Peloton Interactive, Inc. (PTON) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Peloton Interactive First Quarter Fiscal 2021 Earnings Conference Call. At this time all participants are in listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] As a reminder this conference call is being recorded. I would now turn the conference to your host Mr. Peter Stabler, Head of Investor Relations. Sir you may begin.

Good afternoon. Welcome to Peloton's fiscal first quarter conference call. Joining today's call are John Foley, our Co-Founder and CEO; President, William Lynch; and CFO, Jill Woodworth. Our comments and responses to your question reflect the management's views as of today only. It will include statements related to our business that are forward-looking statements under Federal Securities Law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our Investor Relations web site. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter. And with that, I'll turn the call over to John.

Thanks Peter. 2020 has been an incredibly stressful year and we continue to be grateful for the small positive role we play in our members’ lives. COVID-19 has changed nearly every aspect of how we live including how many of us are staying active and healthy. Of course, this has benefited our business results, but it has also brought with it unprecedented operational challenges. So before I jump into our results I'd like to offer some thoughts on the operating landscape. Since our founding, we've prided ourselves on being a member's first organization and an important part of having a member's first focus is providing superior customer service, service that starts with the purchase process and extends all the way through delivery, setup and ongoing member support. We obviously don't just sell bikes and treads; we have an ongoing service relationship that we hope will extend for many-many years. Therefore, it pains us that we've been underperforming recently versus the high standard we strive for. Wait times for our products have been unacceptably long but none of us could have predicted that we'd see all-time spikes in COVID-19 cases in October and the threat of new lockdowns in our global markets. High organic sales growth has been steady since March and the lowering of our original bike price and the launch of Bike+ has steepened that demand curve. We did our best to estimate the demand for Bike+, but while we are incredibly excited about the positive reaction to Bike+, sales outpaced our internal estimates quickly causing wait times for Bike+ to balloon. As such we are working swiftly to pivot manufacturing capacity to Bike+. Product wait times have also been impacted by port congestion, periodic warehouse closures associated with COVID-19, west coast forest fires and hurricanes forcing us to reschedule many deliveries. These external factors unfortunately extended already long delivery times. Launching the Bike+ was an exciting milestone in our history. However, it also drove high call volumes and very long wait times to reach our sales support teams, which impacted our customer experience. In response to long product wait times and elevated customer support volumes, we are specifically taking the following measures. One, we are of course continuing to add manufacturing capacity. Two, we are investing in expedited shipping from our Taiwanese factories into the us by adding air shipments of Bike+ and also utilizing expedited ocean shipping and ground truck logistics all with the goal of improving our delivery times. While these actions result in higher than typical logistics costs we feel that incurring these incremental expenses in the short term is the right trade-off to improve our member experience. Number three, we are working hard to scale our member support team as quickly as possible to handle call volumes and limit wait times getting through to our teams. Four, lastly to give our future members complete transparency we are communicating clearly on our website the expected order to delivery dates by product. Please note we're fully up to the challenge and are 100% committed to again delivering the level of excellent customer service our members deserve and expect but it will take us a bit more time to get there. Now on to some highlights from the quarter. Net connected fitness subscription editions in the quarter totaled approximately 243,000, bringing our end of quarter total to over 1.33 million up 137% year-on-year. As of September 30th we had over 3.6 million global members inclusive of our over 510,000 digital subscribers. As I mentioned previously, we're extremely pleased with the successful launch of Bike+; a product truly developed in collaboration with our member community. Our plan to introduce our new Peloton tread is progressing and we expect to provide additional details about its availability soon. In the meantime we continue to capture email addresses of interested consumers and plan to allow prospective members to see the new tread in our showrooms prior to thanksgiving. I know I speak for the entire Peloton team when I say we can't wait to bring this game changing product to market. On the content side, we're thrilled to introduce bike boot camp and bar to our class library in September. Our bar class collection led by Hannah Corbin and Ali Love was highly requested by our members and represents an important pillar in building out our strength platform. Within the first weeks of launch, our members consumed over half a million bar workouts. Bike boot camp brings the amazing full body boot camp workout to our bike members taught by our world-class instructors Robin Arzon, Cody Rigsby and Jess Sims. Since launch our bike boot camp classes have amassed over 350,000 workouts. And as you've heard us say before our number one goal is to add more and more value to the Peloton membership over time I'm excited to say that there is a lot more new world-class content in the pipeline. So stay tuned. Member engagement remains strong this quarter with 20.7 workouts per connected fitness subscription versus 11.7 in the year ago quarter; an increase of over 75%. The sequential quarterly decline in workouts per connected fitness subscription reflects the typical seasonality tied to warmer weather in Q1. As we've said previously, I encourage you to focus on year-on-year growth and workouts per subscription. Before I turn it over to Jill to cover our financial performance, I'd like to highlight our new partnership with Chase announced last week. This is a first of its kind arrangement for Peloton. Chase will offer up to $60 in statement credits towards Peloton subscriptions for Chase Sapphire Preferred cardholders and $120 in statement credits for Chase Sapphire Reserve card members through December 2021. We are very excited to leverage the Chase platform to further build Peloton brand awareness while offering substantial benefits to our mutual member base. We hope that this partnership continues to drive awareness of the Peloton app, incremental digital subscribers and ultimately more connected fitness product sales over time. Lastly to our Peloton team members, thank you. Rapidly scaling a business during a global pandemic is difficult. You have met this challenge and made us so proud of your incredible energy and commitment to our member community. Again thank you for what you do. Now over to you Jill.

