Good day and welcome to Peloton's Third Quarter Fiscal Year 2024 Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, James Marsh, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning and welcome to Peloton's Third Quarter Fiscal Year 2024 Conference Call. Joining today's call are Peloton Board Members, Karen Boone and Chris Bruzzo, who will be stepping in as Interim's co-CEOs, as well as Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management views as of today only, and will include statements related to our business that are forward-looking statements under Federal Security Laws. 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 could be found on our investor relations website. 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. I'll now turn the call over to Karen.

Thank you all for joining today. For those who don't know me, I've been a member of Peloton's Board since early 2019 and have served as Chairperson since September of 2022. We have a lot to cover this morning, so let's begin with the leadership update. As you may have seen in our release this morning, Barry McCarthy is stepping down as President and CEO and has also resigned as a Member of the Peloton Board. Barry will continue to serve as a Strategic Advisor to Peloton. I know I'm speaking for the entire Board when I say that we're very grateful for his contributions to Peloton. Barry joined Peloton during an incredibly challenging time for the business. During his tenure, he laid the foundation for scalable growth by steadily re-architecting the cost structure of the business to create stability and to reach the important milestone of achieving positive free cash flow. With a strong leadership team in place and the company now on solid financial footing, the Board has decided that now is the appropriate time to search for the next CEO of Peloton. While our search for a successor is underway, Chris and I will be stepping in as Interim co-CEOs and Jay Hoag, who has served on the Board since 2018, will step into the role of Chairperson of the Board. Peloton is at a critical inflection point, and as the board works to identify a permanent CEO, Chris and I will partner with our remarkable leadership team to ensure Peloton continues to deliver a best-in-class experience to our members and continue our work to achieve profitable growth. To give some background on Chris and my areas of expertise, I have significant experience with consumer brands, both at the executive and board level. Most recently, I was President, Chief Financial Officer, and Chief Administrative Officer of Restoration Hardware. Similarly, Chris brings more than two decades of experience working for global consumer brands, most recently as Executive Vice President and Chief Experience Officer of Electronic Arts. As Interim Co-CEOs, Chris and I will work in lockstep with and do everything we can to support Peloton's executive team. I'm excited about the progress that the product and content teams are driving, as well as the level of focus and efficiency that's being brought to Marketing Spend. Chris will expand on this in his remarks. The team has made significant progress in achieving positive free cash flow, which is important as we focus on strengthening our balance sheet and refinancing our debt. We look forward to bringing you updates on our progress in the coming quarters. Let me say that I'm honored to step into this role alongside Chris, whose skill set and background complement my own. I'll now hand it over to him.

Thanks, Karen. The board has entrusted us to serve an important role, and I couldn't have asked for a better partner than Karen to serve as Interim Co-CEO. Let me also reiterate our appreciation for Barry. It has been an immense and challenging effort to create this turnaround at Peloton, and we're grateful to him for his contributions over the last two years. We have already begun a search for Peloton's next CEO and are working with a leading executive search firm on this important effort. Our focus is on identifying a leader who brings the right combination of skills, experience, and vision to execute Peloton's exciting next chapter and drive shareholder value. While there's a lot of important work to do, there's also a lot to be excited about at Peloton, particularly when you look at the depth and strength of our team. While I would love to talk about each member of the team, I will just highlight a few examples for you today. Lauren Weinberg, our newly appointed Chief Marketing Officer, is driving transformation in the marketing organization. Since joining in January, she has identified meaningful opportunities for cost optimization in brand and creative spending, and has brought a fresh perspective to how we will deploy media. She has a critical eye for marketing efficiency that we're already starting to see materialized in our P&O. And Nick Caldwell, our Chief Product Officer, who joined us in November of 2023, has introduced a faster pace of innovation in our R&D organization and we are excited about the impact that our product initiatives will have to improve the fitness experiences for our current and new members. And Jen Cotter, our Chief Content Officer, who over the course of her five years at Peloton has assembled a team of world-class…

