Good day and welcome to Peloton's Fourth 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, Mr. James Marsh, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Peloton's fourth quarter fiscal 2024 conference call. Joining today's call are Peloton board members and interim co-CEOs, Karen Boone and Chris Bruzzo, as well as Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and 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 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 over the call to interim co-CEO, Karen Boone.

Good morning and thank you for joining us today. Before we discuss our Q4 results, I'd like to comment briefly on the CEO transition process, as it is certainly top of mind for us, and we expect the same is true for our shareholders. The CEO search is well underway. We've had no shortage of interest, and we have been working through an impressive group of qualified candidates with the help of a leading executive search firm. Our list of candidates is narrowing. However, at this stage, we cannot speculate on the timing for when Peloton's next CEO will start. We are focused on moving quickly, but our top priority is finding the right leader for Peloton's next chapter and look forward to making that announcement as we close down this important process. In the meantime, Chris and I, in partnership with Peloton's strong leadership team are continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability and deliver meaningful free cash flow without requiring growth to get there, and investing strategically in innovation that will deliver sustainable, profitable growth over the long-term. This includes software and hardware development to deliver new fitness experiences, evolve our content offerings, and refine our marketing strategy, which we'll discuss in more detail today. One of our most important updates since last quarter relates to our recent refinancing. In May, we completed the successful refinancing of our balance sheet, accomplishing the goals of deleveraging and extending our maturities with more flexible terms at a reasonable cost of capital. Through this holistic transaction, we decreased our debt by roughly $200 million and extended our average maturities out to 2029. Our refinancing was competitively priced and significantly oversubscribed, reflecting strong demand…

Thanks, Karen. As Karen mentioned, we are focused on managing the business for sustainable, profitable growth, but I'd like to touch on how this is manifesting in our approach to sales and marketing. In our $200 million cost restructuring plan that we announced in May, which Liz will provide an update on shortly, we included cost reductions in some areas within sales and marketing, such as lower brand and creative spend, lower retail expenses for reducing our showroom footprint, and lower headcount. However, the $200 million cost restructuring plan did not include any media spend reductions. In Q4, we delivered additional cost savings by reducing our media spend year-over-year. We'll continue to optimize our media investment in fiscal '25 to improve our efficiency, which is an important priority for us, because while our Q4 LTV-to-CAC ratio of 1.5x improved significantly compared to Q4 last year, it is still below our 2x to 3x target range. We have more work to do. These efforts are providing additional upside to the bottom line, as we reduced total sales and marketing expense by 26 million, or 19% year-over-year in Q4. We're also seeing early signals that our approach to reach men via marketing is resonating. We saw significant improvements in awareness of our strengths and cycling disciplines for men in the quarter. Next, I'm going to discuss the new approach we're taking to servicing the secondary market, which is when a customer elects to purchase used Peloton hardware directly from a previous owner. The secondary market is an important source of subscribers for us and continues to deliver a steady stream of paid connected fitness subscriber additions, which were up 16% year-over-year in Q4. We believe a meaningful share of these subscribers are incremental, and they exhibit lower net churn rates than rental…

Thank you, Chris. First, I'd like to touch on how we are tracking against the cost restructuring plan we announced at our last earnings call back in May. We made substantial progress toward achieving our plan to deliver over $200 million in run rate cost savings by the end of fiscal '25, delivering approximately $15 million of cost savings in the quarter. Roughly $11 million of the cost savings came from payroll reductions, and the remaining $4 million came from other non-payroll savings. We remain on track to achieve the full $200 million in run rate cost savings by the end of the fiscal year. We also expect to deliver additional efficiency through reductions to media expenses that are not part of the restructuring plan, and we continue to look for opportunities to further reduce our operating costs and improve our working capital efficiency. Now let's spend a few minutes on our Q4 results. We ended the quarter with $2.98 million paid connected fitness subscribers, reflecting a net decrease of $75,000 in the quarter. This exceeded the high end of our guidance range as a result of higher-than-expected gross additions in first-party, third-party retail, and secondary market channels. Average net monthly paid connected fitness subscription churn was 1.9%, which was in line with internal expectations and up roughly 10 basis points year-over-year. We ended the fourth quarter with 615,000 paid app subscriptions, reflecting a net decrease of $59,000 in the quarter. This result exceeded the high end of our guidance range primarily from favorable average monthly paid app subscription churn, which was 8.4% in the quarter. While app churn was down roughly 80 basis points quarter-over-quarter in Q4, we anticipated churn to remain somewhat elevated in the quarter due to the roll-off of subscribers associated with a specific corporate wellness…