Thanks John. I will start with a review of our first quarter results. In Q1, we generated total revenue of $758 million representing 232% year-over-year growth exceeding expectations across all geographies. Our revenue performance benefited from continued strong organic demand for our bike, an incredible reception to Bike+ from both our new and existing members and a significant number of undelivered bikes that were carried over from the fourth quarter. Gross margin for the quarter was 43.4%. Connected fitness product gross margin was 39.4% better than expected due to sales flow through and lower than expected costs for expedited shipments. This partially offset the year-over-year decline due to the price reduction of our original category defining bike. We were incredibly pleased to pass our substantial manufacturing efficiencies we've garnered over the past few years onto our customers. In addition lowering the price of our bike will allow us to continue to rapidly expand our global market opportunity. Subscription gross margin was 58.5% and subscription contribution margin was 64.1% slightly ahead of expectations due to some streaming cost efficiencies. Total operating expense as a percentage of revenue was 34.3% compared to 68.4% in Q1 of last year. Sales outperformance drove significant leveraging of operating expenses in the quarter. Sales and marketing expense represented 15.1% of total revenue versus the prior year period of 34%. For the launch of Bike+ we incurred modest advertising spend. We also proudly launched our first brand campaign featuring Peloton members entitled ‘We All Have Our Reasons’, which has been running on multiple advertising platforms. General and administrative expense was 14.3% of total revenue versus 26.7% in the prior year despite significant continued investment in our team and systems to scale our business. Research and development expense was 4.8% of total revenue versus 7.7% in the year ago period even with increased investments in new software and hardware. With better than expected sales gross margin and operating expense leverage our fiscal 21, Q1 adjusted EBITDA was $118.9 million representing an adjusted EBITDA margin of 15.7%. Net income for the first quarter was $69.3 million or $0.20 per diluted share and we ended the quarter with over 2 billion of liquidity and have additional liquidity in the form of an untapped $250 million credit facility. Now on to our outlook. While the operating environment continues to throw several challenges our way, we endeavor to give guidance that reflects our best estimate as of today of our expected operating performance. I'd like to remind everyone that quarterly flow can vary significantly given the operating environment due to COVID-19 and other factors John mentioned. Before walking through the guidance I'd like to point out that we have decided to move to single point estimates for our financial guidance take it as our best estimate of the upcoming quarter's performance. While full-year guidance brings a higher level of uncertainty especially during this time we have elected to continue to share an estimate of our performance which we view as achievable given our current view of the business. In Q2, we expect revenue of approximately $1 billion representing 114% year-over-year growth. Continued high global demand for our products resulted in an increased backlog of deliveries at the end of the first quarter. In addition to the strong sales we've seen since the early spring due to COVID-19 recent sales performance has been driven by our bike price reduction and stronger than expected reception to Bike+. Also the recent spikes in COVID-19 cases and newly imposed lockdowns in some of our markets have had a significant positive impact on sales. We have expanded our manufacturing capacity several fold and expect to continue to grow our supply of bike and Bike+ in the coming months with the help of our third party manufacturing partners and the opening of our new Shinji factory at Tonic at the end of this calendar year. We expect the growth in our supply chain to allow us to get back to normal order to delivery time frames for our bike by the end of this calendar year. However, we will likely be operating under Bike+ supply constraints for the foreseeable future causing longer order to delivery time frames for Bike+ for a couple more quarters. We are already shifting manufacturing capacity in favor of Bike+ but continue to expect our original bike to be our top selling product in fiscal 2021. In Q2, we forecast end-of-period connected fitness subscriptions of 1.63 million representing 129% year-over-year growth. For Q2, we expect average net monthly connected fitness subscriber churn under 0.85%. As you can appreciate churn is challenging to predict with accuracy given the evolving COVID-19 landscape as well as the uncertainty surrounding the overall macroeconomic environment. Moving on to margins. The strong reception of Bike+ combined with challenges associated with port congestion and COVID-19 related warehouse closures impacted Bike+ delivery dates for many of our customers and caused significant member experience challenges. Therefore as John mentioned earlier, we are incurring outsized additional shipping related expenses in Q2 in order to alleviate some of the delays ahead of the holiday period. As a result we expect Q2 gross margin to temporarily decline to approximately 39% comprising of a connected fitness products gross margin of 35% and a subscription contribution margin of approximately 63%. The shipping expenses also impact adjusted EBITDA profitability for the quarter, but we believe these are important investments we need to make in order to get bikes as quickly as possible to our new members. These additional shipping costs in Q2 will be partially offset by significant year-on-year leverage in sales and marketing expense as well as G&A expense despite continued robust people and technology investments across our company in order to manage our growth. As a result we expect Q2 adjusted EBITDA of $70 million representing an adjusted EBITDA margin of 7%. For fiscal year 2021, we are raising our estimate of full year total revenue to $3.9 billion or better representing 114% year-over-year growth. In fiscal 21, we expect modest quarterly sequential revenue growth as we add manufacturing capacity throughout the fiscal year. For fiscal year 21, we now forecast 2.17 million ending connected fitness subscriptions or more and an average net monthly connected fitness churn to stay under 0.9%. For fiscal year 2021 gross margin is unchanged from our previous full year guidance of roughly 41%. Despite some current Q2 investments for air shipments of Bike+ we still expect full-year connected fitness product gross margins driven primarily by our recent bike price reduction and continued make shift to tread. We leave our expectations for subscription contribution margin for full year fiscal 21, unsure expectations for subscription contribution margin for full year fiscal 21, unchanged at approximately 64% as we continue to expect leverage and fixed costs of content production to be offset by elevated engagement levels, higher digital subscriber growth and continued investments in global fitness and wellness programming. As we move through the balance of the year we expect to ramp marketing spend which will be more than offset by revenue flow through leading us to revise our adjusted EBITDA to at least $300 million. I will now turn it over to the operator to take your questions.

