Peloton quarterly earnings breakdown
Peloton reported its Q3 2021 earnings last week. I've summarised the most important points including the implications of the Tread recall.
Quick highlights
Peloton exceeded revenue expectations for the following reasons:
Higher delivery numbers, particularly for Bike and Bike+
Customers aren’t cancelling their subscriptions and churn (the percent of customers leaving Peloton) is the lowest its been in six years
More people are buying upfront rather than using finance, which helps cashflow and is lower cost
Peloton has higher than anticipated accessories sales (clothing, weights, shoes etc)
Engagement is increasing
26 workouts per month per subscriber on average up from 21 last quarter
Staked workouts and class scheduling helped improved this key engagement metric
This is seasonal - people use their Peloton less in the summer months, so this metric is expected to decline next quarter
Peloton is focusing on growth rather than profitability
Peloton invested $100 million on expedited shipping. The acquisition of Precor will improve shipping times and reduced the need for expedited shipping this calendar year which will help profitability. Precor will manufacture the Peloton bike in the US.
Peloton is increasing its marketing spend now that Bike and Bike+ lead times are lower. Peloton spent less on marketing when lead times were 8 or more weeks. This means Peloton will invest any savings on shipping costs on marketing.
Peloton expects to increase investment on research and development with spend rising to 10% of total revenue from 5.5% this quarter. This suggests new product lines are coming.
Safety - Tread to be redesigned
Given the recall, Peloton spent a large portion of the earnings call discussing its potential impact. Tread and Tread+ are being redesigned. This will take approximately 8 weeks but could take longer given the necessary discussions with the CPSC.
Peloton will continue to create Tread content indicating the Tread product line is still a focus. This is important because by investing in content it hopes to reduce the number of Treads it has to recall.
Analyst questions
One of the most insightful elements of any earnings call is the question and answer section. I’ve summarised the analyst questions into themes whilst also summarising the answers Peloton provided.
Question: Given the product recall, do you expect lower Bike and Bike+ sales?
Answer: Peloton expects a small, short-term impact on Bike and Bike+, but no lasting impact.
Question: How are you going to fix the Tread and Tread+?
Answer: Peloton is fixing the hardware, hinting at a physical barrier to stop objects being pulled under the machine. It’s hoping to fix the Tread first as it is newer and lower profile. Tread+ might take time longer to fix as all changes must approved by the CPSC.
Peloton still expects to launch the lower priced Tread in the US in by July 2021.
Question: Do you need to change manufacturing processes to fix the Tread? Will this cost more?
Answer: There’s some tooling required which could take months to fix Tread+. The Tread might have a quicker solution and require no change to manufacturing processes.
Question: How do you see Bike sales growing?
Answer: There’s seasonality that impacts the Bike sales. Typically around 60 to 65% of sales in fiscal Q2 and Q3, which is September through March. Peloton will increase marketing activity now that delivery times are lower.
Question: How many people do you expect to return their Treads in the voluntary product recall?
Answer: Peloton expects 10% of customers to returns their Treads.
Question: How did the Tread perform in the UK and Canada?
Answer: It was performing well, above expectations.
Question: Will the focus now be on Bike and Bike+?
Answer: NPS of Tread was 85 (NB: This is an extremely high NPS score). Peloton marketed Tread more because it was less supply constrained compared to Bike and Bike+. Peloton expects to market the Bike and Bike+ heavily now it’s less constrained and expects growth to continue.
Question: Which countries are you rolling out to next? Noting you now have a dedicated Spanish speaking instructor (Mariana Fernandez).
Answer: Mexico, Spain are big market opportunities. Spanish language support is exciting and expected soon. But no timelines to share. Note: Peloton added Mariana Fernandez to its instructor line-up. She will predominantly teach classes in Spanish, starting with yoga.
Summary
Despite the bad news of the product recall (see: Does Peloton have a safety problem?) revenues exceeded analyst consensus.
Peloton continues to grow year on year but is yet to be profitable. Peloton’s long-term plan is to reinvest in marketing and R&D and profitability will likely come in calendar year 2022.
The product recall might not be as costly as Peloton has planned; there’s potential upside if less customers return the Tread. With such a high NPS it seems unlikely customers will return the Tread en masse which will soften the blow.
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