Shares of Peloton jumped 26.57 percent on Wednesday as fiscal second-quarter results handily topped expectations. On an analyst call, Barry McCarthy, CEO and president, vowed the connected fitness leader was done cutting jobs as efforts to rejuvenate growth, including by selling on third-party platforms, were beginning to yield fruit.

McCarthy, the former Netflix and Spotify executive marking his first anniversary at Peloton, said results “significantly outperformed” expectations for Connected Fitness subscriptions, Connected Fitness Unit (CFU) orders, CFU deliveries, hardware revenue, subscription revenue, as well as total revenue, adjusted EBITDA, and free cash flow.
One negative was that the company continues to lose money on its hardware business, including sales of its Bike, Tread and Row equipment.

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 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 told analysts. “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.

He described Peloton’s mobile app as the businesses’ “path to the promised land” as he sees it as a key driver of subscription growth. He said of the app, “The end goal for that strategy is to expand the TAM (total addressable market) by reaching a user base that historically we’ve not been able to access. And to do it with our core strength, which is all of the content and the user experience that our instructors give life to, and to enable consumers to use that content on competitive hardware and to use it in the home and to use it in the gym and to use it outside, whether it’s strength or yoga or it’s running outside or run a treadmill, whether it’s rowing what have you.”

The cost of the app, which does not require the use of Peloton equipment, is $12.99 monthly compared with the $44 monthly charge for the company’s all-access membership that can be used on its Connected Fitness equipment. He said, “I think of it as its own endgame.”

Overall, Peloton’s newer initiatives—Peloton App, Peloton Certified Refurbished bikes, bike rentals, and premium-priced CFUs—as well as its move into third-party selling with Amazon, Dick’s Sporting Goods and Hilton partnerships “have been important contributors to the turnaround of our business,” said McCarthy.

Together, product and go-to-market strategy changes accounted for 19 percent of Peloton’s CFU order volume in its fiscal second quarter. Peloton also launched two new products, the Row and Guide, in the quarter.

Asked by an analyst which of the newer initiatives was expected to drive growth over the next twelve months, McCarthy said that based on performance in the second quarter and the third quarter to date, the pre-owned business would be the most significant on a quarter-over-quarter basis. He noted that the Fitness as a Service (FaaS) business has doubled and is “continuing to grow rapidly this quarter.”

On its move to sell to third-party platforms, including Amazon, Dick’s Sporting Goods and Hilton partnerships, McCarthy said the benefit was “less incrementality.” He noted that Peloton doesn’t have enough data to know whether it would have reached the customer purchasing a Peloton through a third-party account through Peloton’s platform or whether the sale on the third-party platform drove the transaction. He said, “It did outperform our expectations in the quarter. But, of course, we had no history going into the quarter…We continue to be optimistic.”

The average net monthly Connected Fitness churn for the quarter was 1.1 percent, in-line with expectations.

Despite the better-than-expected demand in the quarter, McCarthy still isn’t sure if it’s because of a stabilization on consumer behavior around Connected Fitness products or a reaction to the changes Peloton has made. He said, “We’re not back to normal yet. There’s some new normal that’s happening, and I don’t feel like we’re quite grasped what it is, one.

Peloton had seen sales surge during the early part of the pandemic as restrictions were faced going to gyms and benefited from significant pull-forward demand. Peloton then faced a significant inventory as the economy opened up, leading to a sharp decline in sales and an inventory glut in recent quarters.

In other news, Peloton, in a reversal, said it no longer plans to sell Precor, a commercial fitness business it bought in 2021 for $420 million after it failed to fetch an attractive price.

McCarthy noted that on his first earnings call with analysts, he had said that Peloton was committed to Connected Fitness and “the worst kept secret on the planet is that we’ve been exploring the sale of Precor.”
He said Peloton “got pretty far down the path,” but the price the buyer was willing to pay “dramatically dropped” to a point well below what Peloton valued the fitness equipment business. He said, “We walked away from the table. At some point, you’re across a stupid line to the point where you’re unwilling to dance anymore. And that happened for us.”