Thank you. [Operator Instructions] Our first question comes from Doug Anmuth of JPMorgan. Your line is open.

Great. Thanks for taking the questions. First was just hoping you could provide a little bit more detail on the supply bottlenecks and just try to maybe break out or prioritize for us a little bit across port congestion versus manufacturing versus kind of shipping and more last mile type of delivery and then just second just given those supply constraints and the elevated wait times can you just talk about your marketing plans and how that impacts them around the holidays? Thanks.

Hi Doug, it's William Lynch. Thanks for the question. I mean first we'd like to thank the team across the company who have worked as John noted tirelessly to support the incredible growth as Jill mentioned Q1 we did 758 million in revenue and you look at Q1, 20 that was 228 and Q1, 19 that's 112 million. So in 24 months we've grown our business almost 7x and we appreciate the extraordinary effort that the teams across the company have undertaken to make that happen. In terms of breaking it out what I would say is one, we mentioned in the previous call that we felt like we were digging out from bike and as Jill noted that's still our number one selling SKU and we have seen progress there so just in fact yesterday we dropped OTT and all our sales channels on that product of four to six weeks, which if you look back since the pandemic started that is the shortest lead time since April. And then as both Jill and John mentioned Bike+ is elevated and that's really and will stay elevated as we get through Q2 and into Q3 and the reason for that is two things; one as John mentioned that product's exceeding our expectation it's a new product with a new supply chain. And so ramping that supply chain up and reacting to that demand is a little trickier than a more stable more mature product like bike which we've been able to react to and so Bike+ the port closure, the port delays really hurt Bike+. We had a lot of Bike+ coming in against that demand and that delay has hurt specifically that product. We think that is largely due to the environment and just a lot of product coming in, e-commerce product coming in. And then, as we get through that as John noted in his opening remarks we've switched product lines to focus on Bike+ and this team can react very quickly and so we at breaking it out specifically we think the port delays will persist for a period of time and that's baked into everything Jill talked about but as we get through those we feel good about continuing to draw down our core bike OTTs back to where we want them to be which is inside of two weeks as we get through Q2 and then Bike+ we're quickly reacting with all the actions we mentioned to get that product line into that same two-week window but that's going to take a while into Q3.

Great. On marketing front and obviously William feel free to chime in, we do expect throughout the year as we said on the last earnings call that we will be ramping marketing spend through the next few quarters. So expect to see some sequential deleveraging leveraging of sales and marketing as a percentage of sales through the end of Q3. Obviously Q4 we're obviously lapping a quarter where we were completely dark. So we plan on again continuing to ramp marketing spend pretty reasonably on a year-over-year basis in Q4. So I think if you take a step back what's going to be really important is obviously getting to our goal, which is getting our original bike delivery days down by the end of this year. As you can imagine so far this year we focused on our brand campaign that featured our members. We focused on telling the market about Bike+ but we haven't really gone out broadly yet on original bike and the price reduction which is now $49 a month on financing and so as we get through that crucial period of getting those order to delivery dates down we're really excited to tell the world about the value proposition of the bike. So you can expect through the year that we will continue to spend and make sure that we're top of mind with the consumer.

Yes. I would just add to Jill's point we also see continued opportunity in international markets from a marketing standpoint as we've gotten a lot of traction in UK, Germany, Canada and continue to grow awareness and establish our connected fitness leadership there so between really telling the world about this amazing price point on bike, and then continued development of those international markets that's what you're seeing with a more aggressive marketing plan in the back half.

Thank you.

Thank you. Our next question comes from Ronald Josey of JMP Securities. Your line is open.

