Peloton Interactive, Inc.
Q3 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Greetings and welcome to the Peloton Interactive Third Quarter 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. After to conduct a question-and-answer session This conference is being recorded Thursday May 6, 2021. And now I would like to turn the conference over to Peter Stabler, Head of Investor Relations. Please go ahead.

[Peter Stabler:]

Thanks, Scott. Good afternoon, and welcome to Peloton's fiscal third quarter conference call. Joining today's call are John Foley, our Co-Founder and CEO; President, William Lynch; and CFO, Jill Woodworth.

[John Foley:]

Thank you, Peter. Good afternoon, everyone. Thank you for joining us today. I want to start by giving you an update on recent events regarding our treadmill products. As a company we believe strongly in the future of at home connected fitness. And we know we have a responsibility to be an industry leader in product safety. We are a Members First organization and that means for all of us at Peloton, the safety of our member community comes first. I want to be clear though, Peloton made a mistake in our initial response to Consumer Product Safety Commission's request that we recall our Tread Plus product. We should have been more open to a productive dialogue with them from the outset. As a Members First organization, promptly stopping the sales of our products, while we cooperated more closely with the CPSC with something we should have considered sooner. For that I apologize. Given our goal of being the largest and safest home fitness brand in the world, yesterday, we took an important step initiating voluntary recalls and stop use directives for our Tread Plus and Tread products in collaboration with the CPSC, the Consumer Product Safety Commission. That was the right decision at this time. We are working to build and introduce even more safety measures and to help set new industry safety standards for all treadmills. We want to provide a safe, world class fitness experience for our members. People who want the convenience and value of being able to work out from home, Specifically, our voluntary recall involves immediately stopping sales of both products in all markets where they were available. We will also postpone the launch of Tread in the U.S., which was previously scheduled for May 27.

[Jill Woodworth:]

[John Foley:]

In closing, I'd like to reiterate that the safety of our member community is our first priority. And through working with the CPSC and others, our aim is to have the safest products on the market, while delivering the best experiences and value in fitness. We will be working diligently against these goals. And we remain optimistic about our business, strategy and team short, mid and long-term. The underlying growth of our scale bike business is bringing 1000s of new connected fitness members onto our platform daily, building a community million strong that is arguably our greatest asset. We will continue to innovate for our member community. And we're particularly excited about our fiscal year '22 roadmap, when we plan to introduce new hardware, software features, languages and content and all the goal of providing the most comprehensive connected fitness and digital membership experiences in the world and driving ever increasing engagement among our members. Of note, there were 171 billion total platform workouts during Q3 a 258% year-on-year increase. This engagement leads to industry leading retention levels and most importantly, a happier and healthier community now numbering over 5.4 million global members. I will now turn it over to the operator to take your questions. Thank you.

[Operator:]

Thank you. Our first question is from Doug Anmuth with JPMorgan.

[Doug Anmuth:]

I've two. First john, just probably you could talk about what impact the recalls may have on bike and bike plus sales and demand. I mean, we have obviously the 4Q numbers, but as you look into fiscal '22 a bit as well. And then, just definitely if you could talk more about the process to get tread to market in terms of repairing existing kind of built up tread inventory, making the changes in manufacturing and then also getting approvals as well. Thanks.

[Jill Woodworth:]

Hi, Doug, it's Jill. I'm going to take the first question on bike. I think as we said, on the prepared remarks that our guidance for Q4 certainly embeds our thoughts on the impact of the recall on tread. And so we do -- we have baked in some modest impact to bike and bike plus sales, but we think that'll be temporary and we don't think there will be any long lasting impact. And I think as I outlined, we're still predicting unit sales in Q4 to be 3x what they were -- more than 3x what they were two years ago. So, we obviously last year, was a big comp It was the first few months of COVID. But that type of growth over a two year stack, we were pretty excited about and we believe that that can continue into fiscal '22.

[John Foley:]

