Peloton The company said on Thursday it was emerging from the red and had slightly increased sales for the first time in nine quarters while cutting its overall loss.
The troubled connected fitness company, now run by two board members after former CEO Barry McCarthy resigned earlier this year, saw sales rise 0.2% in the fiscal fourth quarter. Although the increase was modest, it was Peloton’s first annual revenue increase since the 2021 holiday quarter.
The company also said it was preparing to focus on profitability rather than growth, slashing marketing and sales spending and significantly increasing free cash flow and adjusted EBITDA. The cuts helped Peloton narrow its quarterly loss to $30.5 million from $241.1 million a year earlier.
The company’s shares rose more than 10% in premarket trading.
Here’s how the bike and tread maker performed compared to Wall Street expectations, according to a survey of analysts by LSEG:
- Loss per share: 8 cents Expected 17 cents
- income: $644 million Expected to be $631 million
Peloton’s losses narrowed significantly in the three months ended June 30. The company reported a loss of $30.5 million, or 8 cents a share, compared with a loss of $241.8 million, or 68 cents a share, a year earlier.
Sales increased to US$643.6 million, an increase of approximately 0.2% from US$642.1 million in the same period last year. That only added $1.5 million, but Peloton did it at a time when the company’s sales typically slow as the quarter heads into summer and people are more focused on going out and traveling instead of exercising. The last time Peloton posted an annual sales increase was during the 2021 holiday season, which is typically the company’s strongest quarter.
Secondary market benefits
Sales of Peloton’s pricey connected fitness hardware fell about 4% in the quarter, continuing a trend for the company. But subscription revenue grew 2.3%, and the segment’s gross profit margin increased 1 percentage point.
Despite declining hardware sales, Peloton is growing its subscription revenue through the secondary market, where people can buy used stationary bikes for a fraction of the price of new ones. This quarter, subscription revenue from hardware purchases on the secondary market increased 16% year-over-year.
“We believe that a significant portion of these subscribers are incremental and that their net churn rate is lower than that of leased subscribers,” the company said in a letter to shareholders.
While hardware sales hurt Peloton’s overall results, its Tread sales are growing after overcoming a costly recall. Sales of Peloton’s treadmill product portfolio increased 42% year-over-year during the quarter.
There are also some positive signs for the company’s bike rental program, which has allowed it to clear excess inventory. Average monthly net paid subscription churn for rentals decreased 1.1 percentage points during the quarter. Demand has been so steady that the levels of refurbishment stock needed to supply the program are no longer available. The company stopped offering its original bike rental program on August 1 and has since seen growing demand for its Bike+ rentals, sales of refurbished original bikes and financing of new bike sales.
“These alternative programs have stronger unit economics than original bike rentals, with more cash up front and higher retention rates,” the company said in a shareholder letter.
Since Peloton’s pandemic heyday ended, the company has struggled to generate free cash flow and ensure it has enough assets on its balance sheet to pay off its many liabilities. Earlier this year, it Announced a massive restructuring plan that includes cutting 15% of its workforce globally to achieve annualized cost savings of $200 million by the end of fiscal 2025.
These efforts are starting to bear fruit.
During the quarter, Peloton achieved adjusted EBITDA and free cash flow for the second consecutive quarter – a feat the company has not achieved since the height of the Covid-19 pandemic. The company reported adjusted EBITDA of $70 million, well above analysts’ expectations of $53 million, according to StreetAccount.
This metric increased by $105 million compared to the same period last year and increased by $64 million from the previous quarter.
Peloton also generated free cash flow of $26 million, compared with negative $74 million in the year-ago period and negative $8 million in the previous quarter.
Peloton improved its balance sheet after completing a massive debt refinancing, avoiding a looming liquidity crunch and pushing back debt maturities by several years.
Peloton said the search for the next CEO is “a top priority for all stakeholders.” “This process is well underway and we look forward to sharing more information as announcements are made,” the company said.
Profits exceed growth
Over the next year, Peloton plans to invest in its hardware and software to provide a better user experience, among other measures. However, its guidance assumes investments in these new initiatives “will not result in user growth during the fiscal year,” suggesting that Peloton may eventually shift its focus from growth to profitability and free cash flow generation.
That’s evidenced by lower spending on sales and marketing — spending that has long been a drag on Peloton’s balance sheet and has been declining. Criticized as being too high for the size of the company.
This quarter, Peloton cut sales and marketing expenses by $25.5 million, a 19% annual decrease. The company said it expects to continue cutting its marketing budget in fiscal 2025.
Peloton expects sales for the quarter to be lower than Wall Street forecasts, but adjusted EBITDA to be higher than expected. According to LSEG, the company said it expected sales to be between $560 million and $580 million, compared with a forecast of $609 million. Adjusted EBITDA is expected to be $50 million to $60 million, compared with estimates of $45 million, according to StreetAccount.
StreetAccount analysts had expected 2.96 million connected fitness subscribers this quarter, but Peloton’s forecast ranged from 2.88 million to 2.89 million.
Peloton expects full-year sales to be between $2.4 billion and $2.5 billion, compared with expectations of $2.7 billion, according to LSEG.
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