Thanks for taking the question. I wanted to ask a little bit about member engagement and understood seasonality maybe coming back in here John and Jill, we mentioned that in the past but can you talk about engagement from the newer sub that you've seen that join from April to present just trying to get a better sense of how newer subs are interacting with the platform. And then John you talked about bike boot camps and bar a classic bar class is launching can you just talk about content availability and then also how you're balancing that with the instructor base? I'm assuming with more subscribers you need more content and more instructors and just wondering about that in investment? Thank you.

I can start it out and then John and William feel free to chime in. And I think we have shown in the past some really exciting data that does show that our newer cohorts tend to work out even more than our older cohorts, which I know has been counter-intuitive over the years as people think that the people that jumped on board with Peloton years ago were really the super users, but it's really the younger cohorts. I think for a variety of reasons, one as we've made such great strides in broadening our demographic and I think that value proposition for someone who's now using the Peloton bike and the Peloton app to replace what they used to do whether it be boutique, fitness or the gym I think they're deriving a ton of value from it. And then specifically, to answer your questions since April, as you can imagine a lot of the new buyers around COVID especially at the spike of COVID in March was where people that had regular gym routines and boutique routines and all of a sudden found themselves in a spot where they didn't have a routine anymore. And so I would say the engagement of the members that have joined since April has likely outstripped that. I don't have the specific data but we've looked at it a few times over the last several months. I would say that their engagement levels are even higher than the cohort data that I believe we showed during our investor session back in September. So really encouraging trends.

Hi Ron, I'll take the first part of your content question I know whether William will want to jump in. But if I understood your question correctly, you were saying that as we scale our member base we need to grow our instructor base which to the letter is kind of a false assumption. The beautiful thing about our model is the scale where we go from 2,000 people consuming a class to 20,000 people consuming that same class and that same instructor that's kind of the beautiful thing that we see in our model, but to your point we are investing in content. It is something we do plan to innovate on and stay out in front of any would-be competition you said bike boot camp yes it's doing very well. Bar is exceeding our expectations. We have new content coming in the coming months and certainly quarters. One thing I'm excited about is new languages as we're in German and we're in English and as we push to be a global technology platform foreign languages obviously at one place you would expect us to invest and I'm really excited about that. But, I don't know whether I'm specifically answering your question but I don't know whether William you had other thoughts.

No, I would say all that's right. I mean, if you look strategically at what we've said is important to us as John mentioned earlier, to continue to make that $39 a month membership more and more valuable. And if you look at our cardio offering certainly with bike we have had and continue to add the best instructor roster on the planet and diversify the content offerings. And then, we said strength as a strategic pillar is vital for us and it's one of our fastest growing categories, and so you have seen us add a lot of content programming. Jen Cotter, Kevin Shorlands and that team have been busy experimenting with new things. It's been an incredibly successful bar. We actually count as part of that strength programming and that has been one of the fastest growing. In terms of adoption fitness verticals out of the gate John mentioned 500,000 classes taken and so you'll see us continue to really lean in on strength and investments, John mentioned an instructor portfolio internationally and we have nothing to announce today. But we've definitely been busy in that front as well. And so, Yoga as well another area that is taking off along with meditation and it's a big focus for us and we're really pleased so far with the adoption across not only bike but non-bike, non-cardio verticals.

One thing Ron, in closure on this question, I will add that it's not just the amount of content or the number of instructors or the number of languages, but it's also the quality of the content that we're producing that we're investing in. I encourage everyone to take a recent class Jess King experienced from a couple weeks ago, her first one back that I sent a note to the team. I thought the innovation on some of the cameras angles and lighting and just the production value of our content is going to be increasing and improving under Jen Cotter and Kevin Shorland's leadership. So stay tuned on that front.

That's great. I'll check it out. Thank you guys.

Thank you. Our next question comes from Justin Post with Bank of America. Your line is open.

Great. I guess I'll ask about supply just because it's such an important factor. Just maybe give us an update on the factory? Is it on track to be ready to start shipping and is that mostly treads or are they going to be doing everything out of there and then maybe you could give us a update on kind of used inventory that you've been collecting and how you're thinking about the CPO rollout at some point? Thank you.

Hi Justin maybe I'll take the first one. This is William Lynch and then John maybe come in on CPO. So in terms of, I think you're referencing Shinji, which is one of the pillars of our expansion on capacity. It's foundational element for us that factory we've been building, we're excited to announce this construction is largely complete and Jill in her opening comments talked about us ramping production very early in the new year as we end this year and that's on track and so we're excited. You'd ask about capacity, there we said 1.5 million units, think of that as a blended tread and bike and it's just one part of our expansion obviously with this kind of growth, there is no one silver bullet. So our existing factories we've been expanding with Tonic and that acquisition in Tainan and then Rexxon has done a great job scaling bike and tread plus in their factory. And also we've been deeply investigating and investing in a domestic U.S. manufacturing capability and we expect to have some announcements on that shortly. And so, if you look at just supply chain and operations as a percent of sales, the growth in OpEx as we planned this year is it's our fastest growing area. And so we see what everyone sees, which is incredible growth that we obviously want to support, and bring OTTs down. So we've got a lot of different vectors here and are excited about it. But yes Shinji's tracking and we can't wait to start producing units out of that factory.

