Peloton Interactive Inc., in its first quarterly report since going public, lowered its net loss to $49.8 million in the first quarter compared to a loss of $54.5 million a year ago. Revenues reached $228.0 million in Q1, representing 103 percent year-over-year growth.

Peloton’s key financial figures from its first-quarter shareholder letter follow:

REVENUES

We generated total revenue of $228.0 million in Q1, representing 103 percent year-over-year growth.  Connected Fitness Product revenue was $157.6 million, representing 102 percent year-over-year growth and 69 percent of total revenue. Our strong sales were the result of our effective brand and performance marketing efforts including a new marketing campaign highlighting our financing program for the first time. We also benefited from continued word-of-mouth referrals from our loyal Members, which remains one of our largest marketing channels. In addition, our strong year-over-year growth was helped by Tread and International, given that both launches occurred late in Q1 of Fiscal Year 2019.

Subscription revenue was $67.2 million in Q1, representing 112 percent year-over-year growth and 29 percent of total revenue. The increase in subscription revenue was a result of strong growth in our Connected Fitness Subscriber base, which reached 562,774 by the end of Q1, representing year-over-year growth of 103 percent. Our growth in Connected Fitness Subscribers was aided by our continued low Average Net Monthly Connected Fitness Churn in Q1 of 0.90 percent. As of September 30, 2019, 90 percent of our Connected Fitness Subscribers were on month-to-month payment plans.

Our growing subscription revenue is driven by our Members’ increasing engagement with our platform, and engagement is the leading indicator of retention. During Q1, our Member engagement continued to grow with 11.7 Average Monthly Workouts per Connected Fitness Subscriber versus 8.9 Workouts in the same period last year. Our Connected Fitness Subscribers worked out with Peloton 19.2 million times, up from 7.1 million workouts in the same period last year, representing 171 percent year-over-year growth. The increasing diversity of our content offering available through our Connected Fitness Products and Peloton Digital continues to drive engagement and greater share of our Members’ workouts.

We ended the quarter with 105,856 Digital Subscribers, up 116 percent year-over-year. Peloton Digital continues to be an important aspect of our business as it serves as a powerful lead generation channel for Connected Fitness Product sales and bolsters our Connected Fitness Subscribers’ engagement with multiple fitness verticals.

Other revenue, which primarily consists of the sale of Peloton-branded apparel, was $3.3 million in Q1, representing 30 percent revenue growth, net of discounts, and 80 percent unit sales growth year-over-year. Growth in apparel sales is offset by the discounts offered in our referral program, which help encourage word-of-mouth purchase recommendations from our growing Member base. Peloton apparel allows our Members to display their loyalty to our brand, and we have seen sales increase year-over-year as we grow our Member base and expand our showroom footprint.

GROSS PROFIT

Gross profit was $105.1 million in Q1 representing 104 percent year-over-year growth. Gross margin for the quarter was steady year-over-year at 46.1 percent.

Connected Fitness Products gross profit was $67.8 million in Q1 and represents 90 percent year-over-year growth. Our Connected Fitness Products gross margin of 43.0 percent was negatively impacted by a mix shift to Tread sales, which currently carry a lower gross margin than our Bikes, as well as investments in our logistics platform to support our growth.

Subscription gross profit was $37.7 million in Q1 representing 144 percent year-over-year growth. Subscription gross margin was 56.1 percent, a 743 basis point improvement versus last year. Subscription Contribution was $42.4 million in Q1 increasing 129 percent year-over-year. Subscription Contribution Margin was 63.0 percent, a 470 basis point improvement versus last year, primarily driven by a $1.9 million benefit from lower content costs for past use year-over-year. This benefit was partially offset by higher studio rent expense year-over-year, as prior year Q1 did not include the lease expense for our new Peloton Studios in New York City and London.

OPERATING EXPENSES

We typically see lower revenue in the first and fourth quarters of our fiscal year relative to the second and third quarters when we benefit from Holiday sales, New Year’s resolutions, and colder weather. Therefore, operating costs as a percentage of total revenue in the first and fourth quarters are typically higher. Total operating expenses of $156.0 million grew 46 percent year-over-year primarily due to increased marketing expense, expansion into new international markets and fitness verticals, and increases in payroll-related costs due to growth in headcount. Total operating expenses were 68 percent of total revenue, compared to 95 percent of total revenue in the prior year period. Our prior year quarter included a one-time stock-based compensation charge of $32.6 million related to our Series F tender offer. Excluding this impact, operating expense would have been 66 percent of total revenue.

