We’re forecasting more than 100% Y/Y revenue growth for FY24. The underlying economics continue to be attractive, given the current churn and buyout rates for Bike and Bike+.”  Additionally, McCarthy shared that the demand for the Bike Rental Program is female-driven and is attracting a more diverse and a younger demographic than it did 6 months ago.  Given the success of the Bike Rental Program, expect to see Peloton lean into this space even more, both within the Corporate Wellness partnerships and beyond. 

Tread+, lululemon and TikTok

Excitement for the Tread+ return to market translated into better-than-expected demand from consumers, which, in turn, also translated into higher demand for the Tread as well, and sales of the entry-level Tread outperformed sales expectations last quarter.  McCarthy says, “The overall treadmill market is about 2x larger than the stationary bike market. So our newly found momentum in the treadmill category, and the diversification of our hardware sales beyond Bike/Bike+, is good news for Peloton’s future growth, provided we sustain our momentum.”  

The partnerships with lululemon and TikTok are both exceeding expectations.  While the apparel rollout with lululemon did not go as smoothly as they had hoped, the overall partnership and inclusion of Studio All Access Members (Mirror owners) has performed better than expected.  In the earnings call, it was mentioned that this partnership was only reflective of the last half of the quarter and they will have a better picture of the overall impact in the coming months.  Over the course of the remainder of the year, Members can expect Peloton to “deliver a broader assortment of co-branded merchandise to surprise and delight Members and non-Members alike.”

And, as for TikTok, while this partnership is still in its infancy (3 weeks old, as of the shareholder letter) and it’s still too early to mine any hard data on how successful it is, McCarthy is excited at the possibilities it provides for content creation.  As this partnership develops, expect to see, “original short-form instructor series, Peloton class clips, celebrity collaborations, live Peloton classes, and ongoing creator partnerships.”

Future Growth 

Peloton’s outlook and guidance for the remainder of the current fiscal year is representative of their current best thinking about what the future holds for business performance, but “I’ll be disappointed if we can’t figure out how to improve our performance during the quarter, like we did in Q2,” says McCarthy.  

Looking ahead, while revenue growth continues to be a challenge (-6% Y/Y), gross profit is another story and is equivalent to 27% Y/Y revenue growth at last year’s 2Q gross margin (source: Peloton Q2 FY24 Shareholder Letter)

In McCarthy’s words, “When I first joined Peloton, I spoke publicly about two primary goals for the business: stop the bleeding and return the business to growth. My primary goal for FY24 has been to restore the company to positive free cash flow for the full year. Based on our updated forecast, we now expect the business to generate positive free cash flow in Q4 (vs. $(74) million in 4Q23) but to fall short of achieving our goal for the full year.  We also expect to end the fiscal year with a net increase in unrestricted cash compared to our Q2 balance.  If we grow our cash balance and generate free cash flow, we will have stopped the bleeding. As for the goal of restoring revenue growth, we expect to meet that goal in 4Q24.”

Challenges Remain

Though McCarthy feels that the company continues to head in the right direction, although slower than maybe he (or anyone else) had hoped, there are challenges that Peloton still needs to overcome.

“Our outlook is tempered by uncertainty surrounding our ability to efficiently grow Paid App subscribers and the performance of other new initiatives, as well as an uncertain macroeconomic outlook,” CFO Liz Coddington says.

Additionally, while the Bike Rental program is a success, it, along with the secondary market (off-market sales) does produce a higher churn rate that Peloton will need to work to bring down.

Odds and Ends From Earnings Call

Following the release of the shareholder letter, Peloton hosted their quarterly earnings call, which allows for an often-enlightening Q&A session with McCarthy and Peloton CFO Liz Coddington.  In today’s call, we learned that Peloton will be leaning into their partnership with NYRR to bring marathon training content to the Tread/+ that will include auto-incline for the Tread+ to simulate course elevation on training runs.  Members, be on the lookout for this content in the back half of the year.  

Additionally, the words “product innovation” were heavily mentioned during the call (we counted at least 5 mentions!).  Which means, new things are on the horizon.  While vague about what those new things were, McCarthy noted his excitement over what’s in the works multiple times.  No specifics were given (of course), but it was mentioned that ideas are currently being discussed, and that this is a long game that will play out over the course of the next 2 years.

And, finally, with respect to the Member Experience within the platform, expect to see more personalization as Peloton continues to lean into AI to give Members curated experiences that will (hopefully) keep them coming back over and over and over again.  

Want to dig into the numbers yourself?  Click here to view the Q2 FY24 Shareholder Letter and Earnings Statement.  And, of course, be sure to tune into this week’s episode of The Clip Out to hear Crystal and Tom break it all down for you even further.


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