Yes. What's up Justin? This is John. Yes the CPO certified pre-owned rollout is something we remain excited about. We continue to think it's a massive opportunity in the years to come. Unfortunately in the short term, we don't have the inventory. There is no big opportunity for us with CPO in the short term, we are testing it to the extent we get some bikes back. But without the inventory there's no certified pre-owned business. So we're quarters if not years away from that being a big driver for us. Again we love it, I will tell you an interesting dynamic that kind of surprised us as a lot of our existing bike members that upgraded to Bike+ we were expecting to get those bikes back and just kind of prime the pump for our certified pre-owned opportunity we found that a disproportionate number of those folks that are existing members decided to keep their existing bike, their original bike and buy a Bike+ and whether they used it, the original bike in their second home or gave it to their college aged daughter or son or kept it in the family so to speak because they were, they understand that these are hot commodities and people want those bikes. So we got fewer of them back than we had expected when we launched Bike+, it's just an interesting dynamic that we're tracking obviously.

Great. Thanks John, thanks Will.

Thank you. Our next question comes from Heath Terry of Goldman Sachs. Your line is open.

Great. Thanks. I was wondering if you could give us a bit of an update on sort of where you’re in-store business stands at the moment, particularly as you get into the launch of tread coming up. How you think about the role that stores will play in the tread business. It seems like tread it'll be an important part of your tread launch particularly here in the U.S. So anything that you could sort of share with us on plan tread launch as we get closer to that and then sort of where your store footprint stands at the moment? Thank you.

Sure. I'll take that John feel free to chime in. So currently, we're at 105 retail stores. We are going to continue to expand intelligently, but we see opportunity for expansion before well profitability on the stores. And as you know and it's an astute observation especially as we launched new products it's an incredible platform for us and we think a strategic advantage for us to have that kind of reach. As we look at retail, we look at how do we access population centers in the U.S. and increasingly we're covering the large majority of the population. And so, in terms of how we're operating now it's been by appointment only for the most part and that's obviously against our strategy of keeping our employees and members and prospects as safe as possible. We have seen that those stores over index on new product and it's just vis-a-vis the average if you look at our channel and so we love retail. We're actually being super innovative if you look internationally. Kevin Cornell's and that team our great international team did a partnership with John Lewis and so we're testing store in a store concepts over there and so far it looks successful. We're in four of those and we're going to measure it through the holiday, and so this company's about innovation and we're going to find ways to reach the customer as we continue to expand our Sam and Tam. And so as you're 100% right on as we think about the tread launch and we'll have more to announce there shortly. Retail is going to play a very, very big role. So stay tuned.

Great. Thanks William.

Thank you. Our next question comes from Edward Yruma of KeyBanc Capital. Your line is open.

Hey good evening. Thanks for taking the questions. I guess first, you spoke a lot about manufacturing I was wondering if you could just readdress maybe last mile the kind of investments you need given the strong ramp you're seeing and then as a follow-up congrats on the Chase deal. Does that change the economics for you or is that simply just Chase subsidizing for their card holders, the membership and to your point John that was a great just king ride. Thanks.

John maybe I'll take the last mile and then. And so it's a great question on logistics. It's not just about manufacturing and so we've been investing in new warehouses and distribution capabilities. We're up to 47 last mile hubs and warehouses which like as with retail give us strategic coverage in close proximity. We measure it within 60 miles in most metros. Can we get to most of the population and increasingly and we have a large majority of coverage and that's just with our own warehouses. We also as you know, employ three PLs for heavy spill and volume so we have that flexibility. If you look at -- and so that's big growth from 19 just on the last mile hubs on the total delivery team last year at this time we were about at 900, we're at 2,200 this year bands we've more than doubled. We have well over 700 bands across the U.S. And so it's not just about infrastructure either we're investing in people. We were really excited about two new leaders we've got in the ops team Jennifer McKeon who was a senior executive over at home depot we brought in and Dan O’Brien, VP of manufacturing. So it's infrastructure. It's people. It's investments across the board and so that has us excited.

And I'll just chime in quickly on the Chase partnership, obviously we're very excited to partner with Chase the nation's largest card issuer and bring this benefit to our mutual member base as to both our connected fitness subs or all access subscribers as well as our digital subscribers. So we can't really get into the details of the agreement between us and Chase, but we do expect that this partnership will help us with developing further our brand awareness with the Chase customer. We're excited about incremental digital subs that may sign up as well, given the credit that they will get through these various credit card offers and eventually as we look at our digital as an incredible top funnel for connected fitness sales, so we do believe since digital has been such a strong lead gen for us that over time this will convert into connected fitness sales but can't really get into the details unfortunately, but we're really excited about it.

Thank you. Our next question comes from John Blackledge of Cowen. Your line is open.

Great. Thanks. A couple questions. You talked about marketing ramping through this year for the original bike given the value prop. How should we think about what Peloton is planning to drive awareness of the lower price tread? Will there be a big marketing push ahead of the launch of the lower price trade right after the holiday? And then second obviously experiencing continued experience incredible demand but with the pandemic surging again in the U.S., U.K. and Germany have you seen an uptick in demand over the past month or so? Thank you.