Thank you, Karen and Chris. I'd like to take a few minutes to discuss our newly announced restructuring plan and then spend some time talking through our Q3 results and finally discuss our current outlook for the remainder of fiscal year 2024. Today we are announcing a new restructuring program to reduce annual expenses by more than $200 million. The objective of the cost reduction is to reshape Peloton to align our cost structure with the current size of our business and position Peloton to generate sustained and meaningful positive free cash flow, which is a top priority for us. We expect to achieve the $200 million run rate savings by the end of fiscal 2025, with a significant share of the cost reductions taking place immediately. When fully implemented, we expect to reduce our team size by approximately 15% or roughly 400 global team members. Operationally, we will continue to reduce our retail showroom footprint. We are also reimagining our go-to-market approach for our international markets to be more targeted and efficient. While we have no plans to exit any of our existing international markets, we will leverage global strategies and capabilities where we can, allowing us to optimize and consolidate resources with localized execution. We made some very tough decisions, and while we firmly believe these actions are the right thing to do for the business. Cuts like these are painful, both because we’re disrupting people's lives and because we're saying goodbye to genuinely good and talented people. We wish our outgoing colleagues the best. And while these decisions are always difficult, they have been made carefully to ensure we can continue to provide the best fitness experience for our members, maintain positive free cash flow over the long term, and continue to invest in core areas of…

We can open up to questions.

Thank you. [Operator Instructions] Our first question will come from the line of Douglas Anmuth with JP Morgan. Your line is open.

Great. Thanks for taking questions. Can you talk about what drives your confidence in Peloton being meaningfully free cash flow positive and fiscal ‘25, how you get there, and does that require the business to return to growth? Thanks.

So first, I think it is important to highlight that we have a strong connected fitness subscription business which, as of Q3 generates over $1.7 billion of annualized run rate revenue at a 68% gross margin. Also we have a very loyal Connected Fitness Subscriber base with 1.2% average net monthly churn as of Q3. And while, we firmly intend to return the business to growth, with today's announced cost reductions, we are lowering our cost base, and we see a path to positive free cash flow without requiring a significant improvement in growth to get there. We have architected a plan to achieve positive free cash flow without growth. And I also want to clarify that we have carefully reviewed the cost measures to make sure that we do still have the capability to invest in innovation, so that the business can grow profitably.

Thanks. And maybe just a follow-up for Karen and Chris. Does anything -- anything stand out in particular in terms of what your most excited about in go-to-market initiatives when you think about rental and certified preowned or third-party retail or anything else? Thanks.

Yes. Thanks for the question. This is Chris Bruzzo. Yes, I mean, we're -- when we say we are excited about the growth potential for Peloton, we mean things like treadmill and Peloton for business and the innovation we’re bringing to software and continued focus on international. It's all of those areas. So treadmill is -- the installed home treadmill base is double that of bike, and yet our bike demand is still greater than our Tread demand. And to me, that just spells opportunity. Peloton for business, we made a great announcement yesterday, we'll continue to look for those opportunities, and I think there is lots available to Peloton going forward. And some of what's happening in the product organization around software innovation is pretty exciting. There is much room to get to greater and greater personalization in the experience for our members. Things like virtual coaching, helping getting them to the right workouts for them, lots of opportunity there. And we already have an incredibly sticky and engaged experience. So this is -- that's only going to make it better. And although we are talking about optimizing the way we spend to reach international markets, we are not any less interested in that potential. There is a lot of growth potential for us in our existing markets, and even looking to efficiently expand to new markets. And then I guess, I should finish based on my background with my appreciation for what the marketing team is doing. So Lauren, who's our newly appointed Chief Marketing Officer, has done -- already done some meaningful things to drive cost optimization to focus to bring Peloton to some new audiences. All of that is starting to bear fruit, and I'm really excited about it.

