Peloton Interactive, Inc. — Fiscal 2021 Second-Quarter 10-Q Summary
Business context and reporting period
Peloton operates an interactive fitness platform combining connected fitness products, including Bike, Bike+, Tread and Tread+, with recurring subscription services and instructor-led digital content. The filing covers the three and six months ended December 31, 2020, compared with the corresponding periods in 2019. Peloton reported more than 4.4 million Members and 1,667,223 Connected Fitness Subscriptions at quarter-end.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Total revenue | $1,064.8 million | $466.3 million | $1,822.7 million | $694.3 million |
| Connected Fitness Products revenue | $870.1 million | $389.1 million | $1,471.5 million | $550.0 million |
| Subscription revenue | $194.7 million | $77.1 million | $351.2 million | $144.3 million |
| Gross profit | $424.8 million | $197.1 million | $753.5 million | $302.2 million |
| Income from operations | $58.8 million | $(61.5) million | $127.7 million | $(112.4) million |
| Net income (loss) | $63.6 million | $(55.4) million | $132.8 million | $(105.2) million |
| Adjusted EBITDA | $116.9 million | $(28.4) million | $235.8 million | $(49.4) million |
- Total revenue increased 128.4% year over year in the quarter and 162.5% for the six-month period.
- Consolidated gross margin was approximately 39.9% in the quarter and 41.3% for the six months. Connected Fitness Products gross margin declined to 35.3% in the quarter from 39.2%, primarily due to a Bike price reduction and expedited shipping costs. Subscription gross margin improved to 60.3% from 58.0%.
- Adjusted EBITDA margin was 11.0% in the quarter and 12.9% for the six months, compared with negative margins in the prior-year periods. Adjusted EBITDA excludes, among other items, stock-based compensation, depreciation and amortization, litigation and settlement expenses, transaction costs and certain COVID-19 costs.
- Operating cash flow was $510.5 million for the six months, versus $33.2 million in the prior-year period. The increase benefited from net income, higher accounts payable and accrued expenses, and increased customer deposits and deferred revenue, partly offset by a $273.0 million increase in inventory.
- Capital expenditures were $119.4 million for the six months. Investing cash outflows were $346.7 million, including marketable-securities purchases and $78.1 million for asset acquisitions.
- At December 31, 2020, cash and cash equivalents were $1,248.4 million and marketable securities were $862.1 million. Total current assets were $2,860.0 million versus current liabilities of $1,384.4 million.
- Peloton had no borrowings under its $250.0 million secured revolving credit facility, which matures in June 2024. It had approximately $4.8 million of standby letters of credit and was compliant with facility covenants.
Material changes versus the prior comparable period
- Connected Fitness Subscriptions increased 134% to 1.67 million, while Average Net Monthly Connected Fitness Churn was 0.76% versus 0.74%.
- Total workouts increased to 98.1 million from 24.3 million, and average monthly workouts per Connected Fitness Subscription rose to 21.1 from 12.6.
- Subscription revenue grew faster than product revenue, increasing 152.4% in the quarter; subscriptions represented 18.3% of quarterly revenue versus 16.5% previously.
- Sales and marketing expense increased 10.6% in the quarter, but declined as a percentage of revenue to 16.7% from 34.4%, partly because advertising spending was temporarily reduced to address supply constraints.
- General and administrative expense increased 82.0% and research and development expense increased 129.9%, reflecting hiring, public-company costs, professional fees, product development and software investment.
- Inventories increased to $522.8 million from $244.5 million at June 30, 2020, primarily as Peloton expanded supply to meet demand.
- Customer deposits and deferred revenue increased to $611.0 million from $363.6 million, including $576.3 million of customer deposits at December 31, 2020, reflecting elevated sales and longer delivery windows.
- Stock-based compensation expense increased to $37.5 million in the quarter and $67.1 million for the six months. Unrecognized stock-based compensation totaled $385.3 million at December 31, 2020.
Guidance, outlook, commentary and unusual items
- Management did not provide a specific numerical revenue or earnings forecast in the supplied filing. It stated that Adjusted EBITDA margin is expected to increase over the long term as the business scales and operating expenses gain leverage.
- Demand remained strong through the holiday season, but Peloton remained supply constrained. Port delays, COVID-19-related closures and logistics limitations produced longer-than-acceptable delivery times and caused deliveries to carry into the fiscal third quarter.
- Management expects to make significant near-term investments to improve order-to-delivery windows, which will dampen near-term profitability. Production was ramping at the Shin Ji factory in Taiwan.
- On December 21, 2020, Peloton agreed to acquire Precor for $420.0 million in cash, subject to customary adjustments and regulatory and other closing conditions. Closing was expected in early calendar 2021. The transaction is intended to add U.S. manufacturing capacity, research and development resources and commercial-market capabilities.
- During the quarter, Peloton completed three asset acquisitions involving software, developed technology and an assembled workforce for approximately $78.1 million in net cash consideration.
- On January 31, 2021, Peloton agreed to acquire additional developed technology, intellectual property and related assets for approximately $57.5 million; the accounting treatment and final allocation had not yet been determined.
- Music licensing remains a material cost and contingency. Peloton recorded $5.6 million of content costs for past use and estimated recurring royalty expense during the six months, with a related reserve of $17.6 million at December 31, 2020.
- COVID-19 benefited demand but continued to disrupt manufacturing, shipping, delivery, customer support, showroom operations and content production. Other significant risks include competition, dependence on Bike sales, supplier and logistics concentration, inventory forecasting, music rights, cybersecurity, product quality, international expansion and the integration of Precor.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2020, with no material changes in internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Whether elevated COVID-19-driven demand, subscription growth and low churn persist after consumer behavior normalizes.
- Whether manufacturing and logistics investments reduce delivery backlogs without materially eroding product gross margins or cash flow.
- The final closing date, funding, purchase-price adjustments and integration costs associated with the Precor acquisition.
- Inventory conversion, customer-deposit obligations and the sustainability of operating cash flow after delivery delays normalize.
- The effect of Bike pricing, expedited freight, warranty costs, music royalties and content-cost settlements on future margins.
- The recurring economic impact of stock-based compensation, which is excluded from Adjusted EBITDA but remains a significant expense.
- Whether litigation, intellectual-property matters, music licensing claims or other contingencies could require additional reserves or cash payments.
- Whether Peloton maintains compliance with the revolving-credit facility’s liquidity and revenue covenants while funding acquisitions and expansion.