Thanks Liz. As a global leader in fitness, Peloton enables our members all over the world to unlock their power, to achieve their fitness and wellness goals, and be part of a community who shares their passions. Our fitness experiences are delivered through the world's leading fitness experts, premium hardware, and innovative software, a variety of ways to work out that include multiple content formats from instructor-led classes to scenic outdoor audio, gaming-inspired, and entertainment. As we look forward, together with our team of talented employees, we'll continue to blaze new trails with personalized fitness delivered anywhere consumers want to work out. Our goal is for Peloton to be the most trusted fitness companion, whether at home, outside, or at the gym. We want to be with our millions of members through every step of their fitness and wellness journey, regardless of the destination. Thank you for your time this morning, and we can now open the line for Q&A.

Thank you. [Operator Instructions]. And our first question will come from the line of Douglas Anmuth with JPMorgan.

Hey, it's Bryan Smilek on for Doug. Thanks for taking the question. Just to start last quarter you had talked about the Connected Fitness market becoming closer to recovery. Can you just update us on the trajectory of return to growth across the industry and maybe what you're seeing on the macro side? And more specific for Peloton, what would be the 1 to 2 key growth initiatives that you're focused on for fiscal year '25? Thank you.

Sure. So why don't I start off with kind of what we're seeing on the macro front. This is Liz. If we look at the overall Connected Fitness market, similar to what we talked about last quarter, our internal estimates that use third-party data indicate that the Connected Fitness category is still declining year-over-year post COVID. We still see that those year-over-year declines have lessened dramatically since fiscal '22. And that does indicate that we are getting closer to an inflection point where the category could start growing again within the next few quarters. With that, in the short to medium-term, we do expect softness in Connected Fitness hardware demand, given the category trends and also macroeconomic uncertainty. But over the long-term, we do still really remain bullish on the growth potential for the Connected Fitness category. And we expect to grow our share of total fitness and wellness spending as we invest in product and content innovation, and we evolve our marketing strategy.

Yes. Let me build on that. This is Chris. I think some of the things to be excited about in the coming year, certainly, a bunch of what we shared today, a lot of innovation in software and in the overall experience with members, we talked about social features, we talked about personalization, we talked about gaming, it's very exciting to see those things start to come to life, and then we have to always point to Tread. Tread remains an incredible opportunity, underdeveloped for Peloton. It's one of our highest potential growth levers. And so I think between those improvements in the experience, capitalizing on the Tread opportunity and then just becoming much more effective with our marketing investments and in particular targeting key audiences, new audiences like men and the Latinx population, those are some of the things we're excited about.

One moment for our next question and that will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

I want to come back to some of the comments you made during the prepared remarks. When you think about improving your LTV-to-CAC looking out over the next couple of years, what do you see as the key gating factors to improve LTV-to-CAC? And how are you thinking about which components of that are within your control versus an output of the broader either marketing or competitive environment generally? Thanks so much.

Yes. This is Chris. I think you're seeing us continue to focus on that. In fact, we discussed last quarter how Lauren Weinberg jumped into the business here at Peloton and brought a really great eye to marketing spend, and we're already seeing some of the benefits of that. So we shared today that our LTV-to-CAC ratio for the last quarter was 1.5x, and that's short of where we want to be, but it's good improvement. And the way we're getting there is by being more focused on efficiency and on the parts of our business that we can have, I think, the most control. We talked today about shifting our focus away from that because from a marketing standpoint because we're busily taking the learnings from the last year and making that experience better that creates an opportunity for us. So actually, it's both sides of the equation that are going to improve our LTV-to-CAC ratio. We're both seeing improvements in the financial foundation and our gross margin. That's going to help the LTV. And then we're just becoming far more effective with lower spend, fewer promotions, and that's having a positive impact on CAC.

And I'll just build on the LTV piece. This is Karen. One of the things we're really focused on is improving our hardware margins. So in the Connected Fitness segment, hardware margins have come down significantly over the last couple of years, and we're working on restoring those. And that's going to look at both unit economics on our individual SKUs but also how we're approaching different markets and different channels. So you're going to see us evaluating pricing. You're going to see us be a little less promotional, both the depth and the frequency and we're just going to optimize that over time as well.