McCarthy admitted that since the acquisition, Peloton had “done nothing to invest in the performance of the business to its detriment” and even moved key talent to support Peloton’s hardware business.

Peloton plans to “reverse course,” bringing in new leadership focusing on rightsizing Precor’s cost structure and setting a goal of restoring Precor’s growth.

McCarthy said, “I think we understand how to add some incremental value without great expense and have a disproportionate increase in the value of the business, and the overarching strategy would be to run Precor for the benefit of Precor and to not dilute those efforts for the benefit of our own operating business, run it as a freestanding subsidiary. And so that’s the path we’re on. And when we see success, we will see a dramatic increase in its market value. And then unless we have a shift in strategy where they have a shift in their product strategy. At some point, we would look to divest.”

Peloton also noted that a plan to sell off a manufacturing facility in Ohio is taking longer than expected, and the company now anticipates completing the sale within six months.

In the fiscal second quarter ended December 31, net losses shrunk to $335.4 million, or 98 cents a share, from $439.4 million, or $1.39 a share, in the year-ago period. Wall Street’s consensus target called for a loss of 64 cents.

While the exercise company has reported losses in the eighth quarter in a row, it’s the narrowest loss Peloton has marked since its 2021 fiscal fourth quarter.

Revenue dropped 30.1 percent to $792.7 million from $1,133.9 million a year ago but was well above Wall Street’s consensus of $709.8 million. Peloton’s guidance had been in the range of $700 to $725 million.
Shares of Peloton jumped $3.43 to $16.36 and have run up well above its price at the close of 2022 of $7.94. The stock remains well below its 52-week high of $40.35, and it’s an all-time high of $164.40 reached in December 2020.

McCarthy noted that Peloton posted a negative free cash flow of $94 million in the latest quarter, marking a significant improvement versus a negative free cash flow of $747 million in the Q322 quarter. Excluding the costs of paying suppliers to settle obligations for parts Peloton no longer needed as it’s rebalanced production in line with demand, Peloton generated a positive cash flow of $8 million in its latest quarter.
McCarthy said, “If you’ve been wondering whether or not Peloton can make an epic comeback, this quarter’s results show the changes we’re making are working.”

More revenue was generated from subscriptions than hardware for the third consecutive quarter, but McCarthy said the trend is benefiting margins. Connected Fitness product sales, typically strong during Peloton’s holiday quarter, dropped 52 percent year-over-year while subscription revenue jumped 22 percent.

McCarthy said, “This trend is gross margin accretive because subscription gross margins significantly exceed hardware gross margins. If this trend continues, which seems likely since we sell more hardware in Q2 than any other quarter of the fiscal year, it represents a structural shift toward improving GMs in the business.”

Gross margins for its Connected Fitness products segment were negative at 11.2 percent, but gross margins for subscription sales were 67.6 percent. The total gross margin was 29.7 percent, up from 24.8 percent in the year-ago period. However, it declined from the previous quarter, driven in part by increased promotions in the holiday quarter.
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.

The company ended the quarter with 6.7 million total members and 3.03 million Connected Fitness subscriptions, which is a 10 percent jump compared to the year-ago period. The company counted 852,000 subscribers to its app, a 1 percent drop compared to the year-ago period. It aims to get 1 million people to sign up for a trial of its app over the next year.

For the current fiscal third quarter, Peloton expects revenue to be lower but margins higher. The company forecasts sales between $690 million to $715 million and a total gross margin of about 39 percent. Wall Street analysts pegged their revenue estimate for the quarter at $692.1 million. The company also expects Connected Fitness subscribers to be between 3.08 million and 3.09 million.

Peloton also indicated it remains on track to generate positive cash flow by the end of the fiscal year in June.

Photo courtesy Peloton