And Doug, let me break out the second question with respect to tread, to make sure that everyone on the call understands that there's two very distinct products and it's the tread plus and the tread. The tread plus is the more expensive tread that we've been selling here in the states for a couple years. And that is the tread that we are working with the CPSC, to get a couple different fixes in. I talked about the software fix, that's going to allow us to have a code that will help prevent misuse. People who call it kids who shouldn't be on the tread, won't know your pin won't be able to start the tread. So that's the first step to start that fix should go out in the next couple of days, to all tread pluses. But we won't get that product back in the market. And we won't take the suggested stop use off until we get what we're calling a hardware fix something more robust, they would go -- call at the back of the tread, that would physically keep objects from getting under the tread. I don't want to talk too much about it. There's a lot of different R&D as we look at it. And once we get a plan and proposed solutions, we have to work through the CPSC to make sure that they're okay with it. So that could take months. And it's going to take some time. The tread which is the low profile, lower priced product that we've been selling in the U.K., and Canada with great reception and great Net Promoter Score great reviews, is something that we think could be on a hopefully a more accelerated timeline, with potentially just improving the screws and/or locking washers, or we have a couple different solutions to make sure that the screws don't come out of the console. And that is a product quality is improved. We're already in people's homes in the U.K. and Canada securing their screen so that they don't -- so that they're more -- stronger attachment. And here in the States we're excited. Hopefully I alluded to in my pre remarks but if you think about the CPSC, potentially turning around a solution that we would present to them within call it six to eight weeks, we're optimistic that we're hopeful that in early Q1 of next year, we'll be able to bring the tread to market, a lower price tread to market here in the states with their approval. So I just want to make sure everyone understands there's two separate products, two separate issues. I think the tread will be coming back to market much sooner than the trend plus.

[Doug Anmuth:]

Just to clarify when you say early 1Q because you're obviously on a different fiscal, you meet your fiscal second quarter that you're saying.

[John Foley:]

That's right. That's right. It would be early Q1 would be hopefully July.

[Operator:]

Our next question is from Ron Josey with JMP Securities.

[Ron Josey:]

Great. Thanks for taking the question. Just maybe following up on Doug's question real quick and very helpful John with the additional commentary. Any changes to your manufacturing process that you're thinking of when you add maybe that additional hardware to the back of the tread that just might take a little time as you think about it as we think about just the newer manufacturing processes that Peloton has done this past year? And then that's question number one. And then maybe the second question, Jill, you talked about improving free trial conversion on digital but then also digital being a bigger part of the overall sort of newer subscribers to connected fitness going forward. Can you talk a little bit more just about that strategy and what that might mean for overall marketing going forward? Thank you.

[John Foley:]

Yes, Ron, for the tread plus, to the extent that there is a hardware fix, as we're calling it broadly, there will be a manufacturing change, we'll have to probably tool apart. And then, work with our contract manufacturer to get that into the manufacturing flow. So that could take a month. Again, the tread, which is the lower profile belt treadmill that was doing well in the U.K. and Canada, and we hope to quickly soon bring to market in the U.S. pending the CPSC approval of our screw system. We believe that won't be meaningfully a change to manufacturing, it'd be just to change to potentially just the screw itself. But we're working through some solutions. So yes to tread plus there will probably be a change in the manufacturing but we're optimistic that the tread which will probably be the higher volume product for next year, we won't have to change our manufacturing process.

[Jill Woodworth:]

Great. And on the second question on digital, it's obviously something we're really excited about, as you know, the way we've thought about digital is -- as a sales funnel to connected fitness. And two ways to obviously drive that is to drive the total number of digital subscribers as high as we can. And we're really proud that we're nearing nearly 900,000 digital subscribers, which is pretty staggering growth to have achieved over the last call at 18 months. So first of all, we have a much bigger lead pool, digital. And then, the second thing, which was something that we've only really done in earnest over the past year, which is really, how do we get them on a more robust upgrade path to connected fitness? We're so excited by both of those things growing in tandem with one another. But I think it is a testament we've said in the past, we run that business at breakeven, to an extent, right, we're not trying to lose a lot of money going after digital subscribers. But we are marketing that product. And it is something we evaluate from time-to-time, how do we allocate potentially more marketing dollars to digital knowing that will ultimately end up as a connected fitness sale? So that is something in real-time that we're constantly looking at, how do we allocate marketing dollars between connected fitness and digital and certainly, with the success of digital that might be something that we do more of in the future, but it's pretty fluid. And again, we do try to operate it on a relatively breakeven basis. But I think a lot of it is true -- is also a testament to the fact that our content and platform just gets better and better. So the digital value is just going through the roof.

[Operator:]

Our next question is from Ed Yruma with KeyBanc Capital Markets.

[Ed Yruma:]

Hey, good afternoon. Thanks for taking the questions. Two for me, I guess first on pricing with bike now that you've got an OTB times kind of in line. Thoughts on kind of pricing, I know you did run a Mother's Day promo that was non-comp. So should we expect to see more of those? And then second, John kind of a broader question, right? You've had lots of highs and lows this year. You've kept people healthy during COVID. But you also had delivery delays in tread. How would you assess brand health and kind of how do you get back to the perception that Peloton once had? Thank you.

