Peloton 3rd Quarter Earnings Call, Fiscal Year 2024

Last Updated: May 2, 2024By

Barry Is Out

Get ready for a wild ride, because this quarter’s earnings call gave us a lot to unpack, including the announcement immediately prior to the call that CEO Barry McCarthy is stepping down as CEO/President and also resigning from the board, as The Clip Out reported immediately after the announcement was made.  The new interim leaders thanked McCarthy for his service, pointing out that he took over as CEO in a very difficult time for the company, and thanking him for bringing the company through the last few years.  Specifically, McCarthy was praised for his re-architecture of what was an unsustainable cost structure, building a great leadership team, and establishing a foundation for the business to grow.

McCarthy was originally appointed as interim CEO in 2022, and the Board has decided that now would be the appropriate time to search for a permanent CEO. McCarthy will continue to serve as a strategic advisor to Peloton, and the Board is hiring a search firm to find a CEO who has the right combination of skills, experience, and vision to bring Peloton into its next chapter.

Worth noting, it sure seemed to us during the call that Peloton mentioned that the “board decided” it was time for a new leader and not that Barry stepped down. But we digress.

Unsigned Third Quarter Earnings Shareholder Letter Released

Peloton shared in an unsigned (yes, we noticed, even before the announcement was made) third-quarter 2024 shareholder letter and in an earnings call that the company plans to “restructure” to position itself for “sustained, positive free cash flow while enabling the company to continue to invest in software, hardware and content innovation, improvements to its member support experience, and optimizations to marketing efforts to scale the business.” 

New Interim Co-Leaders

The earnings call was handled by Karen Boone and Chris Bruzzo, who will be interim co-CEOs of Peloton as the Board searches for the next leader.  Boone has been a Board member for many years and served as Board chair since 2022, and she was previously the President and CFO of Restoration Hardware.  Bruzzo joined the Board in December 2023 and was previously executive vice president and chief experience officer of Electronic Arts.  The role of Board President will be assumed by Jay Hoag.  These leaders plan on using “data-driven and purposeful” methods to make decisions regarding the company.  

Expense Reduction

The new CEOs have a goal to reduce expenses by more than $200 million by the end of the 2025 fiscal year.  This will include a head count of reduction 15% (400 people) but also reducing spend in key areas: marketing, operations, savings from store closings, and R&D.

Positive Cash Flow

The good news emphasized in this call is that Peloton finally has a positive free cash flow.   The company has not enjoyed a positive cash flow in the last 13 quarters but ended this quarter with 895 million dollars of unrestricted cash and cash equivalents.  

The Board is positive that the company has tremendous growth potential and that the connected fitness market continues to normalize post covid.  Peloton is the leader of the connected fitness market and will deliberately invest in key areas of the business, including software (virtual coaching and greater personalization were specifically mentioned), hardware, and content.  The focus will be on engaging more members.  Bike rentals have been up and refurbished and third-party retail sales were strong and outperformed the company’s expectations.  There has also been strong growth in the secondary equipment market.   As a side note, we’ll be talking more about the virtual coaching in this week’s episode. It might not mean what you think it means.

However, the company has seen a reduction in paid app subscriptions and did not see the growth in the business partnership area that was hoped for.  The company is going to pull back marketing for the app until it can evaluate the app tiers and pricing.    

The company has benefited from lower IT costs, lower legal costs, and lower software expenses as well as efficiencies in software development and contractor spending.  

Marketing Strategy

While current marketing has arguably been effective, Peloton realizes that marketing strategies should not just focus on media spending but also on brand and creative spending.  Peloton hopes to put the right balance of “working and non-working” dollars to task to optimize marketing and target new audiences, especially those who have not yet experienced Peloton.   

Keep Running!

One area that Peloton will focus on will be the Tread and Tread+. Peloton wants to be known for its tread as well as its bikes and to attract new members based on the Tread and bring awareness that running is part of its platform.  It was also noted that the delivery of the re-released Tread+ began this quarter, along with the installation of the rear guards for Tread+ equipment owned prior to the recall.  

One innovation that could drive the tread market is the New York City Marathon runner collection which is available for Tread and Tread+ users.  These classes mimic the New York City Marathon, including auto incline features so users can feel what the terrain of the marathon is.  Peloton feels this coaching is the first of its kind.  

Headcount Reduction

Peloton will reduce its “global headcount” by approximately 15%, with about half of these cuts being immediate; this impacts roughly 400 Peloton team members.  It was mentioned numerous times during the call that these cuts involved difficult decisions, but are necessary in order to optimize cash flow. Decisions on who would be cut were made carefully to continue to provide the best content to members and to allow the company to continue to invest in core areas of business that will result in high membership. The “current size of the company” was mentioned as the reason behind these cuts.  Regardless, The Clip Out is sad to see these employees go and we wish them well.

“Reimagine” The Global Market

The company is focusing on reimagining its marketing approach in the international market, with a goal to be more “targeted and efficient” in those markets.  Peloton believes there can continue to be growth in the international markets, but that current marketing strategies are not bringing Peloton to the appropriate potential members internationally. They want to be more specific and intentional with marketing and other operational expenses to get to the right people and get in front of them efficiently.  We thought it was interesting they did not mention that they have given notice to all UK delivery drivers.

Reduce Showroom Footprint

Peloton further plans to continue to reduce its retail showroom footprint (visit them while you can, folks.)  This was not a surprising announcement and has been taking place slowly over the last several quarters.  So… What does that do for Homecoming / Peloton on Tour?  

Looking to the Future

Peloton hopes to continue to learn, track, and measure regularly the goals that they are seeing, and provide an innovative best-in-class fitness product to a broader audience over time.  Specifically, they are still taking a close look at the app tiers and pricing so please note these prices and options could continue to change over time.  The company sees great potential long term because we as a society are increasingly valuing fitness, wellness, and longevity, and Peloton can be a part of those values. Peloton is confident that its premium hardware, interactive software, incredible music, engaging and motivating instructors, and interactive community can provide an amazing experience for its members.  

What are your thoughts on these changes?  Tell us in the comments!

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