William, do you want to take the first question on tread marketing plan and then maybe I can talk a little bit about sales over the last several weeks.

I can and I can weigh in real quick on the lower price tread because I'm so excited about it so sorry William, I'm going to jump in because I kind of got to talk about it. Our lower price tread is such an incredible product John that I believe that against our millions of members go adding millions more with each year that ticks by we're not going to have a problem selling this lower price tread. I think as some of the other analysts have asked that the problem is going to be on the supply side or the opportunity and I think William and John Eddie and the whole team are have an incredible plan of kind of belt and suspenders approach to making sure that we can make enough of these. But I hope we're in a situation where we get to market the lower priced dread. I mean we have such an incredible marketing organization at this point and we talked about the footprint of our retail stores. It's just such a beautiful flywheel that allows us to create demand layer on top of that the word of mouth that our high net promoter score and our super engaged members have. And so we're with the millions of people that will have a Peloton bike we believe that once they have a friend that tells them about how good the tread is, they're going to go to a store check it out realize that they need it and they want it, realize that it scales their $39 membership. So John you probably know that if you get a Peloton bike and you pay $39 if you get a Peloton tread you don't pay an incremental monthly fee. So it's a real great opportunity if you were a Peloton member to get the best treadmill in the world and engage in these boot camp classes. So just kind of wanted to reframe your question a little bit is, I hope to God we're able to run TV for the lower price tread because we want to get the word out, but I think the word is going to get out in front of our marketing organization is the sad reality.

Okay.

Yes. Just to build on what John alluded to, there is going to be substantial marketing around the tread launch and it won't be necessarily as big in terms of big TV awareness campaigns but the enthusiasm is already there. I think John mentioned in the leads, we're capturing leads on tread and we're really pleased and energized by the lead and the interest around treads. So you will see us marketing into in next year. It's the biggest; it's been historically the biggest category in fitness. We think that's a foundational product for us. We're going to continue to ramp supply to allow us to market into it so that we're not marketing into huge OTTs. So we'll balance that.

Right. Okay. Thank you.

And just quickly on the demand question as you can imagine since the middle of March, we have seen very steady organic demand for our product. Clearly, when we saw the second spike happen in the U.S. and of course with some of the announcements around the lockdown in the UK, you do see some spikes of course around these types of things. But as you can imagine in the U.S. obviously we're continuing to see record cases and then to slightly add to that perfect storm we obviously also saw for Bike+ and the price reduction of our bike this was all sort of coinciding in time as well. So I would say demand has never been stronger and we're very excited, but clearly our Q2 outlook and our revised outlook for the full fiscal year takes into consideration the trends that we're seeing.

Okay. Thank you.

Thank you. Our next question comes from Bernie McTernan of Rosenblatt. Your line is open.

Great. Thank you for taking the question. I was wondering if you just framed the higher logistic cost. So how much does it normally cost to ship a unit and how much will it now and how long you anticipate the higher logistic costs will last? And then secondly, just on digital subscribers there's been massive growth and it could be too early to know but has that historical conversion rate of 10% converting to connected fitness held up and generally how long does it take for that conversion to happen when it does? Thank you.

Great. I can handle the first one. I don't know William, if you want to talk a little bit about the digital to connected fitness conversion and some of the things we're doing there but obviously as Bernie in our connected fitness gross profit margin we don't break out obviously what is shipping cost, what is last mile delivery and what is product cost. Q2 is going to be an anomaly. It is pretty unusual for us to use air shipments for our products and so this is an anomaly not something that we necessarily expect to move forward and so it obviously is multiple, it's obviously a multiplier of what we would typically cost to ship our bikes in from Taiwan into the U.S. So it is an anomaly. We don't expect it necessarily moving forward, but we thought it was 100% the right thing to do to do whatever we could to push these delivery dates in as soon as possible. So given the fact that it's kind of one time and shipping costs are typically a fairly small percentage of the overall cost to us so this obviously is moving the needle for us here but again it was a cost we thought that was very warranted for what we're dealing with right now.

And then, on the second point about conversion rates to connected fitness from digital that's exactly our playbook which is expand the Peloton entry point with digital and that was the premise with the price drop last year and the increased marketing and it's been working as digital memberships grown and exceeded our expectation and so the playbook then is to convert those over time to connected fitness users and the team there _ and our team have been really focused on tactics and strategies against that and they've been successful. We measure connected fitness up sells. We measure it daily, we measure weekly, monthly and those rates have improved steadily through tactics like in-app finding out what connected fitness product the members that digital members interested in, suggesting a test ride or test run at retail just to the point on how we leverage our retail assets and also segmenting based on interest of various connected fitness products adjusting our contact strategy around activities that we're doing based on the product they're interested in. So a lot of these things adjusting the app overall and cross-selling certain workout types like bike boot camp. So we're focused on it. It's one of our top marketing objectives and yes they are improving and we have goals to continue to improve them.

