Peloton narrowed its net loss despite weaker sales in the fiscal third quarter ended March 31 as margins expanded and expenses were reduced. The company also announced a settlement agreement with Dish Network that Peloton CEO Barry McCarthy said in a letter to shareholders would enable the company to focus on growing the business again.

Peloton revenues declined 22 percent in the fiscal third quarter to $748.9 million, with Connected Fitness revenues falling 45 percent to $324.1 million and Subscription revenue ticking up 15 percent to $424.7 million.

PTON ended the quarter with 3.11 million Connected Fitness subscriptions, reflecting net additions of 74 thousand members. Gross additions were said to be ahead of expectations, driven by stronger-than-expected hardware sales and bike rentals, higher-than-anticipated secondary market activations, and faster-than-average forecasted deliveries.

Average Net Monthly Connected Fitness churn for the quarter was 1.1 percent, in-line with expectations.

The company ended the quarter with 853,000 Peloton App subscribers, exceeding expectations. As noted in prior quarters, the company expects continued pressure on its App subscription count as it balances its effort to grow its App subscription offering with work toward the debut of a new Peloton App strategy, which it expects to launch later in May.

Total gross margin was 36.1 percent of sales in the quarter, a 1,700 basis point jump from the prior-year comp quarter. Connected Fitness’ gross margin was a negative 5.4 percent of sales in Q3, compared to negative 11.4 percent in the prior-year quarter, a 600 basis point improvement. Subscription gross margin slipped 40 basis points to 67.8 percent of sales in the period.

Operating expenses were pared 42 percent to $536.2 million in the quarter. G&A expense increased $6.8 million versus the year-ago period, primarily driven by a $75.0 million accrual related to the settlement of the Dish litigation, partially offset by year-over-year reductions in professional fees and personnel-related expenses. 

Sales and marketing expenses declined $73.1 million versus the year-ago period, reflecting lower media spending and reductions in personnel-related expenses. 

R&D expenses increased $1.1 million versus the year-ago period, and lower personnel-related expenses partially offset increases in product development and research costs.

The net loss for the period improved to $275.9 million in fiscal Q3 from $757.1 million in the prior-year quarter. Adjusted EBITDA (loss) improved 90 percent to an EBITDA loss of $18.7 million.

The company recognized $51.3 million of impairment and restructuring expenses in the quarter, of which $40.1 million was non-cash. The non-cash charges were primarily related to asset write-downs and write-offs associated with Peloton Output Park, the closure of retail showroom locations, and other manufacturing assets. The cash charges were comprised of $6.9 million of severance payments and $4.4 million related to other items, including facility exit costs. Lastly, the company recognized approximately $2.9 million of other supplier settlement expenses during the period.

McCarthy briefly mentioned the settlement and patent license agreement with Dish Technologies. The settlement cost ($75 million), plus other related expenses, was noted to pressure free cash flow for the fiscal fourth quarter significantly. The settlement follows a recent International Trade Commission (“ITC”) determination that Peloton’s adaptive bit rate streaming method infringes several Dish patents. McCarthy said the company expected a different outcome and could have appealed the ITC decision. However, it believes the settlement better serves the company’s growth agenda because it eliminates a cloud of uncertainty and an enormous distraction to the day-to-day business operation, despite its adverse impact on Q4 cash flow. “With this matter in the rearview mirror, we can focus again on growing our business,” he shared.

Photo courtesy Peloton