[John Foley:]

Yes. The first one Ed, I will say the awareness of our $49 bike is still pretty low, we weren't able to lean into marketing that. So it feels like the understanding that for $49 a month you get the Peloton, the award winning original Peloton bike now in a week's time, feels like we have a lot of runway with that. So we're not looking at a price drop anytime soon. And the second question around brand health. It's obviously something we care deeply about. And yes, I think it ebbed and flowed over the last two years going back to ad-gate, we've had moments and months where we -- our star and situations like right now that we feel like we have some work to do to get back on the right side of the line with trust and safety and let people know what we stand for. And I think yesterday was a big day and mending trust and telling, the market and our consumers and our members that we're going to prioritize safety. And we plan to have an industry leading brand, one of the special brands one of the most trusted brands of the next couple decades. And it started yesterday with our recall to say we're going to take some short-term financial pain to be able to invest in a building something that's built to last for decades where our brand is pristine. And so I think that's what you saw yesterday and something we're obviously committed to.

[Operator:]

Our next question is from Justin Post from Bank of America.

[Justin Post:]

Jill, I think you're suggesting about 200 net adds in Q4. Could you clarify what the tread impact is and what the bike impact is? And then, as you think about next year, interesting bikes to grow. So can you talk about as you look back how much supply was a limitation or the long order to delivery times versus the stay at home, being a positive driver, how do you think about those two factors as we get into '22? Thank you.

[Jill Woodworth:]

Great. So I want to try to be the most helpful to answer your question. On sub adds, you're correct, it is roughly 200,000 adds. And as you know, we stopped delivering tread and tread plusses. So obviously, that had some impact on our guide for connected fitness subs. The other thing to take into account is that that 2.275 million guide or roughly 200,000 net adds, also takes into account the returns that we expect, right? So for tread and tread plus, and we talked about the fact that we have a $50 million increase in our return reserve for tread and tread plus return. So that is also net of tread. So you can pretty much think at least on a net add perspective, that the majority of those net ads are due to bike and bike plus globally. Does that make sense?

[Justin Post:]

Yes, that makes sense. And then, on '22? Yes, mentioned, you think bikes can grow? I just want to make sure, is that versus this year? And how do you think about the drivers?

[Jill Woodworth:]

Yes. So I think in the context of everything, right, we obviously have the tread news, we have the economy reopening with -- as finally getting out from under the pandemic, right. And then, you go back to history with Peloton and you look at the seasonality of our sales, right, we typically see more heavy sales, call it 60% to 65% of sales in Q2 and Q3, our qQ2 and Q3, which is September through March, versus the warmer summer months. So there's a few things going on there. Which is why I thought it was helpful to give the context that even with all of that backdrop, we're still looking at a bike comp, two years stack euro, right, going from '19 to '21, in Q4, we're still talking about more than 3x in unit sales, right? We typically talk in deliveries because that's what translates into revenue. But we feel very good about the health of the bike and bike plus business. What I talked about was the portfolio, the fact that we have a better best strategy, the fact that we have a long runway to market, that lower price bike, the fact that international is actually profitably camping last year, which is crazy, given the type of volumes that we saw in the first few months that COVID hit us all. So international is firing on all cylinders and we've ramped media investment. So there's just and the word of mouth with the scale of member base that we now have with over 5 million people. So I think it was just to give a little bit of optimism around the fact that we feel really good that we're going to have a very strong growth in our bike and bike plus business going forward. And I feel excited in August to give you some updated more specific numbers on where we will land for fiscal '22. But we're excited about everything that we have, especially now that we can be back on air telling our story.

[William Lynch:]

It's William Lynch just to build on Jill's point. Also, notably, it was in your question, Odds will be in a lot better shape on bike and bike plus to Jill's point about our portfolio. As we look at last year versus getting into fiscal year '22 meaningful that order to delivery and overall supply will be in a lot better shapes, this isn't another point.

[Operator:]

We have a question from Youssef Squali with Truist Securities.

[Youssef Squali:]

I have two quick questions. First, Jill the $50 million in returns -- in refunds that you've mentioned, if I'm doing my math, right, that assumes about maybe 10% or 15% of the installed base for both tread and tread plus. Is that the right way of thinking about it? And is there a risk of seeing maybe more refunds extended into early next year? And then, John on I guess on Precor, just how quickly can you launch new connected devices leveraging Precor just beyond the tread beyond the bike and the bike plus? Thanks.