Great. You got me recently. So thank you.

Okay.

Thank you. Our next question comes from Lee Horowitz of Evercore ISI. Your line is open.

Great. Thanks for the question. Two if I could. One on the supply chain constraints and you mentioned that Bike+ could last for several quarters now. How if at all could these constraints potentially impact the way you're thinking about a timeline towards scaling a certified pre-owned program? And then secondly, maybe a little bit on showrooms I believe in prior quarters you had mentioned that tread would be in showrooms ahead of the holiday quarter but perhaps not shipped just yet. I guess one is that still the case and two can you comment at all in terms of what you're seeing in terms of showroom traffic as we've seen COVID cases spike globally and could that potentially impact in the way you're thinking about the timing around tread? Thanks so much.

John do you want to take CPO and then I'll take the rest.

Yes. I mean the CPO is not a business that we can build without supply. It's not, we can't manufacture certified pre-owned. We need to get them back from our members and at this point the velocity that our members are interested in coughing up bikes is anemic at best. So to your point we are going to, we are 100% focused on scaling the supply chain to create new products, new bikes both the Bike+ and the original bike and then both treads tread and Tread+ is 100% our focus. And again I am anxious and excited about the CPO business but there it just isn't there until our members are willing to part with their products.

And adding to that obviously we have very low return rates for our products and so you can imagine we're very excited about the idea of further expanding our market opportunity our demographic reach through a program like this we just don't have the current supply and but we hope to build it over time.

And then, on the tread launch in the roll of retail pre-sale, we have announced that we plan to, I mentioned the role of retail and that it's going to play a big role with tread marketing and trial and that it remains the case and we expect to have something to announce on that very soon and then in terms of on sale date we mentioned the UK of 1226 so we're excited about that.

And Lee, I don't know what you call the charge will be in stores by thanksgiving.

Okay. Great. Yes. Thanks for the questions. Appreciate it.

Thank you. Our next question comes from James Hardiman of Wedbush Securities. Your line is open.

Hi, good evening. A couple for me. If I'm doing this math right on the guidance, you're raising the connected fitness subscriber number about 9%. Revenue guidance is going up about 18% what's the delta there obviously there are a lot of moving parts. But I'm curious about mixed just given what you've said so far, are your mix assumptions changing with within the bike or within the trailer or maybe between the two? And then my second question --

Sorry. Go ahead. Why don't I go ahead and answer that and you can ask your second question. The line is open. We are good.

Okay.

So it's a very astute observation but I think what you've heard us say is that Bike+ has certainly exceeded our expectations and we are continuing to shift as we have done obviously since launch when we started witnessing the incredible reception of the product, we started shifting our manufacturing capacity towards Bike+. Our original bike is 18.95 right and our and Bike+ is 24.95 so there is a fairly big delta there. So that is part of the driver and of the increase in revenue. I would also say the delta is kind of something that maybe not as obvious which is as we progress through the year, we've said that our new tread as well as Tread+ which is already available is going to come in towards the back end of the year. What we do expect is that a lot of that demand initially for that new tread may go to our existing bike owners who are just chomping at the bit to get the product. We did see that when we launched Tread+. We saw the overwhelming majority of those initial orders going to the Peloton die-hard bike owners and so we could see obviously the sale of the product but we might not necessarily create a new sub for that. We call that overlap and so that's a little bit of a phenomenon then that starts to create some of the delta between sub growth and revenue and also keep in mind churn obviously does also impact subscription growth. So one other layer that sort of helps you bridge the gap between the different growth rates of what I would call our connected fitness revenue and our subscriber growth.

Those are all great points. I really appreciate that and then as a follow-up here I'm curious whether or not you think your competitors if you have competitors are having some of the same bottlenecks bottleneck issues as some of that is I guess understanding their supply chain differences. But I guess ultimately, what I'm getting at here is whether or not you think your potential customers are willing to wait given some of the extended wait times. Obviously it's tough to track non-customers but I don't know if you have any metrics that look at inquiries versus sales or anything like that? Thanks.

John, do you want to take the competitor point and I'll take the trade-off with competitive products on OTT.

Yes. Sure. So yes James, you're right. It doesn't feel like we have a direct competitor right now and as we invest aggressively in R&D and stores and logistics and manufacturing and content and our whole vertically integrated product suite we expect to continue to outpace and distance ourselves from a would-be competitor. Our kind of true north as we've talked about with you personally James is the if we can improve our products and we have they're more integrated, they're better software, best of breed software we're continuing to hire software engineers as fast as we can, more content choices, the best music in the world a lot of would-be competitors or people you hear in a handful of people that come up in conversations don't have real music I would say. They don't have the relationships on the music front that we do so you're not listening to fantastic pop music or hip-hop or country or whatever you like and along with what we have is the biggest and most supportive community and fitness as you know, and if we can have lower prices over time we believe that the idea of us having a true competitor is going to be a waning idea and we're going to be pretty hard to compete with but I do know William we track some of the different folks and how their order deliveries are if you want to give any color.