The only thing I would add is, I think Liz and her team are really looking at growth with an eye for sustainable profitable growth. So as we iterate some of the initiatives and make sure that we're optimizing it to make sure that it is contributing to the bottom-line, and it's just not growth for growth's sake.

And we're both -- Karen and I both been remarking in the last couple of days about how strong the executive team is here. And that in itself is something to be excited about. We are here to support that team as it continues to drive these levers for growth.

Great. Thanks Doug. Our next question please operator.

Thank you. Our next question, that will come from the line of Ron Josey with Citi. Your line is open.

Hi, thanks for taking my question. I want to ask Karen and Chris, when you're looking for a new leader here, talk to us about what you are looking for as you balance overall profitability with product innovation and growth. So any insights on sort of the characteristics that you're looking for. And then, Liz, on the $200 million in restructuring, understood the reduction in force. But maybe talk just a little bit more you might be focused on that reduction and thoughts on the retail footprint and other areas that might improve overall profitability. Thank you.

Sure. This is Karen. I'll start with the first one. And I think, we tried to address some of this in today's release and our opening remarks. But just to -- we do want to reiterate that Barry has done a tremendous job stabilizing the business. He came in at a very challenging time, and he's been really relentless in rightsizing an aggressive build out that was not uncommon for many companies during the pandemic. He had to navigate a lot of curved-balls thrown his way, and he's done some incredible work in rearchitecting the cost structure. And again really big highlight. I want to highlight that under Barry's leadership, we achieved one of his primary goals, which was generating positive free cash flow this quarter. And we do expect to do the same thing in the fourth quarter and for the full year in '25. But with the business more stable, the Board decided to pivot to a leader who's going to architect and lead the next phase of growth for the company. So the new leader will kind of be not -- pretty focused on architecting, articulating and executing a vision for growth.

Okay. I'll take the cost restructuring question. So as I said earlier, we announced a cost restructuring plan to achieve $200 million in run rate savings by the end of fiscal '25. And a significant share of those cost reductions are going to take place immediately. Roughly about half of them or about $100 million of those reductions are going to come from payroll. The remainder are going to come from key non-payroll areas, including things like lower spending on brand and creative marketing, savings from our reductions in retail store footprint, lower contractor spending, lower IT spending and software spending. Just to give a little bit more detail, in terms of the various lines in our operating expense areas, the biggest reductions are coming from our R&D organization. But those cost reductions, as I said earlier, are still going to allow for continued investment in all of the key initiatives that we are focused on, including software content and hardware innovation. The next largest area will be marketing where our cost reductions are really focused on things like the brand and creative and a few other areas. But I want to be clear that we aren't relying on significant media spend efficiencies to achieve our cost reductions. Although, we do see additional opportunities to scale back media spend at a higher efficiency. The third area while not mapped perfectly to lines in our P&L, is international. As Chris talked about earlier and mentioned that it's still a growth area for us, but we are planning to cut our international operating losses in half, next year, over the next 12 months, by reimagining our go-to-market approach and being much more targeted and efficient. And so what we are going to do is we are going to stay in all of our existing markets. We have no plans to exit any of those. But we are focusing on more of global strategies and capabilities. And then that allows us to really consolidate resources, so that we can focus on just local execution there.

Got it. Thank you.

Thank you. One moment for our next question. Our that will come from the line of Aneesha Sherman with Bernstein. Your line is open.

Thank you so much. A follow-up on international, please. So a few quarters ago you were talking about the growth potential in Germany and UK, and some of these bigger markets for FY '24. Has your view changed in terms of the total upside of these markets or the kind of ROI of growing in these markets? I understand you are being more targeted and efficient, but has the total size of the pie-changed in your view? And then a quick follow-up on marketing. Chris and Liz, you both talked about investing in software and hardware and not as much on marketing. Ultimately, you do need to drive customer acquisition. How do you think about some of these short-term measures to conserve cash by cutting media spend and cutting sales and marketing and how they might impact acquisition in the next couple of quarters? Thank you.