Sales and marketing expense was $77.6 million and grew 71 percent yearover-year representing 34 percent of total revenue. Our prior year quarter included a one-time stock-based compensation charge related to our Series F tender offer of $3.9 million. Excluding this impact, sales and marketing expense as a percent of total revenue would have been 37 percent in Q1 2019. We continue to see marketing efficiencies in the U.S. Bike business, in part driven by our continued strong word-of-mouth referrals from our Members, which helped to offset some of the increase in marketing spend for international and Tread where we are still in the early stages of building brand and product awareness.

General and administrative expense was $60.9 million and grew 22 percent year-over-year representing 27 percent of total revenue. Excluding the one-time stock-based compensation charge related to our Series F tender offer of $26.2 million in the prior year quarter, general and administrative expense would have been 21 percent of total revenue in Q1 2019. The year-over-year growth was driven by continued investment in our teams and systems required to support us as a public company as well as lease expense related to our new headquarters in New York City, which we took possession of in August 2019. Our move to our new headquarters is planned for Fall 2020.

Research and development expense was $17.4 million and grew 51 percent year-over-year representing 8 percent of total revenue. Excluding the one-time stock-based compensation charge related to our Series F tender offer of $2.5 million in the prior year quarter, research and development expense would have been 8 percent of total revenue in Q1 2019. The growth in overall expense is primarily due to the expansion of our software and hardware engineering teams to continue to develop a robust pipeline of new software features and products.

PROFITABILITY

Net loss improved in Q1 to $(49.8) million compared to $(54.5) million last year. Q1 Adjusted EBITDA loss was $(21.0) million representing an Adjusted EBITDA margin of (9.2) percent and year-over-year margin improvement of 283 basis points primarily due to operating expense leverage. Factoring in Q1 weighted average shares outstanding of 38,453,864, basic and diluted net loss per share was $(1.29).

Q2 AND FULL FISCAL YEAR 2020 BUSINESS OUTLOOK

We remain focused on driving strong Connected Fitness Subscriber growth and engaging and retaining our growing, scaled Member base. Our Connected Fitness Subscriber guidance is based on the early success of Home Trial, our expectations for a robust Holiday and New Year’s resolution season, and continued low Average Net Monthly Connected Fitness Churn. Churn is expected to slightly rise, but stay below 1.05 percent in Q2 and average 1.05 percent for the full Fiscal Year 2020. This is due to the expected increase in return rates from Home Trial and the continued expiration of prepaid Connected Fitness Subscriptions offered prior to July 2018. By the end of Fiscal Year 2020, we expect that at least 94 percent of our Connected Fitness Subscribers will be paying month-to-month.

For Q2, we expect $410 million to $420 million of total revenue, representing 58 percent growth at the midpoint of the range. For Fiscal Year 2020 we expect $1.45 billion to $1.50 billion of total revenue, representing 61 percent growth at the midpoint of the range. As mentioned previously, the strong year-over-year growth in Q1 Fiscal Year 2020 was aided by Tread and International, given that our entry into the Tread category, U.K., and Canada occurred last Fall. This will drive tougher year-over-year comparisons for the balance of Fiscal Year 2020.

For Q2 and Fiscal Year 2020 we expect a gross margin of 39 percent to 40 percent and 41 percent to 42 percent, respectively. Connected Fitness Product margin will continue to be negatively impacted by the mix shift to Tread and investments in supply chain and logistics to scale our business, partially offset by product cost efficiencies. We expect both our Subscription Margin and Subscription Contribution Margin to benefit from an expected reduction in content costs for past use, and to a lesser extent, leverage from our fixed costs of content production as we grow our Connected Fitness Subscriber base.

We will continue to deploy capital in a disciplined manner given the significant global market opportunity in front of us. In Fiscal Year 2020, we will continue to invest in building our brand, supporting our growth, scaling operations internationally, improving our end-to-end Member experience, and recruiting and retaining the best teams across all business functions at Peloton. We expect Q2 Adjusted EBITDA of $(70) million to $(65) million, representing an Adjusted EBITDA margin of (16.3) percent at the midpoint of the range. For Fiscal Year  2020 we expect Adjusted EBITDA of $(170) million to $(150) million, representing an Adjusted EBITDA margin of (10.8) percent at the midpoint of the range.

Photo courtesy Peloton