Sure. An interesting note is that when we ironically, when we extend order to delivery often what we'll see is, we'll see demand go up especially if there's rumors that that's going to happen. Now we've been going fortunately the other way as we mentioned with bike and shortening OTT. But it what we've seen is that people will just wait for a Peloton. We track we track our share, connected fitness share vis-a-vis other competitors and what we've seen is, we don't think we've leaked demand for people who are impatient on getting a Peloton to some of those other competitors if you think of them that way. We think people just wait for the Peloton and so and that's what all our data has shown is that and then the OTTs with those other fitness equipment manufacturers I don't know who you're referencing in particular, but in the ones we look at you've had one who temporarily stocked out and just stopped selling their bike and then another we think of sort of two another one that we have not seen the kind of OTT delays that we have but so that's as you might imagine we track all this.

That's great insight. Thanks guys.

Thank you and our last question comes from Deepak Mathivanan of Barclays. Your line is open.

Great. Thanks for taking the question guys and Jill, I'm not sure if you addressed this earlier I was jumping between a couple calls but can you provide some color on the device mix that you're seeing in fourth quarter after the tread relaunch and the new Bike+ that's out there? I know pre- COVID truck was about 10% but now you have a new device sales new device upcoming so what is the rough mix that you're seeing so far in 4Q? And then the second question was with Bike+ now being out there for a few months are you seeing increased activity on any second sales marketplaces of the typical bike? Is that something that's happened? I know just trying to understand if the $700 is the right trade in price point and any comments that would be helpful?

Sure, I'll take the first one and then William, I don't know if you want or John want to take the second one on the second hand market. So in terms of mix here's what I'm going to say about mix because as you know, we don't disclose the specific mix of our products whether it be between bike and tread or now with the better best with within the different portfolios and what assumptions we're making. In fiscal 2021 our original bike will be our top selling scale. We've certainly seen over the last several weeks that Bike+ has been incredibly popular. We are likely to have long OTT for several quarters here. So obviously I would say the mix shift and some of the change in the uplift and guidance is the bullishness that we have around that great product and obviously at the higher price it is driving higher revenue but I think I've said this before the margin profile between both of those products is pretty similar. So I wouldn't worry too much in terms of modeling than some of the changes to connected fitness margin. We've said that the tread which I think we're all incredibly excited about the lower price tread is I mean well first off just stepping back of course we've been selling Tread+ again now since about the middle of the summer in all of our markets and obviously been incredibly pleased with the performance of Tread+. We know that the lower price tread though will be a game changer for us but what we said is that we're going to need some time to build up manufacturing capacity. We said on the last earnings call we had to prioritize and we were trying to prioritize our manufacturing capacity in favor of bike. We obviously had the Bike+ launch coming as well and so while we think it'll be a game-changing product for us it really will be a fiscal 22 story. So we will start to see towards the back end of the year obviously with the launch of lower price trend we'll certainly see some volume in 21, but it's really a 22 story. So I wouldn't get too worried about thinking through mix there.

And Deepak, I'll take the question on the certified pre-owned is $700 the right price point. It's an astute observation that $700 might not be the right price point for a trade-in credit and an intrepid or a hard-working bike member might be able to sell their bike on Craigslist or EBay and get more than $700 there is absolutely an arbitrage opportunity for someone who wanted to do that. I haven't personally followed and seen if there's been an uptick. I would guess there might be. The reason why we don't track it or care too much to be honest Deepak is it doesn't matter to us. That person is whether they give us the bike and we refurbish it and put it back in the marketplace as a certified pre-owned or if they sell it on Craigslist or EBay and get $1500, $2000 for the product we are going to get a new subscriber. We're going to have a new relationship with the new owner and we're just trying to create a turnkey easy path with the $700 trading credit so that when we're delivering your new Bike+ we can take your other one out of your basement or your home gym so that it's easy and seamless but certainly if you wanted to work harder you could do that.

Yes, by the way Deepak just that's so much so true that we actually offer on our website FAQs on how to resell your bike individually yourself. We think it's great. Its two members where there was one and so as John said we're indifferent and we actually want to help if direct the people to resell it if they choose that route.

Well that makes sense. Thank you so much.

Thank you. I'm showing no further questions this time. I'd like to turn the call back over to CEO, John Foley for any closing remarks.

Thank you much. Yes so quickly before we wrap, I did want to again thank our members for the patience as we work hard to scale our teams, our technologies and our operations to keep up with this massive global demand for our products and experiences. Like we said we are investing aggressively in our supply chain capacity so that we can add more members on more platforms and without frustratingly long order to delivery times. So thank you for your patience. You please know that we are all over it and lastly another thank you to our Peloton teams across Germany, the UK, Canada, the U.S. and Taiwan. We are all so proud of your hard work and dedication to our members and our shared mission. We hope to see more of you in 2021 and hopefully we see more of you in person with COVID-19 well in the rear view mirror by then. So thanks everybody. Good night. We look forward to talking with you next quarter.

Everyone else has left the call. Ladies and gentlemen, this concludes today's conference. Thank you for participating.