Platoon said Thursday it is emerging from the red and posted a slight increase in sales for the first time in nine quarters while narrowing its overall losses.
The company's shares rose 35% on Thursday.
The ailing connected fitness company, which has been run by two board members since former CEO Barry McCarthy stepped down earlier this year, saw sales grow 0.2% during its fiscal fourth quarter. While that’s a modest increase, it’s the first time Peloton has posted year-over-year revenue growth since its 2021 holiday quarter.
The company also indicated it is ready to focus on profitability over growth with significant cuts to its marketing and sales spending and significant increases in free cash flow and adjusted EBITDA. Those cuts helped Peloton narrow its quarterly loss to $30.5 million from $241.1 million in the same period a year ago.
Here's how the bicycle and tread manufacturer fared compared to what Wall Street expected, according to a survey of analysts by LSEG:
- Loss per share: 8 cents compared to the 17 cents expected
- Revenue: $644 million compared to the expected $631 million
For the three-month period ended June 30, Peloton significantly narrowed its losses. The company posted a loss of $30.5 million, or 8 cents per share, compared with a loss of $241.8 million, or 68 cents per share, a year earlier.
Sales rose to $643.6 million, up 0.2% from $642.1 million a year earlier. That's an increase of just $1.5 million, but Peloton did so at a time when sales are typically a bit slower for the company because the quarter extends into the summer, when people are more focused on going out and traveling than working out. The last time Peloton reported year-over-year sales growth was during the 2021 holiday season, which is typically the company's strongest quarter.
Secondary market gains
During the quarter, sales of Peloton’s pricey connected fitness devices fell about 4%, which is in line with the company’s trend. However, subscription revenue rose 2.3% and the segment’s gross margin increased one percentage point.
Although hardware sales declined, Peloton is growing its subscription revenue through the secondary market, where people can buy used exercise bikes for a fraction of the cost of a new one. During the quarter, subscription revenue from hardware purchased on the secondary market grew 16% year over year.
“We believe a significant portion of these subscribers are incremental and exhibit lower net churn rates than rental subscribers,” the company said in a letter to shareholders.
While hardware sales have weighed on Peloton’s overall performance, sales of its Tread treadmill are growing after overcoming a costly recall. During the quarter, sales of Peloton’s treadmill portfolio grew 42% year over year.
The company is also seeing some positive signs from its bike rental program, which has allowed it to clear out excess inventory. During the quarter, the average monthly net churn rate for paid rental subscriptions decreased 1.1 percentage points. Demand has been so consistent that it no longer has the inventory levels of refurbished bikes needed to supply that portion of the program. The company stopped offering its original bike rental program on August 1, and has since seen demand for its Bike Rental+, sales of original refurbished bikes, and sales of new financed bikes grow.
“These alternative programs have stronger unit economics than the original bike rental, with more cash paid up front and a stronger retention profile,” the company said in its letter to shareholders.
Since the height of Peloton’s pandemic ended, the company has struggled to generate free cash flow and ensure it has enough assets on its balance sheet to cover its numerous liabilities. Earlier this year, it announced a broad restructuring plan that included cutting 15% of the company’s global workforce to achieve annualized cost savings of $200 million by the end of fiscal year 2025.
These efforts are beginning to bear fruit.
During the quarter, Peloton achieved both adjusted EBITDA and free cash flow for the second consecutive quarter, a feat it had not accomplished since the height of the Covid-19 pandemic. It posted $70 million of adjusted EBITDA, well above the $53 million analysts had expected, according to StreetAccount.
That metric increased $105 million compared to the same period last year and $64 million compared to the previous quarter.
Peloton also generated $26 million in free cash flow, compared with negative $74 million in the same period last year and $8 million in the previous quarter.
Peloton's balance sheet improvements come after the company completed a massive refinancing of its debt that averted a looming liquidity crisis and delayed debt maturities by several years.
As for who will be Peloton's next leader, interim co-CEO Karen Boone said the search is “ongoing” and they haven't seen a “lack of interest.”
“We're very far along in the process. We've done a lot of research, we've had a lot of conversations and we've narrowed it down to some very qualified candidates,” Boone said. “Right now we have some very specific people in mind.”
In his opening remarks, Boone said the company can't speculate on when its next CEO will start. But just before ending the call, he said the new hire will be in place when the company reports its results, which is expected to happen sometime in the fall.
“I should probably under-promise here, but I'm pleased to say that I think you'll be talking and hearing from Peloton's new CEO on this call next quarter,” Boone said.
Profit over growth
Next year, Peloton plans to invest in its hardware and software to deliver a better user experience, among other initiatives. However, its guidance assumes that investments in these new initiatives “will not lead to subscriber growth in the fiscal year,” indicating that Peloton may finally be shifting its focus from growth to profitability and generating free cash flow.
“Chris and I, in partnership with Peloton's strong leadership team, continue to make progress on several key strategic priorities, including aligning our cost structure with the current size of our business to improve profitability and generate meaningful free cash flow without requiring growth to get there,” Boone said on a call with analysts.
“We are excited about our innovative roadmap, but will be cautious in investing our marketing dollars until we demonstrate product-market fit, and will remain cautious with marketing spend given the uncertain consumer environment and current macroeconomic environment,” he said.
That shift is reflected in reductions in sales and marketing spending, an expense that has long weighed on Peloton's bottom line and has been criticized for being too high for the company's size.
During the quarter, Peloton reduced sales and marketing spending by $25.5 million, or 19% year-over-year. The company said it expects to continue making reductions to its marketing budget through fiscal 2025.
For the current quarter, Peloton expects sales to be weaker than Wall Street expected, but sees higher-than-expected adjusted EBITDA. The company said it expects sales of $560 million to $580 million, compared with estimates of $609 million, according to LSEG. It expects to post adjusted EBITDA of $50 million to $60 million, compared with estimates of $45 million, according to StreetAccount.
StreetAccount analysts had expected the number of connected fitness subscribers to be 2.96 million during the current quarter, but Peloton is projecting a range of 2.88 million to 2.89 million.
For the full year, Peloton expects sales to be between $2.4 billion and $2.5 billion, compared with estimates of $2.7 billion, according to LSEG.