[Jill Woodworth:]

Great. So of course, as you can imagine, estimating the number of tread and tread pluses that we will get back is a very difficult thing to do. This is our best estimate using all the data that we have available to us at this time. And I think your math is reasonably correct. It represents roughly 10% of tread and tread plusses out there. So hopefully, we'll be able to give a much more robust update at the end of Q4 in August, when we report and you're correct. The customers for tread and tread plus have been offered the ability to return their product all the way through November 2022. So this will be something that we'll be adjusting for over time, but we imagine that there will -- we'll see a sort of a bigger spike initially and that should subside over the next several months.

[William Lynch:]

And then, Youssef, it's William Lynch, I'll pick the Precor question. So we had to close the transaction. And we're pleased as John noted closed it on time. And the stated goal of that acquisition was to build the best R&D and supply chain team in all of fitness. We feel like that as we look to the future, that is an important strategic mode. And also given our growth is just as a practical matter, be able to meet the demand that we think we're going to have looking forward across our best in class portfolio. So John mentioned in his opening script, we're on track, we stated that we'd be manufacturing in the U.S., notably for the first time in the back half of the calendar year, first half of our fiscal and we'd mentioned that we would be focusing on the bike line. The good news there is, we are on track for that we're actually early. Rob Barker, who is our CEO of Peloton Commercial, President of Precor; Rob led the Precor business and it's a big part of the acquisition. He has done great work. And so we're tracking ahead. And then, notably, we given that our view on the tread product line is John said the lower cost tread. We decided to also ramp up manufacturing out of that same North Carolina facility in the fall on treads. So that's a new development, and is a testament to our conviction in that product line and also underscores just how strategic that acquisition was for us.

[Operator:]

We have a question from John Blackledge with Cowen.

[John Blackledge:]

Two questions. How were the unit sales for the lowered price treads in the U.K. and Canada, 3Q versus your internal expectations? And then, John, you mentioned pretty positive customer reviews on the lowered price tread. Just any color on what they liked about it. And then, just on the sales and marketing ramp into 4Q, is that broad based across geos. And I'm assuming key focus will be on bike and bike plus, but is there anything else there? Thank you.

[Jill Woodworth:]

Great. So the first question is, obviously, prior to the news over the last couple of days, tread was performing very well, against expectations, we had very strong launches in both the U.K. and Canada. And had been anticipating a very strong launch in the U.S. as well, based on the member feedback from our controlled rollout here as well. So reviews have been great. Reception has been great. And I think, the second question, I think I might pass it to John and possibly William to chime in.

[John Foley:]

Yes. So good question, John. We are very proud of the tread product line. Recall notwithstanding, that's kind of why we did the recall because we're so excited about it. We wanted to take a pause and make sure the CPSC felt great about it and we added some additional safety features and took care of the quality or the screw situation on the on the console. But when we bring them back to market, we expect them to be the best products by far in the market and the safest products in the markets. We're very excited about them. But to answer your question when you think about our original bike product that had a obviously industry leading and one of the highest net promoter scores in the world in any category to learn last month that our tread product had an 85 net promoter score was just kind of staggering. And it really spoke to how great the product and the experiences. And to your question what people like about it. The boot camp classes are particularly popular where you're on and off the tread. So you don't have the monotony of staying on a tread for 45 minutes you get on of this gorgeous device. You have a fantastic instructor, a great community and then you get off and you get a full body workout on our tread products in your home. And so, when you think about getting the best cardio and the best strength in one workout, it's just so efficient and so fun and so motivating. It's one of the things that's driving the net promoter score. I will add, I alluded to this earlier in my opening remarks Strive Score. The Strive Score is a really cool feature that once you're step off the tread, of course, you get the metrics of the speed and the resistance and the incline and all that and all of the metrics and quantitative self that you would expect from Peloton. So, when you stepped off the tread prior to Strive Score, you weren't connected to the leaderboard or being tracked and make sure that you're working hard enough and doing the weight training with all of the other people in the class. And now with Strive Score, it's even more immersive. So we're very excited. It was a fantastic product. And it's getting better. We also announced target metrics, which now it will tell you what incline you should be at. Of course, the instructor tells you, but now the software and the interface also tells you how fast you should be going, what your pace should be, what the incline should be. So it's an incredible software content hardware platform. And when we bring it back to the market, it's going to be 10 out of 10 from an experience perspective and one of the safest treadmills or if not the safest treadmills in the world. So we're very excited.

