Business Context and Reporting Period
Peloton Interactive, Inc. is an interactive fitness platform offering Connected Fitness Products, including Bike and Tread, and recurring Connected Fitness and Digital subscriptions. This Form 10-Q covers the three and nine months ended March 31, 2020, compared with the same periods in 2019; the requested “2019 Q3” label does not match the filing period. The company reported more than 2.6 million Members and 886,100 Connected Fitness Subscribers at March 31, 2020.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $524.6 million, up 65.6% | $1,218.8 million, up 76.2% |
| Connected Fitness Products revenue | $420.2 million, up 60.6% | $958.9 million, up 71.0% |
| Subscription revenue | $98.2 million, up 92.3% | $242.5 million, up 101.9% |
| Gross profit | $245.8 million | $548.0 million |
| Gross margin | 46.9%, versus 38.1% | 45.0%, versus 41.0% |
| Operating loss | $58.4 million | $170.8 million |
| Net loss | $55.6 million, or $0.20 per share | $160.7 million, or $0.80 per share |
| Adjusted EBITDA | $23.5 million; 4.5% margin | $(25.9) million; (2.1)% margin |
| Cash flow from operating activities | Not separately provided for the quarter | $49.1 million, versus $(75.6) million |
Subscription gross margin was 57.8% in the quarter and 57.4% for the nine months, compared with 25.6% and 37.9%, respectively, in the prior-year periods. Subscription contribution margin was 63.6% for the quarter and 63.7% for the nine months.
At March 31, 2020, cash and cash equivalents were $509.0 million and marketable securities were $923.7 million. Total assets were $2.57 billion, including $194.2 million of net inventory. The company had no borrowings under its $250.0 million secured revolving credit facility, $4.2 million of standby letters of credit, and was in compliance with its liquidity and revenue covenants. Operating lease liabilities totaled $522.0 million on a discounted basis.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher Connected Fitness Product deliveries and rapid subscriber expansion. Connected Fitness Subscribers increased 94% to 886,100, while average net monthly churn improved to 0.46% from 0.68%.
- Engagement increased substantially: total workouts rose to 44.2 million from 18.0 million, and average monthly workouts per Connected Fitness Subscriber increased to 17.7 from 13.9.
- Connected Fitness Product gross margin improved to 45.3% from 41.8% in the quarter, primarily from a mix shift toward Bike deliveries and product-cost improvements, partly offset by COVID-19-related hazard pay.
- Subscription margin expansion benefited from subscriber scale and $11.3 million less content-cost expense for past music use in the quarter. The company recorded $1.0 million of such costs in the nine-month period versus $16.4 million in the prior year.
- Sales and marketing expense increased 53.1% in the quarter, primarily from advertising, personnel, payment processing and showroom costs. General and administrative expense increased 169.8%, largely because of litigation settlements and related legal expenses.
- Litigation and settlement expense was $49.3 million in the quarter and $59.0 million for the nine months, compared with $5.8 million and $9.7 million, respectively. The company settled the music-publishing litigation and Flywheel patent matters during the quarter.
- The company raised approximately $1.2 billion net from its September 2019 IPO and concurrent private placement. Preferred stock automatically converted into common stock, and stockholders’ equity increased to $1.52 billion from a $538.6 million deficit at June 30, 2019.
- The October 2019 acquisition of Tonic Fitness Technology cost approximately $45.0 million net of cash acquired and added $32.3 million of preliminary goodwill, with contingent consideration valued at $6.8 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear formal revenue or earnings forecast. Management expects long-term growth, margin expansion and operating leverage, but cautions that sales growth may moderate and that future profitability is uncertain.
- COVID-19: Demand increased materially following stay-at-home orders, but retail showrooms were closed, delivery windows lengthened, Tread deliveries were paused for the remainder of fiscal 2020, and in-home installation, returns and servicing were restricted. The company incurred additional hazard-pay, cleaning, expedited-shipping and other costs.
- Management paused studio production on April 7, 2020 and resumed live programming from instructors’ homes on April 22. The company offered a 90-day Digital trial, with more than one million sign-ups reported between March 16 and April 30, 2020; this post-quarter activity is not reflected in the quarter’s reported revenue.
- Management stated that COVID-19’s full effect on revenue, profitability and financial position could not be predicted. Key exposures include supply-chain constraints, inventory shortages, delivery delays, weaker consumer spending, higher returns, production interruptions and changing subscriber retention.
- Music licensing remains a material risk. The company had an $11.6 million reserve for content costs and normal royalties at March 31, 2020, and future license negotiations could increase costs.
- The company has incurred losses since inception and expects continued losses as it invests in marketing, product development, infrastructure, international expansion and public-company compliance.
- The company adopted lease accounting under ASC 842 on July 1, 2019, recognizing substantial right-of-use assets and lease liabilities. This adoption did not materially affect reported operations.
- Management concluded that disclosure controls were ineffective because previously identified material weaknesses in information-technology controls, segregation of duties, account reconciliations and journal-entry review had not been remediated. Remediation efforts were ongoing.
- The dual-class structure gives Class B shares 20 votes per share, concentrating voting control with existing holders. The company does not expect to pay dividends.
Most Important Facts for Investors to Verify
- Whether COVID-19-driven demand persists after showroom reopening and normalization of work, school and fitness patterns.
- Order-to-delivery times, inventory availability, Tread delivery status, product returns and the resulting effect on revenue recognition and gross margins.
- Subscriber additions, churn, engagement and renewal behavior after promotional trials and any economic deterioration.
- The sustainability of subscription margin expansion after unusually favorable comparisons from lower past-use content costs.
- Cash burn, capital expenditures, inventory investment, marketable-security liquidity and compliance with the revolving-credit facility’s covenants.
- Future music-licensing obligations, litigation-related payments and any additional legal or regulatory claims.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- The impact of stock-based compensation, including $294.8 million of unrecognized option expense and significant potential dilution from outstanding awards.