First of all, kudos to cfee2000 for an excellent recap here: https://discussion.fool.com/pton-results-i39ll-be-adding-on-weak…. Being I own a sizable chunk of PTON as well, I thought I’d chime in with my thoughts on the quarter. Here’s the current draft for my February recap:
PTON – Peloton reported February 4, and the story was much the same as last quarter. Demand is red hot, but supply constraints continue. The headline numbers were plenty good:
• $1.06B in revenue (+128% YoY)
• 4.4M total members (+120% with a record 800,000 added this quarter)
• 40% total gross margin
• $198M in operating cash flow
• $116.9M in Adjusted EBITDA
A quick scan of subscription metrics was even better:
• 1.98M Connected Fitness subscriptions (+134% with a record number of new adds)
• 625,000 digital subscriptions (+425%. Management views these as a strong lead generator for Connected Fitness purchases and subscriptions.)
• 98.1M Connected Fitness workouts (+303%)
• An average of 21.1 monthly workouts per member, up from 12.6 last year
• A record 60.3% subscription gross margin
• A record 65.3% subscription contribution margin (targeting 70%+ long term)
Peloton continues to sell every bike it can produce while creating an ever-deeper relationship with its members. It is also seeing rapid adoption of non-bike classes like Boot Camps and Pilates with management noting 5X growth in the number of strength classes taken over the last year. As everyone knows, the one persistent chink in the armor is whether PTON’s inability to meet current demand ends up costing it customers and/or growth down the road.
Fortunately, the company is slowly but surely making progress in this area. Its new Taiwan factory is up and running, which has helped production. However, issues with shipping – particularly intake at US West Coast ports – are still creating “unacceptable” delivery delays. Peloton sacrificed margin this quarter to pay for additional air shipping and has committed at least another $100M over the next six months to do the same. Management anticipates outsized shipping costs “will largely abate” by June. Thinking long term, I have no issues with either of those decisions. Adding as many members as possible as quickly as possible is just smart business.
I think it is important to recognize delivery delays are faced by many companies right now and not just Peloton. If you don’t believe me, ask anyone who has tried to order something as simple as a set of dumbbells over the last year. Two recent management comments really stood out to me and ultimately give me hope. First was CEO John Foley noting Peloton has increased its production capacity “by more than 6X in the last 12 months.” In fact, PTON is now making more bikes per month than in all of 2018. Next was the CFO stating, “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 year.” I find this encouraging for two reasons. One, it means current delays are due more to temporary shipping and delivery logistics than production issues. So, at least we know PTON believes it can get enough product out the door when delivery smooths out. Two, it suggests Peloton should have an easier time building inventory and meeting demand as it enters the treadmill and commercial markets.
And that’s where I find PTON most interesting. While the current home workout craze shows no signs of slowing, the company is also making steady progress on new areas of growth. Most revolve around Peloton’s treadmill products. Tread was released in the UK on December 26 and is scheduled to make its Canadian, US and German debuts this year. Not surprisingly, this new offering has been a big hit. Management says the treadmill market is larger than bikes, and it is already seeing more demand than anticipated. In fact, that led to a decision to limit some early US deliveries and delay the general US launch to May 27. The general Canadian launch still occurred this month. Basically, PTON is trying its best to ensure the Tread rollout doesn’t hit the same delivery snags as Bike. While this is mildly disappointing, I’d rather a delay due to crazy demand than a design or production flaw. On bumping back the release, Foley stated:
“[With] Tread, we’re taking estimates up full stop based on what we’ve seen in the UK. 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’ve taken it up. And that’s really informed the decision on moving out the U.S. launch general availability 60 days. As John noted, we’re going to be rolling out some orders here in the U.S. but the general availability moving it out 60 days, because we think this is a rocket ship in terms of a product platform, and there’s a lot of demand for it.”
In my opinion, this delay is not the end of the world since treadmill sales weren’t expected to be material to FY21 anyway. And let’s not forget that revenue is already forecasted to finish in the neighborhood of 125% YoY growth. Management has frequently said it expects the treadmill to be a major growth driver in FY22, which starts July 1. Early consumer reaction is strongly hinting management might be right. Could Tread create another crazy-profitable product S-curve for Peloton, much like iPod to iPhone to iPad did for Apple? I’ll admit cherry-picking the best example ever might be a stretch, but something similar is certainly not out of the realm of possibility.
Another potential area of growth is last month’s Precor acquisition. This purchase not only gives Peloton additional US-based production capacity by end of calendar 2021 but also fast tracks its path into commercial sales. Precor brings a sizable number of corporate, hotel, multi-family residence, and college campus customers. While Precor makes several items Peloton does not (ellipticals, stair climbers, weight racks, etc), it is not at all difficult to see many existing Precor bikes and treadmills becoming Pelotons at the first available refresh. Needless to say, that’s a lot of units. Management has promised more details on its commercial plans next quarter after the deal closes.
So, the multi-multi-million-dollar question is whether demand will hold while Peloton works through its delivery issues and initial forays into treadmills and the commercial market. At this point most customers seem willing to wait. In response to this specific question, Foley replied:
“We are not seeing a softening of demand. That is absolutely not what’s happening here. We are seeing incredibly strong organic demand, even in the face of light marketing, as you know. The successes that we’re seeing in getting ordered to delivery down and getting a backlog down are 100% based on incredible upgrades in our manufacturing capacity up over six times 6x increase in just the last 12 months in our capacity…we’re now making more Bikes on a monthly basis than we did in all of fiscal 2018. So, it’s a herculean effort based on our in-house manufacturing teams and our third-party partners. And so yes, I hope that answers your question, but it’s absolutely not a softening of demand. That’s now what we’re seeing. We’re seeing robust demand.”
He also stated:
“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. So other than investors getting nervous, the consumers are still feeling like they want to work out at home.”
So, am I one of those nervous investors? Yeah, a little. I like what I see but would sure like PTON to get through this rough patch. Management guides for $1.1B in revenue and 110% growth next quarter, which I would anticipate being closer to 120%+. Any improvement in delivery times would push this number even higher. PTON also guides for 2.275M Connected Fitness subscriptions, which would be +109% year over year. Adjusted EBITDA will be considerably lower next quarter due to the increased shipping costs, but management believes this is more than a fair long-term tradeoff to deliver as many bikes as possible. I have no reason to doubt them. The full year revenue guide was raised to “$4.075B or more” (+123%). I’d bet on more for sure. The flip side is management left its prior full year Adjusted EBITDA guide of “$300M or more” unchanged to give itself wiggle room to streamline production and shipping.
As mentioned previously, Peloton is the only company I own whose main business is selling widgets. It sure is frustrating it can’t scale like a software company, but that unfortunately comes with the turf. And it’s hard to complain when that turf includes triple-digit growth with no real end in sight for just about every metric that matters. Peloton has a chance to not only dominate fitness but possibly turn itself into a lifestyle ecosystem. It all boils down to whether it can distribute its product fast enough to take advantage of the opportunity. While PTON clearly has work to do, I’m comfortable with a mid-range allocation as management gives it a go.