Peloton Interactive, Inc. — Fiscal 2022 Second-Quarter 10-Q
Reporting period: Three and six months ended December 31, 2021; filed February 8, 2022. Peloton operates an interactive fitness platform combining connected exercise equipment with recurring digital subscriptions. The company reported more than 6.6 million Members as of December 31, 2021.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Total revenue | $1,133.9 million | $1,064.8 million | $1,939.1 million | $1,822.7 million |
| Connected Fitness Products revenue | $796.4 million | $870.1 million | $1,297.4 million | $1,471.5 million |
| Subscription revenue | $337.5 million | $194.7 million | $641.7 million | $351.2 million |
| Gross profit | $280.2 million | $424.8 million | $543.0 million | $753.5 million |
| Gross margin | 24.7% | 39.9% | 28.0% | 41.4% |
| Operating loss | $(425.7) million | $58.8 million | $(785.4) million | $127.7 million |
| Net income (loss) | $(439.4) million | $63.6 million | $(815.3) million | $132.8 million |
| Adjusted EBITDA | $(266.5) million | $116.9 million | $(500.1) million | $235.8 million |
| Adjusted EBITDA margin | (23.5%) | 11.0% | (25.8%) | 12.9% |
Connected Fitness Products gross margin fell to 6.4% in the quarter from 35.3%, primarily reflecting the Bike price reduction, fixed logistics cost deleveraging, higher material and component costs, and Tread and Tread+ recall costs. Subscription gross margin improved to 67.9% from 60.3%.
Operating expenses increased substantially, including sales and marketing of $349.6 million, general and administrative expense of $248.7 million, research and development expense of $100.0 million, and impairment expense of $7.7 million. Stock-based compensation was $71.9 million for the quarter and $124.8 million for the six-month period.
Cash flow and balance sheet: Cash used in operating activities was $1,007.6 million for the six months, driven largely by the net loss and a $601.5 million increase in inventories. Investing activities provided $299.6 million, including $517.7 million from sales and maturities of marketable securities, offset by $178.4 million of capital expenditures. Financing activities provided $1,287.2 million, principally from the $1.2 billion common-stock offering.
At December 31, 2021, cash and cash equivalents were $1.6 billion and cash, cash equivalents, and restricted cash totaled $1.7 billion. Inventories, net, were $1.5 billion, including $572.3 million of finished goods in transit. Convertible senior notes had a net carrying value of $846.7 million and $1.0 billion principal amount, due in 2026. The company had no borrowings under its $500.0 million secured revolving credit facility and remained in compliance with its covenants.
Material changes versus the prior comparable period
- Total revenue increased 6.5% for the quarter and 6.4% for the six-month period, but product revenue declined 8.5% and 11.8%, respectively.
- Subscription revenue increased 73.4% for the quarter and 82.7% for the six-month period, driven by growth in Connected Fitness Subscriptions.
- Connected Fitness Subscriptions increased to 2.77 million from 1.67 million year over year. Average net monthly churn increased modestly to 0.79% from 0.76%.
- Total workouts increased to 123.2 million from 98.1 million, while average monthly workouts per Connected Fitness Subscription declined to 15.5 from 21.1.
- Gross profit declined 34.0% for the quarter and 27.9% for the six-month period. The company moved from operating and net profitability in the prior-year periods to significant losses.
- Sales and marketing expense increased 97.0% for the quarter, primarily because advertising spending had been reduced during the prior-year pandemic-driven demand period.
- The company completed a public offering of 27.2 million Class A shares at $46.00 per share, generating approximately $1.2 billion of net proceeds.
Guidance, outlook, commentary, risks, and unusual items
Restructuring: On February 1, 2022, the board approved a plan including approximately 2,800 global job reductions, facility closures and consolidations, and greater use of third-party logistics providers. Peloton estimates approximately $190 million of cash charges, including $90 million of severance, $40 million of facility-related costs, and $60 million of capital expenditures. It also expects approximately $80 million of asset impairment charges in the third fiscal quarter of 2022 and at least $800 million of annualized run-rate cost savings, with most savings expected by the end of fiscal 2024.
Capital outlook: Before the restructuring plan, management anticipated $240 million to $280 million of capital expenditures over the next 12 months. The company also planned to reduce fiscal 2022 capital expenditures by approximately $150 million, net of anticipated restructuring expenditures.
Products and strategy: Peloton announced Peloton Guide, a connected strength product priced at $495, with an expected launch around April 9, 2022. The company also launched Boxing and continued to expand content and international operations.
Product recalls and legal matters: Tread and Tread+ recalls reduced product revenue by $7.4 million in the quarter and $18.9 million for the six months. A $26.7 million recall-related return reserve was included in accrued liabilities at year-end. The Tread+ remains recalled, and additional return, logistics, repair, warranty, and legal costs may arise. The company faces CPSC, DOJ, DHS, and SEC investigations, product-related litigation, securities class actions, shareholder derivative actions, and patent litigation. No reserves were established for the disclosed proceedings because probable losses and damages could not be reasonably estimated.
Control environment: Management concluded that disclosure controls were not effective as of December 31, 2021 because of a previously reported material weakness involving inventory count and reporting controls. Remediation is underway, but the weakness had not been fully remediated as of the filing date.
Principal risks: Key risks include continued losses and negative operating cash flow, demand and inventory forecasting, excess inventory and supplier commitments, supply-chain and logistics costs, product safety and recall exposure, competition, music licensing obligations, COVID-19 effects, foreign currency volatility, litigation and regulatory proceedings, cybersecurity, reliance on third parties, execution of the restructuring plan, and the ability to retain Members.
Most important facts for investors to verify
- Whether the restructuring plan delivers at least $800 million of annualized savings and whether the estimated $190 million of cash costs and $80 million of impairments are accurate.
- Inventory demand, write-downs, supplier commitments of approximately $550 million, and the risk of further margin pressure.
- Cash burn, operating cash flow, capital expenditures, and the company’s ability to remain above the $250 million liquidity covenant while funding operations.
- Progress and ultimate costs of the Tread and Tread+ recalls, including regulatory investigations and related litigation.
- Whether Subscription growth and retention offset declining product demand and materially improve consolidated profitability.
- Remediation of the inventory-related material weakness and the effectiveness of related internal controls.
- The outcome and potential financial impact of securities, derivative, product-liability, patent, and other legal proceedings.
- Execution of the CEO transition to Barry McCarthy and the effect of the leadership and workforce changes on strategy and operations.