Peloton (PTON) Q3 2023 earnings

A person walks past a Peloton store on January 20, 2022 in Coral Gables, Florida.

Joe Raedle | Getty Images

Peloton‘s shares plummeted Thursday after the company reported a wider-than-expected loss for the fiscal third quarter, forecast its first-ever decline in subscribers and acknowledged an uncertain economic backdrop.

The company’s shares dropped 13% on Thursday.

Yet Peloton pointed to signs of progress with its turnaround plan. It said connected fitness subscriptions grew and free cash flow losses declined. Subscriptions have become an increasingly large share of its business — and accounted for 60% of total revenue in the quarter — as hardware sales continue to lag.

CEO Barry McCarthy said in a letter to shareholders that new initiatives are resonating with customers. Those include a push to sell lower-priced, pre-owned bikes and a rent-to-buy program for fitness equipment. 

Despite the harsh reaction to Peloton’s results and guidance, the company and some analysts said the quarter showed positive signs for the future of the company.

Here’s how the connected fitness equipment company did in the three months ended March 31 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

  • Loss per share: 79 cents vs. 46 cents expected
  • Revenue: $749 million vs. $708 million expected

Peloton’s net loss for the period was $275.9 million, or 79 cents per share, compared with a loss of $757.1 million, or $2.27 per share, a year earlier. It marked the ninth quarter in a row of the company reporting losses.

Revenue declined 22% from a year ago, dropping from $964.3 million.

The fitness company has sought to stabilize its business and find a path to profitability again, after it saw a sharp reversal of fortunes. Sales of its bikes and treadmills slowed dramatically after a Covid pandemic-related surge, forcing Peloton to lean into other revenue sources like subscriptions.

The company ended its third quarter with about 3.1 million connected fitness subscriptions, up 5% from the year-ago period. Connected fitness subscribers are people who own a Peloton product, such as its Bike or Tread, and pay a monthly fee for access to live and on-demand workout classes.

A ‘challenging’ quarter ahead

Yet McCarthy warned of obstacles ahead. He said the company typically experiences a seasonal decline in subscriber growth in the fourth quarter, which coincides with warmer weather and vacations during summer months. He said he expects one this year, too.

Peloton expects to end the fourth quarter with 3.08 million to 3.09 million subscribers. It marked the first time that the company has guided for a decline in subscribers.

In the shareholder letter, he said the quarter “will be among our most challenging from a growth perspective.”

Peloton also forecast a drop in revenue in the quarter. It said it anticipates revenue to decline by about 6% year over year to a range of between $630 million and $650 million, compared with $678.7 million the year-ago period.

McCarthy urged investors to look toward the long term in his remarks on an earnings call and in the letter. Later this month, the company will relaunch the brand and introduce a new version of the Peloton app with a tiered membership structure, he said.

He added the relaunch aims to shake up how people view Peloton, so they think of its wide variety of fitness offerings — not just its well-recognized bikes.

Separately, Peloton announced Thursday that it had reached an agreement with Dish Technologies over a patent dispute. The company said it will pay Dish $75 million to settle a U.S. International Trade Commission complaint.

The company had previously said it aimed to reach break-even cash flow on a quarterly basis in the second half of its fiscal 2023. McCarthy said in the letter Thursday that the settlement will significantly pressure free cash flow in the current fiscal quarter.

He added that the temporary hit is worthwhile because it “eliminates a cloud of uncertainty and an enormous distraction to the day-to-day operation of our business.”

New initiatives show promise

McCarthy’s focus on a turnaround follows a tumultuous stretch after the company’s post-pandemic surge.

The struggles forced the company to cut costs last year by laying off thousands of employees, shuttering many of its stores, and outsourcing its last-mile delivery and manufacturing. Its co-founder and former CEO, John Foley, also stepped down last year and later resigned as executive chairman.

As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix executive, the company has emphasized increasing subscriptions.

The fiscal third quarter was the fourth quarter in a row when subscription revenue surpassed hardware revenue.

The company has tried to nudge sales of equipment by tinkering with prices, offering a rental option and adding rowing machines to its lineup. It got into wholesale by allowing Amazon and Dick’s Sporting Goods to carry its equipment. Peloton also struck a deal with Hilton to put bikes in all of its U.S. hotels.

In the shareholder letter Thursday, McCarthy said those efforts are working.

Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. It has an average monthly churn rate of 5%, which is higher than Peloton’s overall churn rate.

Yet McCarthy said the option, which allows customers to make rental payments and chip away at the equipment’s purchase price, reduces a barrier to sign-ups. He cited an internal survey, which found that 62% of respondents would not have subscribed if it weren’t for the flexibility of the rental program.

Peloton’s sales of pre-owned bikes have also resonated, he said. The company launched that offering in December and is considering adding its treadmills and rowers to the program later this year.

Together, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.

He said third-party sales have also gained traction, and the company plans to expand its assortment with Amazon and participate in its promotional events like Prime Day.

Customers have largely stuck with the brand. Average net monthly connected fitness churn came in at 1.1% for the quarter, consistent with the prior quarter, and just slightly above the year-ago churn level of 0.8%.

On the earnings call, McCarthy said consumers have continued to spend, but he added it’s hard to predict their behavior as economists debate the likelihood of a recession or “soft landing.” He said the debate in Congress over whether to raise the debt ceiling, or risk a first-ever default on U.S. debt, adds to the uncertainty.

Aneesha Sherman, an analyst for Bernstein, said Peloton shares dropped because Wall Street is jittery about the consumer, especially when it comes to discretionary spending. She said the outlook for subscribers also spooked investors.

But she said the reaction is overblown. She said Peloton is “fundamentally shifting what the business is all about” and is on firmer footing as it pivots away from direct-to-consumer sales and reaches customers through Amazon, Dick’s and easier-to-afford options like the rental program.

“The progress has been really significant,” she said. “In a turnaround story like this, you are not going to see linearity. It is going to be bumpy from quarter to quarter.”

Peloton’s stock had risen about 11% so far this year as of Wednesday’s close — but the drop Thursday erased those gains. Its shares are less than half of its 52-week high of $18.86 — and just a tiny fraction of their over $100 highs during the early years of the pandemic.

Peloton’s market cap is $2.63 billion, after reaching as high as almost $50 billion in early 2021.

Simeon Siegel, a retail analyst for BMO Capital Markets, said Peloton has referred often to the huge market for its products. It has outlined its goal to one day reach 100 million members across the globe.

Its latest outlook casts doubt on that vision.

“The fact that Peloton is now guiding subscribers down – even if due to seasonality – will likely raise questions about its ultimate size,” he said. “Historically, people were wondering how large it would become. This begs the question of whether the business is now going to give back.”

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