Yes. I just want to hit on the CAC point one more time. As we've talked about, we've decreased our media spend because we are very focused on making sure that our media is being spent efficiently. And as Lauren and her team work on evolving our messaging and improving our channel strategy with regard to media, we'll start to see that manifest in lower CAC. And so for now, we've pulled back on marketing spend as we optimize some of that. And when we see the efficiency improve, we will lean into it and spend more as our LTV-to-CAC ratios improve. And so Lauren's really focused on efficiency in the lower funnel and also improve engagement with our marketing and to drive it on the LTV side.

One moment for our next question and that will come from the line of Nathan Feather with Morgan Stanley. Your line is open.

Congrats on the progress. Thinking about the subscriber decline that you're looking at in fiscal '25, can you help us think right the key components between the lower marketing spend, the macro stoppage of the bike rental program et cetera? And then, is the bike rental program something that you may expect to toggle on and off depending on the level of used inventory? Thank you.

Why don't I start with just some of the overall subscriber trends because I do think that harkens back to where we were coming out of the pandemic. We saw sales slowdown. And it's easier now to see what was happening, but I do think there was that pull forward. So I think, we believe that we're coming out of it, but we don't quite know if we're all the way out of it. So there's that, and there's the macro that is hard to discern. So there's certainly some of those trends when you think about the subscribers and maybe having pulled some of those forward. So that's certainly one of the things going on.

Yes, for sure. That's true on the macro front. But again, some of it is decisions that we have made that we are going to focus on sustainable, profitable growth and we're not going to spend inefficiently to acquire unprofitable subscribers. And so we have pulled back, and that's the decision that we made to reduce our marketing spend there. The other thing I do want to point out, you mentioned rental, and that is a factor. As we looked at our bike rental program for the original bike, we've talked about this in the past that the economics are great when we have refurbished inventory but are challenged when we are having to supply that program with new inventory. And as our inventory has come down, we determined the right thing to do financially for us was to cease that program, and that will have some impact, although we are starting to see some benefits with more people taking Bike+. But it will have some impact intentionally as we're using the refurbished inventory just for refurbished sales right now. And your question about toggling rental on and off, at this point, we don't see that happening because our return rates are still quite low. And the way that we replenish the inventory for our refurbished program is primarily through people who return their bikes through the 30-day home trial. And since that's so low, we don't expect to have a huge amount of inventory. So our plan for now is to just use that to supply the refurbished original bike program and then not to return to rental. But we may, at some point, decide to change our minds on that, but that's where we are for now. We do still plan to keep the Bike+ program for rental in place. The economics work quite well for us there, both with refurbished and new inventory. And so we have no plans to eliminate that program at any point at this time.

One moment for our next question and that will come from the line of Ron Josey with Citi. Your line is open.

Two, please. Maybe a bigger picture and guidance talks about potential change in pricing overall. I wanted to see if there's any changes as you think about subscription pricing, or is it just hardware, meaning subscriptions around tiers as newer products come out like the Strength app or Tread adoption, any insights on pricing for subs? It's question one. And then, Liz, I want to understand a little bit more of your comments on churn, picked up year-over-year in the quarter, understand seasonality here, though I think you also said expected to remain high going forward. So any insights on what's keeping that churn as high as it is relative to historical would be helpful. Thank you.

Sure. So I'll take the sub one. We are looking at all of the pricing across the business. There are no plans right now to increase our subscription price. We do think it's a great value. And as we do deliver more value with some of these experiences we're talking about, something we might consider in the future but at this point, we don't have any plans for that. On the hardware pricing front, it's easier to think about what we might do in certain markets, especially where the penetration of third parties such as international is more significant. There are certain markets where we're entirely third-party distributors. And so the margins there need to be a little bit higher to support those. So again, looking at the unit economics across all products and across all channels, right now, the subscription margins are quite good. It's the hardware margins that are a little more challenged. So it doesn't mean that we won't ever entertain a subscription price increase, but it's not something that we're planning for any time in the immediate future.

Sure. And then, I'll take the churn question. So at a high level, our business continues to benefit from really strong retention rates. We still have a relatively low churn. It was around 1.9% in Q4. And I did mention that it will likely be around the 1.9% range for Q1, which is an uptick year-over-year. In Q1 of last year, we benefited from a number of members unpausing their subscriptions following an elevated pause rate as a result of the seat post recall that we had in Q4 of fiscal 2023. When we compare year-over-year churn rates, this creates a headwind for us this year because of last year, we had that onetime benefit. That's about half of the year-over-year increase in churn is coming from that. We're also seeing a slight impact from worsening churn rates, and then we do see some mix shift into our higher-churn populations, namely our secondary market subscribers, which we've talked about. They do have a slightly higher churn rate than those who purchase outright via first-party or third-party channels and then also a slightly at the higher churn rates that we do see from our bike rental program.

