Peloton Interactive, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2022. The supplied metadata refers to “2021 Q3,” but the filing itself is for fiscal 2022 Q3. Financial statements are unaudited and prepared under U.S. GAAP.
Business context
Peloton operates an interactive fitness platform combining connected fitness equipment with paid digital content subscriptions. As of March 31, 2022, the Company reported more than 6.9 million Members and 2,961,767 Connected Fitness Subscriptions, compared with 2,080,860 a year earlier.
- Connected Fitness Products include Bike, Bike+, Tread, Tread+, Guide, accessories, apparel, delivery and installation services, and Precor commercial products.
- Subscription revenue is generated primarily from monthly Connected Fitness and digital subscriptions.
- The Company’s results reflect post-pandemic demand normalization, excess inventory, elevated logistics costs, product recalls, and a major restructuring plan.
Financial performance and key metrics
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Nine months ended March 31, 2022 | Nine months ended March 31, 2021 |
|---|---|---|---|---|
| Total revenue | $964.3 million | $1,262.3 million | $2,903.4 million | $3,085.0 million |
| Connected Fitness Products revenue | $594.4 million | $1,022.9 million | $1,891.9 million | $2,494.4 million |
| Subscription revenue | $369.9 million | $239.4 million | $1,011.6 million | $590.6 million |
| Gross profit | $184.2 million | $444.9 million | $728.2 million | $1,198.4 million |
| Net income (loss) | $(757.1) million | $(8.6) million | $(1,572.4) million | $124.2 million |
| Adjusted EBITDA | $(194.0) million | $63.2 million | $(694.2) million | $299.1 million |
| Net cash used in operating activities | $(670.1) million | $(151.2) million | $(1,677.8) million | $359.3 million |
| Free cash flow | $(746.7) million | $(204.0) million | $(1,945.5) million | $186.4 million |
- Margins: Third-quarter consolidated gross margin was approximately 19.1%, compared with 35.3% in the prior-year quarter. Connected Fitness Products gross margin was negative 11.4%, versus 28.4%; Subscription gross margin improved to 68.1%, versus 64.6%.
- Subscription economics: Subscription Contribution was $265.2 million, with a 71.7% Contribution Margin, compared with $163.7 million and 68.4% in the prior-year quarter.
- Engagement: Total workouts increased to 164.6 million from 149.5 million, while average monthly workouts per Connected Fitness Subscription declined to 18.8 from 26.0.
- Churn: Average Net Monthly Connected Fitness Churn increased to 0.75% from 0.31%.
- Liquidity: Cash and cash equivalents were $879.3 million at March 31, 2022, compared with $1.1348 billion at June 30, 2021. Restricted cash was $86.9 million. Marketable securities declined from $472.0 million to zero.
- Inventory: Net inventory increased to $1.4100 billion from $937.1 million, including $99.9 million of reserves, primarily for returned products and obsolete accessories.
- Debt and credit: Convertible senior notes had a $1.000 billion principal balance and an $855.3 million net carrying value, due February 2026. Peloton had no borrowings under its $500.0 million secured revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Total revenue declined 23.6% in the quarter and 5.9% for the nine-month period. Connected Fitness Products revenue fell 41.9% and 24.2%, respectively, primarily because of fewer Bike and Tread+ deliveries, demand normalization, recalls, and lower product volumes.
- Subscription revenue increased 54.5% in the quarter and 71.3% for the nine-month period because of subscription-base growth.
- Connected Fitness Products gross profit deteriorated to a $67.9 million loss in the quarter from $290.4 million of profit. Drivers included price reductions, excess and obsolete inventory, higher logistics, port and storage costs, and recall-related charges.
- Operating expenses increased materially, including sales and marketing expense of $227.7 million, general and administrative expense of $242.3 million, and research and development expense of $77.1 million.
- The Company recorded $181.9 million of goodwill impairment, $32.5 million of long-lived-asset impairment and disposal losses, and $158.5 million of restructuring expense in the quarter.
- Operating cash flow shifted from $359.3 million provided in the prior-year nine-month period to $1.6778 billion used, driven principally by the net loss, a $473.3 million increase in inventory, and a $260.4 million decrease in accounts payable and accrued expenses.
- Peloton raised approximately $1.2188 billion net through a November 2021 offering of 27.2 million Class A shares, increasing the weighted-average share count and diluting existing holders.
Guidance, outlook, commentary, risks, and unusual items
- Restructuring: The February 2022 plan includes headcount reductions, facility closures, completion and sale of the Peloton Output Park shell facility, distribution consolidation, and greater use of third-party logistics providers. Substantial implementation is expected by the end of fiscal 2024. Total related charges through March 31, 2022 were $186.0 million, and the Company cautioned that expected savings may not be realized and additional charges may occur.
- Liquidity outlook: Management expected approximately $140 million to $160 million of capital expenditures over the following 12 months and believed existing cash, operating cash flows, revolver availability, and expected term-loan financing would fund needs for at least 12 months. This assessment depends on demand, inventory reductions, recalls, restructuring, capital spending, and access to financing.
- Subsequent financing: On May 9, 2022, Peloton entered into a binding commitment letter for a $750.0 million senior secured term loan facility with a five-year maturity and a springing maturity ahead of the convertible notes. Final terms were not provided in the filing.
- Pricing and products: Peloton announced lower Connected Fitness Product pricing and higher subscription pricing, including an expected increase of the standard All-Access price to $44 per month effective June 1, 2022. Peloton Guide launched in April 2022, and the Company was experimenting with combined product-and-subscription pricing in select markets.
- Product recalls: Tread and Tread+ recalls resulted in $36.3 million of revenue reductions for the nine months and a $36.7 million reserve at March 31, 2022. Additional recall costs could include returns, logistics, repairs, product development, subscription waivers, and legal fees.
- Supplier and inventory exposure: Contractual obligations to suppliers and contract manufacturers were estimated at $120 million to $280 million. Peloton was also negotiating potentially additional inventory purchases of $180 million to $470 million; these discussions were ongoing and the range could change.
- Legal and regulatory matters: The Company faces CPSC, DOJ, DHS, and SEC investigations and litigation related to Tread+ safety, securities class actions, shareholder derivative actions, and patent disputes with DISH and iFit. No reserves were recorded for these matters because potential losses were not probable and reasonably estimable.
- Controls: Management concluded that disclosure controls were not effective because of a previously reported material weakness involving inventory counting, reporting, and valuation controls. Remediation was underway, but the weakness had not been remediated as of March 31, 2022.
- Unusual items: Third-quarter results included significant restructuring, goodwill impairment, asset impairment, recall, litigation, and stock-based compensation charges. Stock-based compensation expense was $117.1 million for the quarter and $241.9 million for the nine-month period.
Important facts for investors to verify
- Whether demand and product deliveries stabilize sufficiently to reduce excess inventory and restore positive Connected Fitness Product gross margins.
- The timing, final terms, covenants, interest costs, and funding of the proposed $750.0 million term loan.
- Whether Peloton can achieve the restructuring savings without additional impairments, cash charges, or operational disruption.
- The ultimate cost and regulatory outcome of the Tread and Tread+ recalls and related investigations and litigation.
- The collectability and valuation of $1.4100 billion of inventory, including reserves and potential supplier inventory commitments.
- The Company’s ability to reduce cash burn and maintain compliance with the $250.0 million minimum liquidity covenant and $3.0 billion minimum four-quarter revenue covenant.
- The effect of the equity offering, stock-based compensation, outstanding options, and convertible notes on future dilution.
- Whether the inventory-related material weakness is remediated through effective controls and formal testing.