Shares of Peloton Interactive Inc. climbed about 28 percent on Thursday after the connected fitness leader announced the hiring of Peter Stern, who earned credit for establishing Apple Fitness+, and delivered first-quarter results that exceeded plan.

The strong performance led to Peloton raising its earnings guidance for the year. Shares rose 8.50 $1.85 to $8.50 in over-the0-counter trading.

On an analyst call, Karen Boone, interim Co-CEO, said Peloton’s results exceeded guidance on all key metrics in the fiscal first quarter ended September 30, benefiting from a balanced approach to profitability and growth. The focus included extensive cost reduction efforts, including several rounds of layoffs, and investing in its lowest media spend in the quarter since fiscal 2020 over four years ago.

Highlights of the quarter, according to Boone, include:

  • Aligning its cost structure to the current size of the business by delivering over $200 million of run rate cost savings by the end of fiscal year 2025 from cost restructuring plan announced in May 2024.
  • Improving unit economics across all products and sales channels “in pursuit of delivering sustainable, profitable growth and meaningful free cash flow generation,” and
  • Continuing to make strategic investments in innovation, including refining its marketing strategy to attract new audiences and evolving its content offering, to enable Peloton to return to top line growth in the long-term.

“A key part of managing our business towards profitable growth involves ensuring all the subscribers we acquire are profitable and ensuring we have sustainable unit economics,” said Boone. “We manage our business through a lens of LTV (customer lifetime value) to CAC and have taken actions to improve the areas that are in our immediate control on both the LTV and the CAC (customer acquisition cost) side of the equation.”

To enhance customer LTV, Peloton is focused on expanding Connected Fitness products’ gross margin across all of products, sales channels and markets, with the quarter including steps to raise prices for all bike products across international markets in the quarter as well as moves to reduce promotional activity in Q1. Peloton also introduced a used equipment activation fee, which increases the LTVs for new customers who joined Peloton via the secondary or resale market.

In Germany, Peloton has transitioned operations to an entirely third-party retail and distribution model with Peloton’s first party website remaining live to support brand awareness and product education but traffic directed to third-party retailers, namely Amazon and FitShop for sales and fulfillment. She said, “Germany sales have outperformed our internal expectations following the third-party transition. We are optimistic that this channel strategy could provide a more capital efficient model to explore expansion into additional international markets over time.”

Overall, paid connected fitness subscribers in international markets grew 8 percent in Q1.

In North America, efforts continue to close underperforming first-party retail stores as part of steps to improve unit economics. In November, a test the reimagined smaller store concept will open in Nashville to evaluate a more cost-efficient retail model. Other new programs in North America include the formation of a new partnership with TrueMed to allow customers to use pre-tax, HSA or FSA dollars to purchase telecom products as well as a deal reached to sell Peloton Bike+ at a discount at Costco over the holiday season.

“All of these changes position us well to capture the seasonally strong holiday demand with healthier unit economics, delivering stronger Connected Fitness gross margins and free cash flow,” said Boone.

New CEO Hire

Regarding the hiring of Stern, who starts at the beginning of 2025, Boone said that as the co-founder and “driving force behind Apple Fitness+, Peter led its growth to millions of members and is responsible for successfully scaling over a dozen other subscription services, ranging from Ford BlueCruise to Apple iCloud to Time Warner Cable Home Security. Importantly, Peter has also been a passionate member of the Peloton community since 2016 and have a deep appreciation and respect for this business, this brand and the impact that we have on millions of people around the world every day. I truly cannot wait to officially welcome him to Peloton at the start of the calendar year.”

Stern currently serves as president of Ford Integrated Services. His previous roles include VP of services at Apple and EVP and chief product, people and strategy officer at Time Warner Cable.

Asked about potential changes under Stern in the Q&A session, Boone said Stern will likely have a “taking stock period” and initially continue Peloton’s newfound focus on driving margins, reducing inventory levels and boosting profitability but eventually reposition Peloton back to growth.

“He is, I believe, the guy who is going to come in and set the strategy that is going to return us to growth,” said Boone. “He is very bullish. We all are very bullish on the health and wellness space, the share of wallet that is going to go to this category. So again, he’s going to spend time learning. We will spend time aligning on where to go, how quickly to invest. And again, I do believe he’s the right leader to return us to growth. And I do believe strongly that under his leadership, our brand is well positioned to be a long-term player and the absolute leader in this category.”

First-Quarter Results

Total revenue in the quarter was $586.0 million, down 1.6 percent from $596 million a year ago. Total revenue was above the high end of its $560 million to $580 million guidance range and analysts’ consensus estimate had been $574.8 million.

Connected Fitness Products revenue was $159.6  million, a decrease of 11.6 percent year over year. Subscription revenue reached $426.3  million, an increase of 2.7  year over year. The higher subscription revenue was a result of higher Paid Connected Fitness and Paid App subscribers.

Peloton’s reported net loss for the three-month period was $900,000, or effectively breakeven on a per-share basis, compared with a net loss of $159.3 million, or 44 cents per share, during the same period a year earlier. Analysts’ consensus estimate had been a loss of 16 cents.

