Peloton Interactive, Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: The filing is an annual report for the fiscal year ended June 30, 2022, not a fiscal 2021 fourth-quarter filing. The filing separately reports the quarter ended June 30, 2022.
Business context
Peloton operates an interactive fitness platform combining Connected Fitness Products, subscription services, proprietary software, and instructor-led content. Products include Bike, Bike+, Tread, Tread+, and Guide. Peloton reported more than 6.9 million Members and 2,965,677 ending Connected Fitness Subscriptions as of June 30, 2022. Subscription revenue represented 38.9% of fiscal 2022 revenue, compared with 21.7% in fiscal 2021.
Financial performance and metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $3,582.1 million | $4,021.8 million | (10.9%) |
| Connected Fitness Products revenue | $2,187.5 million | $3,149.6 million | (30.5%) |
| Subscription revenue | $1,394.7 million | $872.2 million | 59.9% |
| Gross profit | $698.4 million | $1,454.4 million | (52.0%) |
| Connected Fitness Products gross margin | (11.3%) | 29.0% | Down 40.3 points |
| Subscription gross margin | 67.7% | 62.1% | Up 5.6 points |
| Operating loss | $2,734.0 million | $187.8 million | Material deterioration |
| Net loss | $2,827.7 million | $189.0 million | Material deterioration |
| Adjusted EBITDA | $(982.7) million | $253.7 million | Down $1,236.4 million |
| Operating cash flow | $(2,020.0) million | $(239.7) million | Greater use of cash |
| Free cash flow | $(2,357.4) million | $(491.9) million | Greater use of cash |
Average Net Monthly Connected Fitness Churn increased to 0.96% from 0.61%. Total workouts increased to 540.0 million from 459.7 million, while average monthly workouts per Connected Fitness Subscription declined to 16.4 from 22.0.
Fiscal 2022 quarterly revenue was $805.2 million in the first quarter, $1,133.9 million in the second quarter, $964.3 million in the third quarter, and $678.7 million in the fourth quarter. Fourth-quarter gross profit was negative $29.8 million and net loss was $1,255.3 million.
Cash, liquidity, debt, and balance sheet
- Cash and cash equivalents were $1,253.9 million at June 30, 2022; restricted cash was $3.8 million.
- Inventories, net, increased to $1,104.5 million from $937.1 million. Inventory reserves increased to $282.2 million from $60.1 million.
- Total liabilities were $3,435.6 million and stockholders’ equity was $592.9 million.
- Peloton had $1.0 billion principal amount of 0% convertible senior notes due February 2026, carried at $864.0 million net of discount and issuance costs.
- Peloton had a $750.0 million secured term loan, carried at $690.0 million net on the balance sheet, and had not drawn its $500.0 million revolving facility. The revolver had $77.6 million of outstanding letters of credit, including $69.9 million secured against the facility.
- The credit agreement requires at least $250.0 million of liquidity and minimum total four-quarter revenue of $3.0 billion, subject to specified replacement covenants. Peloton was in compliance at June 30, 2022.
- Management stated that existing cash and expected operating cash flows were sufficient for working capital and capital expenditures for at least the next 12 months. Planned capital expenditures for the next 12 months were approximately $90 million to $100 million.
Material changes versus the prior comparable period
- Product revenue fell sharply as pandemic-related demand normalized, Bike deliveries declined, Tread+ remained recalled, and near-term demand proved difficult to forecast.
- Subscription revenue increased 59.9%, supported by subscription-base growth and relatively strong retention, but churn worsened and engagement per subscription declined.
- Connected Fitness Products gross margin turned negative, primarily because of excess and obsolete inventory reserves, higher logistics and storage costs, fixed-cost deleveraging, price reductions, and recall costs.
- Operating expenses increased substantially, including sales and marketing expense of $1,018.9 million, general and administrative expense of $963.4 million, and research and development expense of $359.5 million.
- Peloton recorded $181.9 million of goodwill impairment and $390.5 million of impairment expense. Restructuring-related charges totaled $611.3 million, including $373.8 million of asset write-downs and write-offs, $109.1 million of severance and personnel costs, $56.5 million of stock-based compensation, and $56.4 million of inventory markdowns.
- Peloton recorded $337.6 million of supplier settlements to terminate certain future inventory purchase commitments.
- Operating cash flow deteriorated primarily because of the net loss, a $398.6 million increase in inventory, and a $168.6 million decrease in accounts payable and accrued expenses.
Guidance, outlook, commentary, and unusual items
- Management said its long-term outlook for Connected Fitness remained positive but acknowledged that pandemic-era demand and supply volatility caused the company to become overbuilt for near-term conditions.
- The restructuring plan is expected to be substantially implemented by the end of fiscal 2024. Subsequent to year-end, Peloton announced the exit from owned manufacturing, reductions in North American delivery and Member Support workforces, closure or consolidation of distribution facilities, and a reduction in North American showrooms.
- Management estimated additional restructuring cash charges of approximately $95.0 million in fiscal 2023 and beyond and approximately $75.0 million of additional asset impairment charges in fiscal 2023.
- Peloton invested approximately $86.6 million in the Ohio facility known as Peloton Output Park and intended to sell the facility rather than use it for manufacturing.
- The Tread and Tread+ recalls reduced Connected Fitness Products revenue by approximately $139.9 million cumulatively through June 30, 2022. The recall-related return reserve was $39.9 million at year-end. Tread+ sales had not resumed, and the company could not forecast a resumption date.
- The company disclosed CPSC, Department of Justice, Department of Homeland Security, and SEC investigations, as well as securities, derivative, personal injury, and intellectual property litigation. Peloton stated that the ultimate outcomes and potential losses generally could not be estimated clearly.
- Ernst & Young issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses related to inventory controls and controls over goodwill, long-lived asset impairment, and restructuring assessments.
- On July 1, 2022, Peloton repriced certain employee stock options for eligible continuing employees to an exercise price of $9.13 per share.
Most important facts for investors to verify
- Whether the restructuring actions produce the targeted cost savings without causing additional impairments, disruption, or customer-service deterioration.
- Whether product demand, inventory levels, product margins, churn, and engagement stabilize after the post-pandemic normalization.
- Available liquidity relative to continuing negative operating cash flow, debt service, minimum-liquidity covenants, and the 2025 springing maturity provisions.
- The ultimate cost and timing of the Tread/Tread+ recalls, including potential CPSC penalties, litigation outcomes, additional returns, and remediation costs.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- The ability to reduce reliance on owned manufacturing, warehouses, and delivery operations while maintaining product quality, delivery performance, and Member support.
- Whether excess inventory reserves, supplier commitments, music royalty guarantees, lease obligations, and other contractual commitments require additional cash payments or charges.