Peloton (PTON) results for the third quarter of 2023

A person walks past a Peloton store in Coral Gables, Florida on January 20, 2022.

Joe Raedle | Getty Images

pelotonShares of ‘s tumbled Thursday after the company reported a bigger-than-expected loss for the fiscal third quarter, forecast its first drop in subscribers and acknowledged an uncertain economic environment.

Shares of the company fell 13% on Thursday.

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Still, Peloton pointed to signs of progress on its turnaround plan. It said Connected Fitness subscriptions were growing and free cash flow losses were shrinking. As hardware sales continue to lag, subscriptions have become an increasingly larger part of the business — accounting for 60% of total revenue for the quarter.

CEO Barry McCarthy said in a letter to shareholders that new initiatives are resonating with customers. These include efforts to sell lower-priced used bikes and a gym equipment hire-purchase program.

Despite the harsh reaction to Peloton’s results and guidance, the company and some analysts said the quarter showed positive signs for the company’s future.

Here’s how the connected fitness equipment company performed in the three months ended March 31 compared to what Wall Street was expecting, based on a poll of analysts by Refinitiv:

  • Loss per share: 79 cents vs. 46 cents expected
  • Revenue: $749 million versus $708 million expected

Peloton’s net loss for the period was $275.9 million, or 79 cents a share, compared to a loss of $757.1 million, or $2.27 a share, a year earlier. It was the ninth consecutive quarter that the company reported losses.

Revenue fell 22% year over year from $964.3 million.

The fitness company has been trying to stabilize its business and find a way back to profitability after taking a drastic turn. Sales of its bikes and treadmills slowed dramatically after a surge fueled by the Covid pandemic, forcing Peloton to turn to other revenue streams such as subscriptions.

The company ended its third quarter with about 3.1 million connected fitness subscriptions, up 5% from the year-ago period. Connected Fitness subscribers are people who own a Peloton product like Bike or Tread and pay a monthly fee for access to live and on-demand workout classes.

A “challenging” quarter is ahead

Nonetheless, McCarthy warned of impending obstacles. He said the company typically experiences a seasonal dip in subscriber growth in the fourth quarter, coinciding with warmer weather and vacations in the summer months. He said he’s expecting one again this year.

Peloton expects to end the fourth quarter with 3.08 to 3.09 million subscribers. It was the first time the company expected a drop in subscriber numbers.

In the letter to shareholders, he said the quarter “will be one of our most challenging from a growth perspective.”

Peloton also forecast a drop in revenue for the quarter. It expects revenue to decline about 6% year over year to $630 million to $650 million, compared to $678.7 million in the year-ago period.

McCarthy urged investors to take a long-term view in his earnings announcement remarks and letter. Later this month, the company will rebrand and introduce a new version of the Peloton app with a tiered membership structure, he said.

He added that the relaunch aims to change the way people look at Peloton, so they think about the wide variety of fitness offerings – not just the familiar bikes.

Separately, Peloton announced on Thursday that it had reached an agreement over a patent dispute with Dish Technologies. The company said it will pay Dish $75 million to settle a complaint from the US International Trade Commission.

The company previously stated that it aims to achieve break-even cash flow on a quarterly basis in the second half of its 2023 fiscal year. McCarthy said in Thursday’s letter that the settlement will weigh significantly on free cash flow in the current fiscal quarter.

He added that the temporary crisis is worth it because it “removes a cloud of uncertainty and a huge distraction from the day-to-day running of our company.”

New initiatives are promising

McCarthy’s focus on a turnaround follows a turbulent period following the company’s post-pandemic recovery.

The fights forced the company to cut costs last year by laying off thousands of employees, closing many of its stores and outsourcing last-mile delivery and manufacturing. Its co-founder and former CEO, John Foley, also resigned last year and later resigned as chairman of the board.

As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix exec, the company placed emphasis on increasing subscriptions.

The third fiscal quarter marked the fourth straight quarter in which subscription revenue exceeded hardware revenue.

The company has tried to boost sales of equipment by tinkering with prices, offering a rental option and adding rowing machines to its lineup. It got into wholesale by allowing Amazon And Dick’s sporting goods to carry his gear. Peloton also struck a deal with hilton store bicycles in all US hotels.

In Thursday’s letter to shareholders, McCarthy said these efforts are working.

Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. The average monthly churn rate is 5%, which is higher than Peloton’s overall churn rate.

Still, McCarthy said the option, which allows customers to make rental payments and benefit from the purchase price of the equipment, lowers the barrier to registration. He pointed to an internal survey that found that 62% of respondents would not have subscribed without the flexibility of the rental program.

Peloton’s used bike sales have also been very popular, he said. The company launched this offering in December and is considering adding its treadmills and rowing machines to the program later this year.

Combined, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.

He said third-party sales have also picked up steam and the company plans to expand its range with Amazon and participate in its promotional events such as Prime Day.

Customers have largely remained loyal to the brand. Average monthly net churn at fitness was 1.1% for the quarter, consistent with the prior quarter, and just above last year’s churn rate of 0.8%.

Speaking on the earnings, McCarthy said consumers continue to spend, but added that it’s difficult to predict their behavior as economists debate the likelihood of a recession or a “soft landing.” He said the debate in Congress over whether to raise the debt ceiling or risk a first default on the US debt is adding to uncertainty.

Aneesha Sherman, an analyst at Bernstein, said Peloton stock fell because Wall Street was nervous about consumers, particularly when it comes to discretionary spending. She said the prospects for subscribers had also unsettled investors.

But she said the reaction was overblown. She said Peloton is “fundamentally changing what business is about” and is on a firmer footing as it moves away from direct-to-consumer sales and reaches customers through Amazon, Dick’s and more affordable options like the rental program.

“The progress has been really significant,” she said. “You won’t see linearity in a turnaround story like this. It’s going to be bumpy from quarter to quarter.”

As of Wednesday’s close, Peloton’s stock was up about 11% so far this year — but Thursday’s drop erased those gains. Its shares are at less than half of its 52-week high of $18.86 — and just a tiny fraction of its peak of over $100 in the early years of the pandemic.

Peloton’s market cap is $2.63 billion, after hitting nearly $50 billion in early 2021.

Simeon Siegel, a retail analyst at BMO Capital Markets, said Peloton has often pointed to the huge market for its products. She has set out her goal of one day reaching 100 million members around the world.

His recent outlook casts doubt on that vision.

“The fact that Peloton is now driving subscribers downward — albeit seasonally — will likely raise questions about its eventual size,” he said. “In the past, people wondered how big it was going to be. The question is whether the company will now give something back.” Peloton (PTON) results for the third quarter of 2023

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