Thanks for the summary, FoolishJeff. I just got off the earnings call which made me feel a bit more excited about this business than I was by just looking at the numbers. This is due mainly to one thing → the tread. Discussion regarding the treadmill dominated much of the Q&A, and rightfully so. Overall, here are some of the things I liked and did not like regarding this report. Since I prefer bad news first, let’s start there.
Things I did not like:
• Delay of the tread launch in US - I think this will hurt the stock price tomorrow, however, I think it is the right decision. Management decided to push back the launch date for the tread in the US from February 9 to late May. They will continue with the launch in Canada on February 9. The reason for this delay is so they can use those resources to support the demand in the UK and the upcoming demand in Canada. They would not have enough production capacity to support all three countries. More on this below.
• Gross margins dropping - gross margins dropped by 385 basis points however, this was expected as they announced last quarter they were going to take a hit on margins in order to get the bikes to the new customers faster. I think this is also the right call as it is some short-term pain to ensure they keep their customers satisfied and brand strong. At the end of the day, what is most important is getting that new customer to be a long-term member of the Peloton community. I am okay with this for now as they take on additional shipping cost to get their new members their product faster and keep the customers happy.
• Small revenue beat - Peloton beat guidance by 6.5% this quarter, which is up from 4.5% last quarter but I was still expecting more. I was hoping for something closer to 10% and it looks like the market was as well. At this point, we are pretty much splitting hairs but it would have been nice to see a bigger beat on the top line. I figure this was due mostly to delivery delays for the bikes.
• Tread rollout will not impact 2021 fiscal year - After the delay of the tread rollout, Jill Woodworth announced that the treadmill will not have any material impact on their fiscal 2021 revenue figures. This makes sense considering the tread will not be introduced until May now, which is well into their Q4 fiscal year. This likely disappointed the market but as I mentioned above, I think it is the right call.
• The lack of information given related to the Precor acquisition - I was hoping for more information about the commercial opportunity ahead of them after the acquisition of Precor made this quarter. Management clearly sounded excited about the opportunity but would not provide much clarity around the plan and impact to financial results over the coming quarters. Perhaps this is standard, especially considering the deal has not yet closed.
• Added shipping cost will impact Q3 profitability - this is apparent from the Q3 guidance of $10M of adjusted EBITDA after it has been over $115M for the last three quarters each. Again, a bit of a bummer in the short-term but this is short-term pain for long-term gain. I’ll take it.
Things I did like:
• Extended lead times are not causing customers to cancel orders - John Foley made it very clear that although deliveries had to be delayed and lead times are extended, they have not seen any softening of growth. It sounded to me like this has had very little impact on their demand as most customers are willing to wait for their hardware. I think this speaks to the strength of the brand.
• Huge demand for the tread in the UK - Demand has far exceeded managements expectations for the treadmill that was released in the UK. This is a huge news. The tread is a far bigger market than the bike so for demand to be really strong with their initial rollout speaks very well for what is to come in the US market. However, as a result they made the decision to delay the rollout in the US because they determined they would not have the volume of product available given the robust demand seen in the UK. This is my biggest takeaway and it makes me really, really excited for fiscal year 2022 for Peloton.
• Bike lead times will soon return to normal - Foley also said that their lead times will soon be back to four weeks for their bikes. This is great news. I know several folks around here were hesitant to jump on the bike wagon (see what I did there) due to the supply chain issues, but it sounds like these are beginning to dissipate slowly but surely. As an aside, Foley said they are now producing more bikes monthly than in all of 2018 combined. Pretty incredible growth.
• Paid Digital Subscriptions grew 472% to approximately 625,000 - Incredible growth! Management mentioned on the call how this is one of their best lead generators and they are seeing many digital subs transition to connected fitness subs. They might be able to put me in that bucket soon. I foresee this number continuing to grow at breakneck speed over the coming quarters.
• Engagement numbers - Their main engagement numbers continue to show how the much their members love the Peloton classes. Quarterly workouts reached an all time high of over 98,000 and the average monthly workouts per sub also increased QoQ to 21.1. The retention rate remained unchanged at 92%.
• Management sounds really excited - between the strong demand for the tread, the robust backlog, the rapid growth of the digital subs, and the commercial opportunity from the Precor acquisition, I do not blame them. Heck, I am awfully excited about the opportunity ahead of them! This company was at the right place at the right time and had a great product to capitalize.
I would say this was a strong report, but not as strong as I had hoped. The thesis has not changed, and is still very much on course. I am really excited for what’s to come for this company.
Anecdotally, my wife and I are still loving our digital subscription. We will be moving into a house with more space next month and are talking about using an extra bedroom as a workout room. If we go this route, we will for sure purchase a Peloton tread and likely the bike as well. The digital subscription has really increased our desire to workout and I would highly recommend it. I do not think we are the only people across the globe who would like to transition to working out at home. As John Foley says, it is so much more convenient and nothing on earth is more valuable than your time.
Long PTON
Rex