Business Context and Reporting Period
Peloton Interactive, Inc. filed this Form 10-Q for the quarter and nine months ended March 31, 2021, its fiscal 2021 third quarter. The request metadata identifies “2020 Q3,” but the filing itself clearly reports March 31, 2021 results and compares them with March 31, 2020. Peloton operates an interactive fitness platform selling Connected Fitness Products and recurring subscriptions.
Peloton reported more than 5.4 million Members and 2,080,860 Connected Fitness Subscriptions as of March 31, 2021. Results benefited from strong demand for at-home fitness products during the COVID-19 pandemic.
Financial and Operating Highlights
| Metric | Three months ended March 31, 2021 | Year-over-year change | Nine months ended March 31, 2021 |
|---|---|---|---|
| Total revenue | $1,262.3 million | 140.6% | $3,085.0 million |
| Connected Fitness Products revenue | $1,022.9 million | 139.9% | $2,494.4 million |
| Subscription revenue | $239.4 million | 143.7% | $590.6 million |
| Gross profit | $444.9 million | 81.0% | $1,198.4 million |
| Gross margin | 35.3% | Down from 46.9% | 38.8% |
| Loss/income from operations | $(13.7) million | Improved from $(58.4) million | $113.9 million |
| Net loss/income | $(8.6) million | Improved from $(55.6) million | $124.2 million |
| Adjusted EBITDA | $63.2 million | Up from $23.5 million | $299.1 million |
| Operating cash flow | Not separately provided | — | $359.3 million |
- Connected Fitness Products gross margin was 28.4% for the quarter, down from 44.3%, primarily because of expedited freight, higher raw-material costs, the Bike price reduction from $2,245 to $1,895, and product mix.
- Subscription gross margin increased to 64.6% from 57.8%, supported by fixed-cost leverage, lower travel and studio expenses, and an adjustment to certain reserve estimates.
- Average Net Monthly Connected Fitness Churn improved to 0.31% from 0.46%. Average Monthly Workouts per Connected Fitness Subscription increased to 26.0 from 17.7, and quarterly workouts increased to 149.5 million from 44.2 million.
- Stock-based compensation was $41.7 million for the quarter and $108.8 million for the nine months, compared with $20.5 million and $56.3 million, respectively, in the prior-year periods.
Cash, Liquidity, Debt, and Capital Investment
- As of March 31, 2021, cash and cash equivalents were $2.0559 billion and marketable securities were $629.4 million, providing approximately $2.7 billion of cash and short-term investments.
- Total assets were $4.7124 billion and total liabilities were $2.7191 billion. Inventory increased to $614.2 million from $244.5 million at June 30, 2020, reflecting supply-chain investment and demand planning.
- Operating cash flow of $359.3 million was partly offset by $233.4 million of investing cash outflows, including $167.9 million of capital expenditures and $135.8 million for acquisitions.
- Peloton issued $1.0 billion of 0% convertible senior notes due February 2026, receiving net proceeds of $977.2 million. The notes had a net carrying value of $821.5 million at March 31, 2021 and an initial conversion price of approximately $239.23 per share.
- Peloton paid $81.3 million for capped call transactions intended to reduce potential dilution from the convertible notes. The transactions cover approximately 6.9 million shares, subject to adjustments, with an initial cap price of approximately $362.48 per share.
- The secured revolving credit facility was increased from $250.0 million to $285.0 million. No borrowings were outstanding, although $4.8 million of standby letters of credit were issued. Peloton was in compliance with the facility’s covenants.
- Management stated that existing cash, marketable securities, operating cash flow, and available borrowing capacity should fund working capital and capital expenditures for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 141% for the quarter, driven by significantly higher product deliveries and a 135% increase in Connected Fitness Subscriptions.
- The company moved from a quarterly operating loss of $58.4 million to a loss of $13.7 million, while nine-month operating results moved from a $170.8 million loss to $113.9 million of operating income.
- Quarterly net loss narrowed to $8.6 million from $55.6 million; nine-month results improved to $124.2 million of net income from a $160.7 million net loss.
- Connected Fitness Product margins contracted materially because Peloton prioritized expedited shipping and lowered Bike pricing, while subscription margins expanded through scale.
- Operating expenses increased substantially in absolute dollars, including general and administrative expense up 42.3% for the quarter and research and development expense up 210.4%, reflecting public-company costs, Member support, headcount growth, and product and software development.
- Peloton acquired Aiqudo for approximately $57.7 million and completed several asset acquisitions for approximately $78.1 million during the nine months. Aiqudo was acquired to strengthen product research and development capabilities.
- On April 1, 2021, after the reporting date, Peloton completed its $431.1 million cash acquisition of Precor to expand manufacturing capacity, product development, and commercial-market opportunities.
Guidance, Outlook, Commentary, and Risks
- Management highlighted improved order-to-delivery times for the original Bike, continued strong Member engagement, new content and software features, and planned expansion into Australia.
- Peloton expected to begin limited manufacturing of Peloton products at Precor’s North Carolina facility by the end of calendar 2021, with further production ramp-up targeted for 2022.
- Management expected long-term Adjusted EBITDA margin expansion as the business scales, but noted that future results depend on demand, supply-chain execution, marketing investment, international expansion, product launches, acquisitions, and COVID-19 developments.
- After quarter-end, Peloton recalled its Tread+ and Tread products in cooperation with the U.S. Consumer Product Safety Commission and halted sales. The company estimated an approximately $50 million reduction to fourth-quarter fiscal 2021 Connected Fitness Products revenue from anticipated returns.
- Potential recall-related costs include increased return reserves, Tread+ inventory write-downs, logistics and relocation costs, subscription waivers, hardware development, and legal and advisory fees. Actual costs could exceed current estimates.
- The company faces a CPSC investigation, class action litigation, private personal injury claims concerning Tread+, and a securities class action alleging misleading statements. Peloton stated that loss probabilities and damages were not reasonably estimable and therefore recorded no reserves for these proceedings.
- Key operating risks include product safety and recall exposure, supply-chain concentration and component shortages, expedited freight and inflationary pressures, reliance on music licenses, competition, post-pandemic demand normalization, month-to-month subscription cancellations, cybersecurity and privacy incidents, foreign-exchange exposure, and integration of Precor.
- Peloton maintained a $13.3 million reserve for content costs related to past music use as of March 31, 2021. Warranty reserves were $51.1 million, compared with $19.9 million a year earlier.
Important Facts for Investors to Verify
- Whether the Tread and Tread+ recalls produce costs, returns, inventory write-downs, or revenue reductions materially above the disclosed $50 million estimated revenue impact.
- Whether Connected Fitness Product gross margins recover after expedited freight, Bike price reductions, raw-material inflation, and recall-related costs.
- Whether post-COVID demand, subscription growth, churn, workout engagement, and customer acquisition economics remain durable as consumers return to gyms and other activities.
- Progress and financial results from integrating Precor, including manufacturing ramp-up, commercial-market expansion, and any impairment or unexpected liabilities.
- Liquidity after the Precor acquisition, recall-related expenditures, capital expenditures, inventory investment, and potential cash settlement obligations under the convertible notes.
- Developments in the CPSC investigation, product-liability claims, class actions, securities litigation, music licensing obligations, and related insurance coverage.
- The effect of stock-based compensation, convertible-note accounting, potential dilution, and the company’s future transition to the accounting requirements of ASU 2020-06.