Okay. Well, there's a few questions there, definitely more than one. But I'll start with the question about international, and really the question is about upside potential in international. Well, first of all, our international Paid Connected Fitness Subs actually grew 8% year-over-year in Q3. However, when we look at our LTV-to-CAC ratios associated with that growth, we are currently not hitting our target efficiency levels. And so we need to optimize our marketing investment levels to be much more efficient. And as we reduce our costs there to be more efficient, our growth may be a bit slower but it will be at a much better LTV-to-CAC level that allows for profitable growth, which gets at the point that Karen was making earlier. Some of the specific changes -- so we talked about some of the changes that we are making on the international side in terms of optimizing and consolidating resources, but we are also going to be focusing our marketing on segments where we have the highest product market fit. So we are not going to be focusing on reaching out to every single -- every one and all of those markets. And we believe that by honing our messaging and targeting the right audiences, we will be much more efficient and be able to ultimately grow. We are still optimistic and we remain focused on international as a growth lever. And it is also important to note that while our growth is a bit slower than we had anticipated previously, we are really encouraged by the fact that we do see low Paid Connected Fitness Subscription churn internationally, at rates that mirror the US. I also want to point out that our unaided brand awareness, is still really pretty low in international markets that we serve today, aside from perhaps maybe Canada. And we see a lot of untapped potential from new countries and markets that we may enter in the future.

And I would just add -- this is Chris. I would just add -- that's a natural learning curve for companies as they engage in international markets to understand what works -- what doesn't, how to do it efficiently. I think, you are seeing and hearing a disciplined approach here from Peloton on how to approach those markets in a way where we maximize the number of people we reach and we do that in a way -- that's really efficient. And some of what Liz just talked about in terms of the product market fit, the quality of the experience and the kind of engagement and low churn, those are really great starting points. That's where the strength of the company and its brand are. And so from there, we know we can grow. As it relates to the marketing question, I think it is important to realize that our focus is really shifting towards growing new audience, targeting new audiences, expanding to the incredible number of people who've yet to experience or have the Peloton experience. And so it is also a great discipline. Just the same way we talked about, and I just mentioned in international, also in marketing, to bring an intense focus a real drive to getting the cost of acquisition in-line with the value of bringing new customers on, and that's where our focus is. So we agree. There is still a good healthy investment by Peloton in marketing spending. But of course, we want the discipline of being efficient with that. And that will actually allow those dollars to return better and reach more people, and that's the ultimate goal. So there is lots that are -- a lot of -- that has already been discovered as Lauren engages in the opportunity here at Peloton and I think there is – we are going to see lots of good return from her work.

I just wanted to add one thing. When we say that we pulled back on some of our marketing spending, we are not pulling it tremendously back in a way to release stifle growth. We are just looking at our LTV-to-CAC ratios and looking at the way that we can improve them and bring them back more in-line with our target investment levels. And then it's not just about media spending. I keep calling it on brand and creative spending as well. That's an opportunity that Lauren saw when she got here. We need to make sure that when we look at our marketing spend, that we are putting the right balance of working and non-working dollars in a more optimized way to work. And I just want to make sure that that comes through. That's really what we are focused on there as opposed to pulling back on spending.

And it is important to note, as Liz mentioned there, the amount of marketing adjustments that she just referenced a minute ago includes our fixed costs, includes head count. And we have made some really tough decisions, and we are going through that restructure plan today. And so some of those reductions in costs related to marketing are about head count or about fixed costs. So you shouldn't necessarily think of it all as a reduction in media spending. That's just not going to be the case.

Great. Thank you for the question. Next question please.

Thank you. One moment for our next question. And that will come from the line of Michael Graham with Canaccord Genuity. Your line is open.

Thank you. And really helpful set of communications here. I just wanted to ask about the -- with the relaunch of Tread+ just maybe talk about the market size for Tread and how incrementally you think the subscribers there are going to be to the business.

