After reviewing the numbers and listening to the conference call, I’m more bullish on Peloton than I was before earnings. Yes they have a supply problem in the near term and yes that is putting near term pressure on margins as they take immediate steps to meet demand, but demand itself has never been stronger, and with the Precor acquisition in particular, they’ve already set in motion the steps to solve their supply problem AND create additional opportunity in the commercial space.
Let’s get into the numbers, which have some good and some bad but the bad in my view is just a flash in the pan and nothing trend-worthy or chronic (note - I’m using calendar year below not Peloton’s FY).
Top and bottom line numbers were about what I was expecting, taking seasonality into account (their calendar Q3/Q4 are typically stronger). Solid growth period.
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| | Q319 | Q419 | Q120 | Q220 | Q320 | **Q420** |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev (Total)(in millions) | $228.00 | $466.30 | $524.60 | $607.10 | $757.90 | $1,064.00 |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev (Connected Fitness Products)(in millions) | $157.60 | $381.10 | $420.20 | $485.90 | $601.40 | $870.10 |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev (Subscription)(in millions) | $67.20 | $77.10 | $98.20 | $121.20 | $156.50 | $194.70 |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (YoY)(Organic)(Total) | | | | | 232.41% | 128.18% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (QoQ)(Organic)(Total) | | 105% | 13% | 16% | 25% | 40% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (YoY)(Organic)(Connected Fitness) | | | | | 281.60% | 128.31% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (QoQ)(Organic)(Connected Fitness) | | 142% | 10% | 16% | 24% | 45% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (YoY)(Organic)(Subscription) | | | | | 133% | 153% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| Rev Growth (QoQ)(Organic)(Subscription) | | 15% | 27% | 23% | 29% | 24% |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| EPS (Adjusted) | -1.29 | -0.2 | -0.2 | 0.27 | 0.2 | 0.18 |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
| EBITDA (in millions) | -$21.00 | -$28.40 | $23.50 | $143.60 | $118.90 | $116.90 |
+-----------------------------------------------+---------+---------+---------+---------+---------+-----------+
On to expenses, the trend of increasing Subscription Gross Margin and the contribution of that as a % of total Gross Margin is intact and very important to the long term thesis of margin expansion. Management reaffirmed that they are still on track for a long term target of 70% subscription contribution margins, so I assume the underlying subscription margins will also continue to trend higher. Yes they saw their Connected Fitness Product Gross Margin contract, but management very clearly articulated why this is a short term impact which I’ll provide more detail on later.
Notice also the continued operating leverage trend that is happening over the past 2 years on R&D, S&M, and G&A.
+----------------------------------------------------+------+------+------+------+------+------+
| | Q319 | Q419 | Q120 | Q220 | Q320 | **Q420** |
+----------------------------------------------------+------+------+------+------+------+------+
| CoR (Connected Fitness Products) | 39% | 49% | 44% | 44% | 48% | 53% |
+----------------------------------------------------+------+------+------+------+------+------+
| CoR (Subscription) | 13% | 7% | 8% | 9% | 9% | 7% |
+----------------------------------------------------+------+------+------+------+------+------+
| Gross Margin (Connected Fitness Product) | 43 | 40.5 | 45.3 | 45.3 | 39% | 35% |
+----------------------------------------------------+------+------+------+------+------+------+
| Gross Margin (Subscription) | 56.1 | 58 | 57.8 | 56.8 | 59% | **60%** |
+----------------------------------------------------+------+------+------+------+------+------+
| Gross Margin (Subcription Margin as % of Total GM) | 63 | 64.4 | 63.6 | 64.1 | 64% | **65%** |
+----------------------------------------------------+------+------+------+------+------+------+
| Gross Margin (TOTAL) | 46% | 42% | 47% | 48% | 43% | 40% |
+----------------------------------------------------+------+------+------+------+------+------+
| | | | | | | |
+----------------------------------------------------+------+------+------+------+------+------+
| Research and Development | 8% | 4% | 4% | 5% | 5% | 4% |
+----------------------------------------------------+------+------+------+------+------+------+
| Sales and Marketing | 34% | 34% | 30% | 14% | 15% | 17% |
+----------------------------------------------------+------+------+------+------+------+------+
| General and Administrative | 27% | 17% | 24% | 14% | 14% | 13% |
+----------------------------------------------------+------+------+------+------+------+------+
| Operating Margin (GAAP) | -22% | -13% | -11% | 15% | 9% | 5% |
+----------------------------------------------------+------+------+------+------+------+------+
On the customer side, again the numbers show continued strength and the story intact. The only thing I’d like to see better is the Paid Digital Subscription numbers continue to accelerate to complement the Connected Fitness Subscriptions. However, on the earnings call they felt pleased with digital and said it’s producing upsell to Connected Fitness, so that’s a good sign.