Adjusted EBITDA was $115.8 million in the first quarter, which was $55.8 million above the high end of its guidance range, and an $106.7 million improvement Y/Y. Outperformance was partially driven by roughly $15 million of timing savings within FY25.

Gross margins in the quarter were 51.8 percent, which was 180 bps (basis points) above its guidance of 50 percent, due to favorable Connected Fitness Products gross margin and revenue mix-shift toward its Subscription segment. Connected Fitness Products gross margin was 9.2 percent, ahead of internal expectations while Subscription gross margin was 67.8 percent, in line with internal expectations.

Total operating expenses, including Impairment and restructuring expenses, were $291.2  million for the quarter, a 30.3 percent reduction year over year. The reduction reflects a decrease in personnel-related expenses tied to headcount cuts, a decrease in professional services fees and lower spending on advertising and marketing programs.

Peloton recognized $7.8 million of impairment and restructuring expense, of which $4.9 million was non-cash. The non-cash charges were primarily related to asset write-downs in relation to exiting retail showrooms. The cash charges were comprised of $3.4 million in exit and disposal costs and professional fees, offset by a $0.5 million net benefit from lower severance and other personnel costs. Peloton also recognized $23.5 million of supplier settlements primarily due to accruals for the year-ago quarter related to the settlement of disputes with a third-party supplier about certain alleged past and future commitments.

Operating Metrics
Peloton ended the quarter with 2.90 million Ending Paid Connected Fitness Subscriptions, a net decrease of 81,000 in the quarter. This exceeded the high end of its guidance range by 10,000 subscribers. The main driver of the subscriber outperformance was favorable net churn as a result of fewer subscription pauses, partially offset by slightly lower gross additions.

Average Net Monthly Paid Connected Fitness Subscription Churn was 1.9 percent, slightly favorable versus expectations, in-line with the prior quarter, and an increase of roughly 40 bps year over year. As previously noted, net churn performance from Q1 FY24 included a one-time benefit as a result of elevated unpauses, following elevated pauses in response to its original Bike seatpost recall in Q4 FY23.

Peloton ended the quarter with 582,000 Ending Paid App Subscriptions, a net reduction of 33,000 in the quarter. This result exceeded the high end of its guidance range by 12,000 from both higher additions and better than expected Average Monthly Paid App Subscription Churn, which was 7.1 percent. The decline reflects efforts to scale back the amount of media spend maximize media efficiency.  Peloton said it may decide to invest more in App media if software enhancements such as Personalized Plans and Private Teams, and 4 developing new offerings like the Strength+ App beta show traction with consumers.

Q2 Outlook

Peloton’s guidance for Q2 FY25 Ending Paid Connected Fitness Subscriptions of 2.84 to 2.86 million reflects a sequential decrease of 50,000 subscribers at the midpoint. Peloton expects its Average Net Monthly Paid Connected Fitness Subscription Churn rate to slightly improve sequentially in Q2.

Peloton’s Q2 FY25 Ending Paid App Subscription outlook of 560,000 to 580,000 reflects a sequential decrease of 12,000 subscribers at the midpoint, as a result of a decision to limit App media spend.

Revenue guidance of $640 million to $660 million reflects a sequential increase of $64 million at the midpoint as a result of these subscription trends, combined with an expected seasonal increase in hardware sales. The sales guidance was below Wall Street expectations of $671.4 million.

Total gross margin guidance of 46.5 percent reflects an expected sequential decline in Total Gross Margin of 534 bps as a result of a seasonal mix-shift toward its Connected Fitness Products segment during the holiday sales period.

Peloton’s adjusted EBITDA guidance of $20 million to $30 million reflects a sequential decline of $91 million at the midpoint, mainly due to higher sales & marketing expenses as we increase media spend for the holiday season.

FY25 Outlook

Peloton’s Full Year FY25 guidance reflects the expectation that hardware sales will decline Y/Y, as well as an expectation that Average Net Monthly Paid Connected Fitness Churn will continue to increase modestly Y/Y and follow its historical seasonal pattern.

Peloton’s Full Year guidance range for Paid Connected Fitness Subscriptions of 2.68 to 2.75 million remains unchanged and reflects a broad range of outcomes.

Peloton’s Full Year guidance range for Paid App Subscriptions of 550,000 to 600,000, a 20,000 reduction versus its prior guidance, reflects its decision to limit App media spend as investments are made in product development to improve the Member experience. Additionally, as Peloton continues to improve its Member experience, Peloton said it sees clear opportunities to improve engagement, which could result in favorability to churn for both Connected Fitness and App. Peloton added, “While we are optimistic we can improve engagement through product and content innovation and evolving our marketing strategy, the timing of when we will start to see meaningful impact from these efforts is uncertain, and therefore not reflected in our guidance.”

Peloton’s FY25 outlook for revenue remains unchanged at $2,400 million to $2,500 million, as well as its outlook for Total Gross Margin, which remains unchanged at 49.0 percent. Peloton raised its FY25 Adjusted EBITDA guidance by $40  million to $240 million to $290  million, which reflects its continued improvements in profitability, largely due to Y/Y gross margin expansion, the operating cost savings expect to achieve related to its previously announced cost restructuring plan, and reduced Y/Y media spend.

 

 

Image and charts courtesy Peloton