One moment for our next question and that will come from the line of Arpine Kocharyan with UBS. Your line is open.

Thanks for thanking my question, and you addressed some parts of this already. Could you go back to your kind of underlying assumption for Connected Fitness subs for 2025 and maybe kind of dissect how much of that decline is increasing churn versus addition of new subscribers? And then just one housekeeping question. In terms of Q4, could you clarify a contribution from lulu deal? Thank you.

Sorry, I missed the last part of your question. Q4 from what was that?

From lulu deal? Lemon deal?

Oh, lululemon, sure. So we don't actually share externally any information about the revenue that we get from our lululemon deal. We've shared it somewhat in the past. It's remained pretty constant and consistent. We are seeing really good retention rates from the lululemon members, and so we're pleased with that. Your question about underlying subs for 2025, it's really hard to break out the factors in a way that we can piece and parse them for you, how much is this, and how much is macro, how much are certain different things. But I do want to really just kind of circle back to the fact that there are some macroeconomic factors at play. There's still some COVID impact at play that we believe is really tapering off this year and hopefully, by next year, won't be a factor for us anymore. But some of the things are really related to decisions that we are making about the business that and we also are leaving, if you look at our guidance for fiscal '25 for subscribers, it does suggest that we are going to be declining in subscribers, and the range is pretty broad. And the reason for that is that as we evolve our strategy over the course of the fiscal year, we may make changes to pricing. Karen alluded to some things that we're thinking about there. We're evolving our promotional strategies and that we may also pull other levers to achieve our financial targets. And so all of those things may affect how our gross additions flow in. We also see a lot of opportunities for some of the things that Chris was talking about, not only to potentially drive subscriber growth but also to improve engagement, which could also result in an improvement in our churn rate. And so examples of where we expect to see that could be our beta test and some of the new products and content offerings and then also just as we evolve our member marketing strategy. However, we need to learn how our members are going to respond to these offerings and the timing of when we might see some of the impact from those efforts on churn is uncertain. So it's really hard for me to parse out how those different things are going to manifest over the fiscal year but we really do feel good about the range that we provided. And it does suggest that in fiscal '25, our ability to grow subscribers remains unlikely, although we're going to work on improving that over the course of the year as we go.

One moment for our next question and that will come from the line of Lee Horowitz with Deutsche Bank. Your line is open.

2025 has clearly become a year where you right-size the cost structure and get the business to a healthy profitable base. But looking forward, how do you think about how much white space is actually left in the Connected Fitness market for Peloton to attack? And how may that view on sort of the ability to attack the overall market inform the attributes you're looking for in your next CEO? And then, maybe one on gross margin. Can you help us unpack sort of the meaningful Connected Fitness gross margin improvements that you were looking for in 2025 a bit more? How are you planning to affect that outcome in 2025? And how much more room do you think there is to sort of right-size that cost structure on product gross margins going forward sort of absent any benefits you may get from mix?

Okay. There's a lot there. Let's start with the white space and what we're excited about. I'd say there are still a lot of people who think about us as a bike and/or cardio company. So I think that is white space. I think we have 16 modalities, but not everyone knows all the modalities we have. We're really excited about Tread and running, both from the selling more Treads, but also the content, the experiences and run clubs and social features that we're thinking about. We're really bullish on strength. I think there's so much of a movement towards strength. I think people understand the science behind it and why it's important. It is the number 2 modality for us, but I still think there's a lot of people who come for the cardio and then understand the strength. We're not yet known for strength. So I think you'll see with the beta tests we're having, with other things we're planning to make sure that's better understood and more well known. I think you'll see that as more of a white space for us in the future with new members and even kind of going deeper with our existing members. And then, I think there's more we can do just with broadening beyond just fitness over time. These are things that we'll test and beta and make sure they're working before we scale them and invest a lot of money behind them. But I think there's an incredible amount of white space over time for us, both in the U.S. and in our international markets. With international specifically, we're very focused on reducing the losses there in our go-to-market strategy. So it's more capital light. But as we kind of optimize the current market, we'll be able to go into additional markets. So I do believe there's a lot of white space over time.