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| | Q319 | Q419 | Q120 | Q220 | Q320 | **Q420** |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Connected Fitness Subscriptions (millions) | 0.56 | 0.71 | 0.89 | 1.09 | 1.33 | 1.67 |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Paid Digital Subscriptions (millions) | | | 0.18 | 0.31 | 0.51 | 0.63 |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Total Members(millions) | 1.6+ | 2.0+ | 2.6+ | 3.1+ | 3.6+ | 4.4+ |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Connected Fitness Subscruiption WORKOUTS(millions) | 11.70 | 24.30 | 44.20 | 76.80 | 77.80 | 98.10 |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Churn | 0.9 | 0.74 | 0.46 | 0.52 | 0.65 | 0.76 |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| 12-month retention rate | 94% | 93% | 93% | 92% | 92% | 92% |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| | | | | | | |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Connected Fitness Subscription Customer Growth (YoY) | | 97% | 93% | 114% | 138% | 135% |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Connected Fitness Subscription Customer Growth (QoQ) | | 27% | 25% | 22% | 22% | 26% |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Paid Digital Subscription Customer Growth (YoY) | | | | | | |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
| Paid Digital Subscription Customer Growth (QoQ) | | | | 76% | 65% | **23%** |
+------------------------------------------------------+-------+-------+-------+-------+-------+-------+
One quick note on the Balance Sheet is that they now have 611 million in short term deferred revenue, and on Cash Flows they had FCF of $391 million which continues to build from turning positive in calendar Q220.
On guidance, they gave both their next quarter guidance and updated their full fiscal year guidance, which gives us a clear picture of what they expect for the next 2 quarters on top line revenue growth. <For next quarter, they guided to $1.1 billion in total revenue and with the full fiscal year guide, that equates to $1.245 billion in total revenue the following quarter (calendar Q2). That would be seasonally impressive and keep growth at over 105% YoY through the first half of 2021.
While the numbers for this quarter overall look mildly positive and the guidance looks slightly more positive, the real story in this quarter in my opinion came from the conference call and the commentary on the demand and margin story. On the negative side, they haven’t been able to meet demand and are having to put cash into air shipments and expedited ocean freight to remedy that situation, so there is short term pain there they’ve been clear about, but they are putting their customers first and believe that the short term pain is for long term gain.
Conference Call - Prepared Remarks
Our acquisition of Precor will allow us to produce Peloton products here in the U.S. and fast track our ability to build a large domestic manufacturing footprint over time. Importantly, Precor has deep manufacturing in R&D expertise, which will help us bring new hardware products to market more quickly and better position us to serve our North American member base over time. Precor’s product portfolio and sales team will also accelerate our commercial business where we see a significant opportunity to grow Precor’s franchise while introducing the Peloton platform to an even greater number of fitness enthusiasts and channels such as hospitality, multi-unit residential buildings, corporate campuses, and colleges and universities. As we mentioned in our transaction announcement, we expect to be producing Peloton equipment in the U.S. by the end of this calendar year at Precor’s North Carolina facility and expect to close the acquisition early this calendar year.
Despite the significant investments in the quarter on expedited and air shipping, our adjusted Connected Fitness gross margin continues to more than offset our customer acquisition costs. For our subscription segment, we expect continued fixed cost leverage to be partially offset by increased costs of higher member engagement and continued strong growth of digital subscriptions, which carries a lower gross margin profile over the long term, we continue to expect that our subscription contribution margin will exceed 70%!!!
Our member engagement continued to soar in Q2 with Connected Fitness subscription workouts growing over 300%, to 98.1 million that’s an average of over one million workouts per day in the quarter. I’m also happy to report that in January, we saw our first day of over 2 million workouts. In Q2, we averaged 21.1 monthly workouts per Connected Fitness subscription, versus 12.6 in the year-ago period, an increase of 67%.
