Peloton (PTON) reports an increase in Q4 2022 loss

Brody Longo trains on his Peloton exercise bike on April 16, 2021 in Brick, New Jersey.

Michael Loccisano | beautiful pictures

Peloton on Thursday reported widening losses and slumping revenue for its fiscal fourth quarter as the connected fitness equipment maker tries to win back investors with cost-cutting and changes strategy.

The company’s stock fell more than 20% – a day after the stock rose more than 20% on news of its partnership with Amazon.

It marked Peloton’s sixth straight quarter of reporting a loss. The company said it aims to achieve quarterly breakeven cash flow in the second half of fiscal year 2023.

However, Peloton CEO Barry McCarthy said he expects the connected fitness market to remain challenging for the foreseeable future, as consumer demand for home exercise machines wanes. . Covid pandemic high level.

Since McCarthy Taking over as CEO from Peloton founder John Foley in February, the company has pursued sweeping changes that have yet to yield complete results. Peloton has increased the membership fee, inflated prices on some deviceslay off thousands of workers, test a rental option, exited last mile delivery and transfer all production to a third party. On Wednesday, Peloton also start selling part of its products on Amazon in the United States, the first such agreement with another retailer.

“Those who oppose will look at [fourth-quarter] McCarthy wrote in a letter to Peloton shareholders.

“But what I see is significant progress driving our comeback and Peloton’s long-term resilience,” he said. “We still have work to do.”

Peloton did not provide an outlook for its upcoming 2023 financial year. For the first quarter ended September 30, it said it saw subscriptions unchanged and revenue ranging between $625 million and $650 million, lower than analysts’ estimates. accumulate. This takes into account weakness in short-term demand and seasonal fluctuations to business activity, Peloton said.

There’s a favorable opportunity for the company: This is Peloton’s first reported quarter, where higher-margin subscriptions make up the bulk of total revenue.

During the call with analysts, McCarthy also introduced some of the things Peloton is still experimenting with to boost sales. Those include selling pre-owned bikes, renting bikes for a monthly fee, and adding new levels to Peloton’s digital app, including a premium tier where people will pay more for expanded content and better features.

“It is not enough just to cut costs, but also to increase revenue,” he said.

Using the movie rental wars as an example, McCarthy says Netflix was able to get ahead of Blockbuster, a movie rental business that filed for bankruptcy in 2010, because it offers customers personalized content. and lots of options.

Mounting loss

Peloton’s net loss increased for the three-month period ending June 30 to $1.24 billion, or $3.68 per share, from a loss of $313.2 million, or $1, 05 USD/share, one year earlier.

McCarthy said the loss stemmed from Peloton’s efforts to avoid excess inventory, cut fixed costs and address other supply chain issues. Earlier this year, the company embarked on $800 million restructuring plan. Peloton ended the fourth quarter with inventory of $1.1 billion, compared with $937.1 million a year earlier.

Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That figure falls short of the $718.2 million analysts were looking for, according to Refinitiv estimates.

In that number, connected fitness revenue includes contributions from Peloton’s Precor Enterprise down 55% to $295.6 million.

Peloton’s connected fitness gross margin was another bleak, at negative 98.1% from a positive 11.7% a year earlier. Peloton said it experienced higher logistics costs per delivery, increased port and storage costs, plus fees associated with its Tread+ treadmill recalled.

Peloton recorded $383.1 million in subscription revenue, up 36% year over year and accounting for 56.4% of the company’s total revenue. Subscription gross margin increased to 67.9% from 63.3%.

McCarthy, who previously worked at Netflix and Spotify, has made it clear that he is more interested in pursuing growth on the subscription side of Peloton’s business, rather than focusing on such hardware. He believes Peloton’s digital adoption will be core to the company’s future success.

Peloton burned through $412 million in cash in the fourth quarter, after it averaged negative $650 million in cash flow in each of the preceding quarters. It ended in June with $1.25 billion in cash reserves and a $500 million revolving line of credit.

BMO Capital Markets analyst Simeon Siegel applauded McCarthy for making some “very constructive decisions” to stem the cash outflow in recent months. However, he said, Peloton may be facing a bigger problem of brand saturation.

The number of members decreased

Peloton ended its latest quarter with 2.97 million connected fitness subscriptions, on par with the previous quarter and up 27% from a year ago. Connected fitness subscribers are those who own Peloton products, such as its Original Bike, and also pay a monthly fee to join live and on-demand workout classes.

However, its total membership fell by about 143,000 people from the previous quarter to 6.9 million. McCarthy, following Foley’s original vision, has said that the company hopes to one day amass 100 million members.

Peloton’s average monthly net disruption for connected fitness users increased to 1.41% from 0.73% a year ago.

The company said this was ahead of its internal expectations in part because a consumer protection ruling in Canada forced all customers in the country to approve. Subscription price hike takes effect in June, and about 85% of them have done so to date. Peloton said it had anticipated that some people would drop their memberships after the price increase.

But investors may be wary of this leap. A lower churn rate would be better news for Peloton, as it means people are sticking around and continuing to pay for their membership.

McCarthy said in the letter to shareholders that the fourth quarter must prove to be a “high water mark” for write-offs and restructuring fees related to inventory and supply chain challenges. It should also mark the beginning of Peloton’s back story, he said.

Peloton stock was down about 60% by market close on Wednesday. Its market capitalization has dipped below $5 billion, after hitting a high of nearly $50 billion in early 2021.

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