Yes. And the things that Karen is talking about, strength, Tread, even our efforts to become more focused in marketing where we build up demand before we try to deliver it via promotions, et cetera, all these things are made possible because we're putting the company on solid financial footing. So we say in our remarks, we're planting the seeds here for growth. And some of these seeds will take some time. We've got to change that perception that it's only about the bike that it's actually also about strength. In fact, strength is our second most popular way of exercising with Peloton. It's also about running, and we're doing some very cool stuff around Pace Targets and running content. So those are efforts that we're very excited about and we think create lots of white space for Peloton, but it will take time to develop.

On the margin front, so first of all, we are expecting substantial improvement in our Connected Fitness gross margins in fiscal '25. See, some of the reasons for that are the fact that we are not expecting to have the inventory write-off in reserves that we've been challenged with in the past. We're much more rightsized on our inventory, and we're going to continue to lean on making that more and more efficient over time so that we can reduce our days on hand and just have a much more efficient supply chain going forward. We also talked about the fact that we are focused on hardware pricing and also on reducing the amount of promotional activity that we have in the year. Those things directly affect our gross margins. And then, in terms of how high can it get, I'm not going to throw out a specific target for you. But our goal would be to get our Connected Fitness margins back into the low, at least the low double-digit range and then continue to improve it over time. Another thing worth pointing out, is that some of our marketing messaging in the past has really been focused on promotions. And we are moving away from that to really focus on the full value proposition of what you get with Peloton and your overall membership as part of our messaging. And the goal there is, again, to make it less about promotions and more about the value of Peloton over time.

We do have time for one final question, and that will come from the line of Shweta Khajuria with Wolfe Research. Your line is open.

I'm not sure if you addressed what you're looking for in the next year. If you could please comment on that, that would be great. And then, the second thing is, these new initiatives that you are talking about. As the new CEO comes in, how could the strategy change potentially because it may depend on him or her a little bit as well? And as it stands now, if you were to put it in a spectrum, which top 2 strategies do you think will have the most impact in the near to midterm? Thanks a ton.

Sure. So I'll take the CEO question. As I said in my prepared remarks, this is a very high priority for us. We've been very focused on it. We are far along in the process. We've done a lot of vetting, a lot of conversations. And we've narrowed it down to some very highly qualified candidates. That said, we're not done until we're done because we're pretty far along with some candidates. We're not going to go through the specific profiles, but I would say we're just really excited about the process and the interest that there has been and the quality of the candidates we're talking to. So I'm not going to give specifics on what we're looking for. Again, we have some very specific folks in mind at this point. But that person will absolutely opine and weigh in on the strategy. I think some of the things we're doing right now are intentionally something like a subscription price increase. That is a one-way door we probably wouldn't go through without a new CEO as an example. But the things we're doing now and the things we're focused on in the very near term, all the things we're talking about today are what I would consider sort of no-brainers. We're being more judicious with our spend both on marketing, which we've talked about, but really up and down the P&L. And we're making sure that our unit economics and our margins make sense and those things fund CAC and future growth in the future. And we're planting the seeds with what we think are some really exciting content and offerings for all of our members, new members and existing members alike. So I think we're focused on that and I think the new CEO coming in will pick right back up, and we won't miss a beat.

Totally. And Karen and I like to talk about preparing the way for the next leader and making some of the smart moves now that we can make to create the best possible environment. So getting the company on solid financial footing, planting seeds for growth. These are the learning -- becoming more effective in how we're using our resources, especially in marketing and then creating demand and in helping Peloton become known for things like strength and Tread and running. These are the important things. So we see that as preparing the environment. And we think that that's just going to create a great runway for the next leader.

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

Okay. Thank you for the time today. I do want to stress that the entire Board is highly focused on the CEO search, and we do hope to have some news to share there in the very near term. In the meantime, Chris and I and the entire leadership team are highly focused on what we can control. We're executing against our restructuring plan, and we're delivering those expense reductions. And we talked a lot about media efficiency today, but I do want to stress that we're looking at further optimizing our spend up and down the P&L, including on hardware gross margins and ensuring our unit economics work in all of our markets and in all of our channels. And we're also very focused on working capital efficiency to deliver the inventory reductions. And importantly, we are making investments for future growth where we will test and learn before scaling the spend. We're excited about the opportunity with Tread, the work we're doing to lean into strength, both with content and delivery formats, and with new community features and additional experiences on the come for both existing and new members. I do want to thank our amazing instructors and the many talented employees who bring the magic of Peloton to our millions of members day in and day out. And I should probably under promise here, but I am excited to say that I do believe you will be speaking to and hearing from the new CEO of Peloton on this call next quarter. Thank you.

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