Sure. So as we've said previously, we estimate the Tread market to be roughly 2 times -- or the at-home treadmill market to be roughly 2 times that of bike. And as we said also, it is a much smaller share of our connected fitness hardware sales compared to the bike. So for us, we see a large opportunity market-wise and then a large opportunity for us. We also see that our current Tread and Tread+ sales still skew towards existing members. And so what you are going to see us try to do is really take steps to focus marketing efforts on educating potential customers about our Tread, and connecting running with the Peloton brand. And the goal of these efforts is to explain to these potential customers how -- what Peloton can offer them in terms of Tread and running offerings. So a great example of that is the fact that we launched that New York Road Runner Scenic Collection on Tread and Tread+. And that allows members to run the New York Marathon course using metadata and auto inclines with the course's gradient, which is really a pretty amazing experience, and we believe the first of its kind to be able to be offered. And then, again, when I -- when we talk about Tread and opportunity for us, we do see a significant opportunity for us to improve awareness of Tread. For us, that unaided awareness is roughly about 24% in the US, and that's like our bike unaided awareness is about double that. So lots of opportunity for us.

Okay, thank you.

Thank you. One moment for our next question. And that will come from the line of Andrew Boone with JMP Securities. Your line is open.

Thanks so much for taking the question. Can you talk about your learnings from the app strategy over the last year? In what way should we expect those to evolve going forward?

So in terms of our app strategy, I think we have had a lot of different learnings. Yes. So first of all, in Q3, our paid app subs underperformed our forecast. We saw lower additions because of softer trial demand than we had expected. And we also had underperformance in our Peloton for business channel, and that was really related to the timing of deals and when we expected them to happen. And then also where previously in Q2, we had seen lower churn than we were expecting, in Q3 we saw slightly higher churn because we saw some of the subscription cohorts whose legacy pricing expired, we saw higher churn from them. But one key learning that we did have is the fact that we’re seeing more subscribers select the App+ tier. And so as a result of that, despite the subscriber decline, we did see our app revenue increase quarter-over-quarter. And we've been talking a lot about media spend. But while we are improving our LTV-to-CAC, we are still below our investment targets. And so we have to -- we are actively evaluating our app tiering strategy. that includes like looking at pricing, looking at our tier structure. And in order to have a disciplined investment framework, and we are scaled back marketing spend for app, until we establish a better product market fit and we see that we can grow our app more efficiently. So let me talk just really briefly about the subscriber acquisition funnel. So we are looking at ways to improve that. We see an opportunity to improve our conversion from app download to trial, and then also from -- then from trial to conversion. And then one example of an improvement we've recently made was removing the free tier or making it less visible, which moves us in the right direction. And then we still believe in the app. The app is an important part of our Peloton fitness experience and platform. We are continuing to invest in app product innovation. We have lots of exciting offerings on the way that Nick's team is working on. But we're not ready to share them yet. And we do expect it to be an iterative process, as we continue to learn. I also want to point out that beyond just our paid app sub base, the subscribers that just pay for the app, it is an important part of our connected fitness subscription offering as well. And on average, we do see the majority of our connected fitness subscribers also use our app on a monthly basis.

So another great area of where the company is showing discipline and learning. So as we're making these adjustments to tiering strategies and pricing, as we are watching members who had the legacy app actually upgrade, as we are adjusting what the experience is like for groups based on what we're learning, of course that means we have to optimize our acquisition funnel. And this is a digital product, and we can have -- we have a lot signals as to what's working from an acquisition standpoint and what isn't. And so that just becomes like a constant process of optimizing. So you'll continue to see us do that, whether it's the product, how it's targeted, and the way we are driving acquisition.

Great. Shirley, we have time for one more question, please.

Thank you. And that question will come from the line of Jonathan Komp with Baird. Your line is open.