[William Lynch:]

And then just on marketing spend briefly. Obviously, when we were in long OTDs and we announced we were spending $110 million to expedite largely bikes, it made no sense to market when we were in that supply constrained environment. The way we've looked at and Jill noted in Q4, we will be ramping up marketing spend because OTDs are coming down but also across, obvious, as you mentioned, because we see opportunity, the way we're disciplined performance marketers, the way we look at that calculation is there's a CAC target, customer acquisition cost based on the LTV -- substantial LTV that we've got on our connected fitness products, both in terms largely contributed by hardware margin. And then, our industry leading membership revenue at the margins with the retention rates. And so, we stick to that, we see opportunity to fuel growth, the growth that Jill mentioned on the core bike line and those economics afford us the ability to market aggressively. So that's one of the many attractive things about our business. And now that we're in a better supply position that's why you're seeing that marketing ramp on bike across all geos.

[Operator:]

Our next question is from Laurent Vasilescu with Exane BNP Paribas.

[Laurent Vasilescu:]

I think it was called out the internationals doing very well. I'm curious to know about the milestones you're setting for the Australian launch. What does Australia mean for the potential country rollouts, especially since you recently added a Spanish speaking instructor?

[William Lynch:]

Well, Australia, we look at market opportunities internationally on a couple of different ways. We actually have a matrix one. It starts with an attractive TAM of what we are identifying is 3.3 million households. If you look at behavior, there's a huge universal fitness fanatics, boutique fitness as an example is growing 60% a year, boutique fitness is growing 60% year-on-year. Interestingly, as we looked at and did research on our purchase intent and awareness in Australia Peloton, actually, without any marketing in country has had both high awareness and purchase intent relatively. And Australians, we know love global brands. That was another thing that came out of the research. So all those reasons made it super attractive. We'll launch both with bikes and bike plus and digital. We're actually doing something interesting and these talks to the benefit of learning from each global launch. We're going to release the app first. And get seed the market with the app and then amazing digital content that Jill referenced. We will have three retail showrooms at launch. Those are important early on, retail is a great platform for demonstrating our amazing user experiences. And we've already got a three in terms of logistics and delivery identified in the major metros, a lot of the population is concentrated, as I suspect, in Australia; Melbourne, Sydney, Brisbane. We've got three PLs ready to go. So Kevin Cornell in our international team are doing a great job. We have a country manager, Karen Lawson, in that country. So we feel very prepared. We're excited.

[John Foley:]

Thank you for noticing Marianna Fernandez and our Peloton Spanish yoga in Espanol as it were, we are super excited about all the languages that we plan to offer. Spanish was a big one. Marianna is the first instructor as you noted, we don't have any new countries to announce on that in that line right now, but you can imagine, we have global ambitions and Spanish language is something that we're very excited about. Obviously, we have Mexico adjacency. Spain is a big market. And there's a lot of Spanish speaking Americans, which is a third opportunity, as we think about the Spanish, the immediate Spanish opportunity. Again, we're not announcing any timeline there, but we do -- Spanish gets me excited. And Marianna is a great first addition in that vector.

[Operator:]

And our last question for today is from Jason Helfstein with Oppenheimer.

[Jason Helfstein:]

Maybe wanted to just ask what this all means now with the of the industry growing going forward. Your tread plus was an enormously different than other flat treadmills on the market, but those tended to be in commercial locations. So are those companies now going to be restricted from selling those to home users? And just broader, how are you thinking about kind of what this means, the treadmill sales industry given that it is the largest? It has the highest market share of all home fitness products? Thanks.

[John Foley:]

Yes, it's a great question. Thank you for asking it. Because you're right, it is the number one selling piece of fitness equipment in homes globally from a unit perspective. And we believe treadmills remain safe and effective exercise machines for the home. When operated as instructed and we know it is historically, like you said, the most popular fitness option in the home that we have. We know that millions and millions of Americans use treadmills safely in homes today. So we remain incredibly bullish about the opportunity in order to run at home, you need a treadmill in order to cycle at home, you need an indoor stationary bike. And we believe that they're going to be pillars for getting in shape at home. Again, especially when you think about treadmills of yesteryear being more for running and our treadmill is more of a multidisciplinary circuit training platform and portal for experiences. But clearly to your question, we need to work with the CPSC to make sure that we not only emerge as the global leader in connected fitness, but also the leader in safety in the industry. And we believe that it is our opportunity and our responsibility for that matter to really be the industry leader and safety. We're obviously already the industry leader in innovation. And we're excited to work with the CPSC and keep you guys appraised of future announcements and future product developments that are going to make our treads even safer. Thanks everybody.

[Operator:]

There's no further questions at this time.

[Jill Woodworth:]

Okay.

[Peter Stabler:]

Thanks everyone for joining us today. Have a great afternoon.

[Operator:]

That concludes the call for today. We thank you for your participation. And I ask you that please disconnect your line.