Importantly, over the past several months, we’ve built significant additional capacity at Tonic, and through our third-party manufacturing partners. We are extremely pleased that our current manufacturing capacity exceeds demand, a trend that will accelerate as we move through the back half of the fiscal year.
…port congestion issues continue to negatively impact our product delivery windows. As you may have seen, the executive director of the Port of Los Angeles recently reported that port unloading times are currently four times longer than they were a year ago. - note that even if this persists, once they can start churning out product from the Precor facilities, this should be greatly mitigated as an issue
The short-term investments in shipping our products are obviously, impacting our near-term profitability, but we must invest in our member experience, it’s our first priority. And these investments today will allow us to resume marketing spend so we can maintain our leadership position in Global Connected Fitness.
Conference Call - Q&A
John Foley (CEO) - the successes that we’re seeing in getting the order to delivery down and getting our backlog down are 100% based on incredible upgrades, and our manufacturing capacity up to over six times – 6x increase in just the last 12 months in our capacity of them know – we’re now making more Bikes on a monthly basis than we did in all of fiscal 2018…When the vaccine was announced in the fall, you saw a reaction to the stock, but we did not see any reaction to our sales or demand. We still have not seen any softening since that vaccine was announced and since the vaccine has been rolling out.……I’ll remind you that **investments in digital aren’t just good for that business on its own, but it’s good for our Connected Fitness members who have Bike or Tread, and also get that digital platform as part of the $39 membership for their whole household.**So that’s one of the things that’s helping drive engagement as they might be traveling and might want to go for a run or do yoga in their hotel room or whatever, or go down to the gym and take a Bootcamp class on somebody else’s treadmill. It’s one of our thesis that if we introduce our great instructors and our great music, and our great community, and our great content, and software to members in very low friction, $12 a month way and they see what we’re bringing and why the experiences on Peloton are different, that they’re eventually going to want a Peloton Bike or Peloton Tread. We are absolutely seeing that it continues to be one of our best lead gen channels. And it’s getting better as we get smarter with it.
Jill Woodworth (CFO) - we’re still seeing very strong organic demand across all geographies across all products………the strength in our revenue guidance is continued to be driven by Bike, Bike+, Tread+ all geographies, which are growing much faster than the U.S.…As we all know the port issues and COVID are incredibly fluid situations. I can never say never that we won’t use expedited shipping. But what I can say is that we do expect that this $100 million, which we recognize is a very large investment. We believe will get us back to normal shipping protocol by the end of this fiscal year.…And we’re in a position even with these investments such that those gross profit offset – more than offset all of our customer acquisition costs on a fully loaded basis, which means thereafter, we have a very high margin, long lifetime value given the low churn of our subscriber base, the value of our subscribers.
William Lynch (President) - And then Doug on Precor, we love the commercial opportunity. And in fact, since the announcement, if you look at inbound from some of those channels that John mentioned universities, schools, clubs, hotels, hospitality, it’s been enormous curiosity about what this could mean in terms of delivering a combined Precor Peloton experience in the commercial channel.…And then on the Tread launch in the UK as John noted, we couldn’t be more excited, in fact, it’s exceeding our expectations.…U.K. launch and Tread, we’re taking estimates up full stop based on what we’ve seen in the U.K. And we felt like we had baked in a plan that had a strong forecast there. And based on what we’ve seen early, we we’ve taken it up……So everything, we’re seeing as we noted with the U.K. on Tread, and then we’ll learn next week from Canada, but all early signs there in terms of leads in Canada, just the same thing, strong demand for that product…we studied the consumer and we have quarterly tracking and we do bespoke research, and what’s clear isthe shift into the home is not a COVID-led phenomenon. It is accelerated, but we see if anything as we emerge just whatever the new normal is that the norms haven’t changed. There’s a secular shift into fitness in the home.…we’re building a supply chain that has not been seen before in fitness.…
In summary from the conference call, clearly there are many more tailwinds than there are headwinds if you believe they can solve the supply problem over the next couple of quarters and if you believe that work-from-anywhere/home is a secular trend and not a flash in the pan.
-Chris
Long PTON ~10% (and will add on any weakness)