Yeah. Hi, good morning. Thanks everyone. A bit of a follow-up, I'll toss it out to the group. But could you maybe just spend a little time maybe diagnosing a little better. In your view, some of the challenges in returning to growth overall, and I guess the question really is the spending that you are doing and maintaining, are you spending on the right things? How do you know that? Are you really just beholding to some of the industry trends that are still an overhang? Just any more thoughts there would be helpful.

Yes, do you want to start? We should start by talking about the connected fitness marketplace. I think, that's really important. And there was significant growth leading into the pandemic, and then the extraordinary experience that everybody had during that time, especially for companies like ours that -- where the in-home experience was so relevant during that time. And we are still dealing with the Whiplash, the normalizing that occurred post-COVID, and that was particularly true again for those products and experiences that we are focused on in-home. But I think we are excited to see this Connected Fitness marketplace, we are the dominant market share leader in that space, normalizing. And we can see it -- as we look to the future, we can see it reaching an inflection point. And again, reaching that kind of stable place of regular growth. And so that's the starting point. Is the marketplace that we are in contracting or is it growing? And so we can see good signs that that market is reaching that inflection point and it's going to return to growth. But there's the larger question of do we know if we are investing on the right thing. I think that's, in fact, really what the restructure -- a big part of what the restructure was focused on. And so this is a sizable cut in our operating cost base, but it is -- but besides the size of that impact, it is also where we made those choices. And we are intentionally going into those places where we know we can focus more. And so you are hearing me say again and again on this call, there is an opportunity for us to bring discipline, discipline to the way we approach international markets, discipline to the way we handle marketing spending, discipline to where we invest in innovation and in future growth. So that is absolutely a primary focus here. That's all. Anything you want to add, Liz?

Yes. The only thing I do want to add is aside from the disciplined investments and our strategy, we’re going to continue to learn and test and iterate we are going to measure on a regular basis how we're tracking against the goals that we've set, and we will be able to course-correct as we get there. And one of the key things about the cost reduction program that we have implemented today is that we feel confident about where we’re in terms of generating that positive free cash flow. And that gives us the confidence that we can continue to work on different types of innovations and find the right ways to deliver a best-in-class connected fitness experience to a much broader audience over time. I think it is really clear that we do see a long-term potential backed by secular trend of people who are increasingly valuing fitness and wellness in their lives. And that's a trend that is clear and it is something that we can use to Peloton's advantage because we are -- we believe we are the leader in the connected fitness space.

And that's really not going away. I just want to double down on what Liz said, the trends in health and wellness exercise and fitness, they have such benefit to health and to -- and they are great indicators of -- and predictors of health and longevity. So people are more and more focused on that. It is not going away, people are getting more educated about it. We have a bigger role to play in that conversation as a business and as a brand. And we just have a really good mousetrap. We have premium hardware, we have interactive software. We have incredible music, are engaging and motivating instructors. And we have this community that interacts with each other. They compete alongside each other with the leaderboard. It's just again a really good product market fit and offering for people. There are -- people are going back to the office, but not every day. Some people are going to stay working-from-home. And so at-home fitness -- the connected fitness market, we’re the leader for a reason because I do think we have the best experience. And so bringing that to more and more people over time, I think, is what we really see as what's going to happen.

Great. Thank you.

Thank you. I would now like to turn the call over to Karen Boone for any closing remarks.

Great. Thank you. So I want to close with just reminding everyone that today is a really hard day. Change is always hard, and there is a lot of it to digest today. The restructuring we announced is especially difficult because it is impacting so much of our team. But it is a really critical and necessary step to meeting our objectives around cash flow generation and making sure the business is on solid ground and footing for the years ahead. Through all the changes over the last several years, our mission has remained constant, to connect the world through fitness, empowering people to be the best version of themselves anywhere, anytime. It has been and continues to be important and meaningful work, and we are so grateful to all the individuals who have contributed along the way. Thank you for your time.

This concludes today's program. Thank you all for participating. You may now disconnect.