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December 19, 2021
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PTON: Where did they go wrong?
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Peloton: Where did they go wrong?
As someone who has gone through all of Peloton's earnings calls and transcripts I wanted to highlight the change in tone management has used over the last five quarters. From going through an explosion in growth to recently doing a hiring freeze and delaying product development for 2022, I thought this might be a great learning experience about the power of listening to the earnings call OR reading the transcript.
First, let's check out Peloton's "Swaggy Sentiment" behind the earnings call transcripts and see how sentiment has changed from the start of the company's covid tailwinds until now.
Now to go through some of the calls and the interesting tidbits management had to say. Remember, earnings calls are usually 45-60 minutes in length and thus I did my best to handpick highlights from the transcript.
Analyst questions and answers will be preceded with **
Participants in the call include:
John Foley (CEO)
William Lynch (President)
Jill Woodworth (CFO)
Let's start from 5 quarters ago when management was extremely bullish on the demand they've seen for their products and we'll finish with their most recent earnings call from last month.
Peloton 2021 - Q1 (Nov 5, 2020)
High organic sales growth has been steady since March and the lowering of our original bike price and the launch of Bike+ has steepened that demand curve. We did our best to estimate the demand for Bike+, but while we are incredibly excited about the positive reaction to Bike+, sales outpaced our internal estimates quickly causing wait times for Bike+ to balloon.
**Doug Anmuth (Analyst Question):
First was just hoping you could provide a little bit more detail on the supply bottlenecks and just try to maybe break out or prioritize for us a little bit across port congestion versus manufacturing versus kind of shipping and more last mile type of delivery and then just second just given those supply constraints and the elevated wait times can you just talk about your marketing plans and how that impacts them around the holidays?
**Williand Lynch (Respons to Question):
And then as both Jill and John mentioned Bike+ (demand) is elevated and that's really and will stay elevated as we get through Q2 and into Q3 and the reason for that is two things; one as John mentioned that product's exceeding our expectation it's a new product with a new supply chain. And so ramping that supply chain up and reacting to that demand is a little trickier than a more stable more mature product like bike which we've been able to react to and so Bike+ the port closure, the port delays really hurt Bike+. We had a lot of Bike+ coming in against that demand and that delay has hurt specifically that product.
**Jill Woodworth (Respons to Question):
So I would say demand has never been stronger and we're very excited, but clearly our Q2 outlook and our revised outlook for the full fiscal year takes into consideration the trends that we're seeing.
Q2 is going to be an anomaly. It is pretty unusual for us to use air shipments for our products and so this is an anomaly not something that we necessarily expect to move forward and so it obviously is multiple, it's obviously a multiplier of what we would typically cost to ship our bikes in from Taiwan into the U.S. So it is an anomaly. We don't expect it necessarily moving forward, but we thought it was 100% the right thing to do to do whatever we could to push these delivery dates in as soon as possible. So given the fact that it's kind of one time and shipping costs are typically a fairly small percentage of the overall cost to us so this obviously is moving the needle for us here but again it was a cost we thought that was very warranted for what we're dealing with right now.
So to your point we are going to, we are 100% focused on scaling the supply chain to create new products, new bikes both the Bike+ and the original bike and then both treads tread and Tread+ is 100% our focus.
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Peloton 2021 - Q2 (Feb 3, 2021)
Over the last several quarters, we have been very focused on significantly growing our manufacturing capabilities. 15 months ago, we bought Tonic, one of our Taiwanese-based third-party manufacturing partners, which has allowed us to significantly scale our Bike and Bike+ production.
And over a year ago, we broke ground on a new Tonic plant in Shin Ji and we’re pleased to report that this facility is now up and running. With the desire to have greater control over our own supply chain destiny, we were proud to announce our biggest acquisition to date, Precor, and we’re excited to welcome the Precor team into the Peloton family.
**Doug Anmuth (Analyst Question):
Thanks for taking the questions. One for Jill and one for John. Jill, you mentioned that manufacturing capacity exceeds demand. I just want to clarify, is that strictly because you've ramped capacity or are you seeing any change to demand due to extended order to delivery times? And then John, just on the Precor opportunity, hope you can talk a little bit more about how you're thinking about the commercial space and the opportunity there.
**John Foley (Answer to Question):
We are not seeing a softening of demand. That is absolutely not what's happening here. We are seeing incredibly strong organic demand, even in the face of light marketing, as you know. The successes that we're seeing in getting order delivery down and getting a backlog down are 100% based on incredible upgrades in our manufacturing capacity up over six times - 6x increase in just the last 12 months in our capacity.
**Jill Woodworth (Answer to Question):
We’re clearly using the $100 million to expedite the shipping of products so that we can get product into our warehouses stateside. There’s obviously been numerous reports about the issues that are going on, right. There’s container shortage. There is extended time of container ships sitting out on the ocean. There is a backlog to get those containers unloaded. And so this investment is essentially to circumvent all of those issues, so that we can prioritize getting our major warehouses stocked up for us for our third-party 3PL partners so that we can take down that order to delivery as quickly as we possibly can.
Peloton 2021 - Q3 (May 5, 2021)
...we have baked in some modest impact to bike and bike plus sales, but we think that'll be temporary and we don't think there will be any long lasting impact.
