Peloton said on Thursday it was coming out of the red and posted a slight increase in sales for the first time in nine quarters as it narrowed its overall losses.
The company’s shares rose 35% on Thursday.
The beleaguered fitness affiliate, which has been run by two board members since former chief executive Barry McCarthy stepped down earlier this year, saw sales rise 0.2% in its fiscal fourth quarter. While it’s a modest increase, it’s the first time Peloton has seen year-over-year revenue growth since the holiday quarter of 2021.
The company also said it is poised to focus on profitability over growth with significant cuts in marketing and sales expenses and significant increases in free cash flow and adjusted EBITDA. Those cuts helped Peloton narrow its quarterly loss to $30.5 million from $241.1 million in the year-ago period.
Here’s how the Bike and Tread maker performed compared to what Wall Street expected, based on a survey of analysts from LSEG:
- Loss per share: 8 cents vs. 17 cents expected
- Annuity: 644 million dollars vs. $631 million expected
For the quarter ended June 30, Peloton narrowed its losses significantly. The company posted a loss of $30.5 million, or 8 cents per share, compared with a loss of $241.8 million, or 68 cents per share, a year earlier.
Sales rose to $643.6 million, up about 0.2% from $642.1 million a year earlier. That’s only a $1.5 million increase, but Peloton did it at a time when sales are typically a little slower for the company because the quarter kicks off the summer when people are more focused on going out and traveling than exercising. . The last time Peloton posted year-over-year sales growth was during its 2021 holiday season, which is typically the company’s strongest quarter.
Secondary market profits
During the quarter, sales for Peloton’s expensive connected fitness equipment fell about 4%, continuing a trend for the company. But subscription revenue rose 2.3% and the segment’s gross margin rose 1 percentage point.
Although hardware sales are down, Peloton is growing its subscription revenue through it secondary market where people can buy used stationary bikes for a fraction of the cost of a new one. During the quarter, subscription revenue from hardware purchased on the secondary market grew 16% year-over-year.
“We believe a significant portion of these subscribers are incremental and exhibit lower net churn rates than rental subscribers,” the company said in a letter to shareholders.
While hardware sales have hurt Peloton’s overall performance, sales for its Tread are picking up after overcoming a costly recall. During the quarter, sales from Peloton’s treadmill portfolio grew 42% year over year.
The company is also seeing some positive signs in its bike rental program, which has allowed it to clear excess inventory. During the quarter, the average net monthly fee paid for rentals decreased by 1.1 percentage points. Demand has been so steady, it no longer has the refurbished inventory levels necessary to supply this side of the program. The company stopped offering its original bike rental program on August 1, and since then, demand has grown for Bike+ rental, revamped the original bike sales and funded new bike sales.
“These alternative programs have stronger financials than the original bike rental, with more cash paid upfront and a stronger retention profile,” the company said in its shareholder letter.
Since Peloton’s pandemic heyday came to an end, the company has struggled to generate free cash flow and ensure it has enough assets on its balance sheet to cover its many liabilities. Earlier this year, it announced an extensive restructuring plan that included cutting 15 percent of the company’s global workforce to achieve $200 million in annual cost savings by the end of fiscal 2025.
These efforts are beginning to bear fruit.
During the quarter, Peloton delivered adjusted EBITDA and free cash flow for the second consecutive quarter – a feat not achieved since the height of the Covid-19 pandemic. It posted $70 million in adjusted EBITDA, well above the $53 million analysts expected, according to StreetAccount.
That metric was up $105 million year-over-year and $64 million quarter-on-quarter.
Peloton also generated $26 million in free cash flow, compared to negative $74 million in the year-ago period and $8 million in the prior quarter.
The improvements to Peloton’s balance sheet come after the company completed a massive debt refinancing that averted a looming liquidity crisis and pushed back its debt maturity by several years.
As for who will be Peloton’s next leader, interim co-CEO Karen Boone said the search is “well underway” and there is “no shortage of interest.”
“We’re very far along in the process. We’ve done a lot of vetting, a lot of discussion, and we’ve narrowed it down to some very highly qualified candidates,” Boone said. “We have some very specific people in mind at this point.”
In her opening remarks, Boone said the company can’t speculate on when its next CEO will start. But just before the call ended, he said the new hire would be in place by the time the company reports earnings, which is expected sometime in the fall.
“I should probably under-promise here, but I’m excited to say that I believe you’ll be talking and hearing from Peloton’s new CEO about this call next quarter,” Boone said.
Profit over growth
For the coming year, Peloton plans to invest in its hardware and software to deliver a better user experience, among other initiatives. However, its guidance assumes that investments in these new initiatives “will not deliver subscriber growth within the fiscal year,” indicating that Peloton may eventually shift its focus away from growth in favor of profitability and free cash flow generation. .
“Chris and I, working with Peloton’s strong leadership team, continue 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 substantial free cash flow without having to grow to get there,” Boone said in a call with analysts.
“We are excited about our innovative roadmap, but will be cautious about deploying marketing dollars until we prove product market fit and will continue to be cautious about marketing spend given the uncertain consumer environment and ongoing macroeconomic environment,” he said.
That shift shows in its reductions in sales and marketing spending — an expense that has long dragged down Peloton’s balance sheet and has criticized as too high for the size of the company.
During the quarter, Peloton reduced sales and marketing expenses by $25.5 million, or 19% year over year. It said it expects to continue making cuts to its marketing budget throughout fiscal 2025.
For the current quarter, Peloton expects sales to be worse than Wall Street expected, but is driving higher-than-expected adjusted EBITDA. The company said it expects sales of between $560 million and $580 million, compared with estimates of $609 million, according to LSEG. It expects to post adjusted EBITDA of $50 million to $60 million, compared with estimates of $45 million, according to StreetAccount.
StreetAccount analysts expected the number of connected fitness subscribers to be 2.96 million in the current quarter, but Peloton is forecasting a range of 2.88 million to 2.89 million.
For the full year, Peloton expects sales to be between $2.4 billion and $2.5 billion, compared with estimates of $2.7 billion, according to LSEG.
