Peloton Interactive reported a wider quarterly loss than expected as revenue growth slowed and costs expanded due to a massive treadmill recall.  The company also said it’s reducing the price of its original at-home exercise bike for the second time in a year.

Beginning Thursday, its core bike will cost $1,495 — a $400, or a roughly 20 percent, reduction — with the monthly financing rate dropping $10 to $39 a month. Peloton said in a press release that the price cut is part of its mission to making the company’s products “more accessible and attainable.” Peloton also said in its earnings release that it’s beginning to shift its business mix back toward treadmill sales, which are less profitable than those of its cycles.

The loss per share in the quarter came to $1.05 versus a loss of 45 cents expected on average from Wall Street. Sales came in at $936.9 million, ahead of Wall Street’s consensus estimate of $927.2 million.

Overall, sales grew 54 percent in the fourth quarter ended June 30 to $937 million. The pace of growth slowed from the third quarter, when sales more than doubled from year-ago levels and topped $1 billion.

The sales gains in the latest quarter were driven by demand for its Connected Fitness products, strong gross additions, and sustained low connected fitness subscription churn levels, partially offset by the impact of Tread product recalls.

Connected Fitness Segment revenue, which includes the contribution from Precor, was $655.3 million, representing 35 percent year-over-year growth and 70 percent of total revenue.

Subscription revenue grew to $281.6 million, representing 132 percent year-over-year growth and 30 percent of total revenue, driven by Connected Fitness product sales and low Average Net Monthly Connected Fitness Churn of 0.73 percent.

Peloton’s Connected Fitness subscription base climbed to 2.33 million at the end of Q4, representing year-over-year growth of 114 percent. As of June 30, 98 percent of its Connected Fitness Subscriptions were on month-to-month payment plans.

In Q4, its average monthly workouts per Connected Fitness subscription was 19.9. This was below the 24.7 last year, as typical seasonal trends associated with improving weather and consumer mobility re-emerged but represented 66 percent growth from engagement levels during Q419. Users with Connected Fitness subscriptions worked out with Peloton “134.3 million times, up from 76.8 million workouts in the same period last year, representing 75 percent year-over-year growth,” said Peloton.

Gross Profit
Gross profit in Q4 was $253.6 million and 27.1 percent of revenue, representing a 12.1 percent year-over-year decline in gross profit. Connected Fitness segment gross profit was $75.5 million in Q4, representing a 65.6 percent year-over-year decline. Peloton’s Connected Fitness segment gross margin was 11.6 percent, down from 45.3 percent in the year-ago period. Compared to the year-ago period, its Connected Fitness gross profit margin was primarily impacted by recall-related costs, the impact of the September 2020 Peloton Bike price reduction and increased supply chain and logistics expenses.

Subscription gross profit was $178.1 million in Q4, representing 158.9 percent year-over-year growth. The subscription gross margin was 63.3 percent, up from 56.8 percent in the year-ago period. Subscription contribution was $195.2 million in Q4, representing 151.4 percent year-over-year growth. Its subscription contribution margin was 69.3 percent, versus prior year at 64.1 percent, driven by continued fixed cost leverage.

Operating Expenses
Total operating expense was $555.4 million and grew 179.4 percent year-over-year, representing 59.3 percent of total revenue versus the prior-year period of 32.7 percent. Sales and marketing expense was $229.3 million and grew 172.3 percent year-over-year, representing 24.5 percent of total revenue versus the prior-year period of 13.9 percent. The year-over-year increase reflected the resumption of media spend in Q4 as order-to-delivery windows normalized and the impact of lapping unusually low spending in the year-ago period. General and administrative expense was $232.1 million and grew 169.3 percent year-over-year, representing 24.8 percent of total revenue versus 14.2 percent in the prior year.

Year-over-year growth was driven by continued investment in its employees, systems and expanded member support, and adding Precor to the company. The negative impact to revenue from its Tread product recalls is also reflected in the growth of G&A as a percent of revenue in the quarter. Research and development expense was $93.9 million and grew 231.0 percent year-over-year, representing 10.0 percent of total revenue versus 4.7 percent in the year-ago period. Expense growth continued to reflect increased investments behind new software features and its hardware development pipeline, as well as accelerated spending associated with engineering recruitment and acquisition-related hiring that bolstered its hardware and software capabilities.

Profitability
Net loss for Q4 was $313.2 million versus net income of $89.1 million in the same period last year. Q4 Adjusted EBITDA was negative $45.1 million representing an Adjusted EBITDA Margin of negative 4.8 percent versus 23.7 percent in the same period last year. Basic and diluted earnings per share were a loss of $1.05.

Guidance
Peloton expects approximately $800 million of revenue in Q1, representing 6 percent growth compared to last year and an 87 percent two-year CAGR. This forecast considers the price reduction on Bike and a modest revenue contribution from Tread. Gross profit margin in the first quarter is expected to be approximately 33 percent, and an Adjusted EBITDA is expected to be negative $285 million.

For the full year, Peloton anticipates $5.4 billion of revenue in FY22 against $4.02 billion, reflecting strong Bike portfolio demand across regions, healthy adoption rates for Tread and continued low churn. Gross profit margin in the year is expected to be approximately 34 percent and Adjusted EBITDA is expected to be negative $325 million

Looking ahead, Peloton expects to return to Adjusted EBITDA profitability for FY23.

Photo courtesy Peloton