Yes. So I think in the context of everything, right, we obviously have the tread news, we have the economy reopening with -- as finally getting out from under the pandemic, right. And then, you go back to history with Peloton and you look at the seasonality of our sales, right, we typically see more heavy sales, call it 60% to 65% of sales in Q2 and Q3, our qQ2 and Q3, which is September through March, versus the warmer summer months. So there's a few things going on there.
**Youssef Squali (Analyst Question):
I have two quick questions. First, Jill the $50 million in returns -- in refunds that you've mentioned, if I'm doing my math, right, that assumes about maybe 10% or 15% of the installed base for both tread and tread plus. Is that the right way of thinking about it? And is there a risk of seeing maybe more refunds extended into early next year? And then, John on I guess on Precor, just how quickly can you launch new connected devices leveraging Precor just beyond the tread beyond the bike and the bike plus? Thanks.
**Jill Woodworth (Answer to Question):
Great. So of course, as you can imagine, estimating the number of tread and tread pluses that we will get back is a very difficult thing to do. This is our best estimate using all the data that we have available to us at this time. And I think your math is reasonably correct. It represents roughly 10% of tread and tread plusses out there.
Peloton 2021 - Q4 (Aug 25, 2021)
We invested aggressively in supply chain and logistics, allowing us to bring product wait times back to pre-pandemic levels.
Our strategy remains constant. We will continue to invest aggressively behind new hardware products, software experiences, and content offerings for both cardio and strength training, the two pillars of physical fitness. We will continue to prioritize subscription growth over near-term profitability as it's still very early days in the consumer migration to connected fitness in the home.
As we have said we believe the opportunity for our new tread is two to three times the size of the bike category.
As I mentioned a moment ago initial tread and treadplates return rates were higher than our forecast as of the third quarter call.
G&A expense was 24.8% of total revenue versus 14.2% in the prior year. As you know, our business grew significantly during fiscal 2021. We made substantial investments across member support, financial systems, and other functions so that the organization can scale effectively with the growth of the business.
Also, we added Precor to our organization, which was a driver of some of the sequential increase in G&A inclusive of legal and integration costs related to the acquisition of Precor in Q4.
One, our return to normal seasonal patterns for Q2 and Q3 combined, comprised roughly 60% of sales, with Q1 being our lowest sales and delivery volume quarter. As in the years prior to COVID, we expect fiscal 2022 sales trends to be impacted by seasonal weather as well as holiday and New Year's resolutions purchases.
We saw these trends going into fiscal 2022. Two, strong demand for bike and Bike+, with higher unit sales expected than in fiscal 2021. Three, strong acceptance of our lower price tread with our expectation that approximately 50% of treads globally will go to existing connected fitness households and therefore, those sales will not result in an incremental connected fitness subscription. Four, compelling that customer acquisition costs with rapid payback. Five, continued high engagement and healthy retention across all cohorts, including those added during the pandemic, implying expected low churn of our connected fitness subscriptions.
In Q1, we expect revenue of approximately $800 million, representing 6% year-over-year growth and an 87% two-year CAGR. Please note that our Q1 revenue assumption contemplates a very small contribution from the upcoming launch of Tread in the U.S.
The price drop with B1 was absolutely offensive. As we think about the competitive landscape, we think about democratizing access to great fitness, which is, as you know, always been in our playbook.
On an index level, let's say, five years ago, it cost us $1 to make a bike. It costs us $0.40 today, even with the commodity and freight rate increases. So I think given our very lean portfolio and our ability to build very few SKUs with great capacity will give us a tremendous margin power over the next few years.
**Jason Helfstein (Analyst Question):
So is there anything the data that's just the kind of the longer pending Tread launch, meaning just it's been talked about, obviously for a long time and all the issues that that could have weighed on bike sales, meaning you have some consumers who were only buy one device, and they were kind of waiting. And so that kept people potentially on the fence to decide what they wanted. And the second question on the supply chain, we can see the inventory numbers up pretty dramatically quarter-to-quarter on the balance sheet. Outside of the cost headwinds that you talked about for supply chain, are you worried at all about actually getting product to the consumer over the next, basically through the holiday season? Thanks.
**William Lynch (Answer to Question): I -- well, I can take the second question first. This is William. In terms of the guidance that Jill provided, we feel like we built in the investments that John and Jill talked about. We built the infrastructure to support our holiday plans. As Jill noted, we feel like fiscal year 2022 is going to be returned to more seasonality. So a large part of our business is in Q2, Q3. And certainly that's true of deliveries. And so everything in the supply chain from inventory that you're noting, the accumulation of on the balance sheet, to warehousing, and how we've expanded our warehouse footprint, to our delivery infrastructures, people, vans, our last mile facilities, all that we're staging for what will be our biggest holiday ever.
Peloton 2022 - Q1 (Nov 3, 2021)
As you all well know, stay-at-home and work-from-home orders, coupled with commercial gym closures, drove massive awareness gains for Connected Fitness, accelerating an adoption curve that was already well underway. Given the unprecedented circumstances presented by the global pandemic, we said last quarter that modeling the exit from COVID and the massive growth we saw in fiscal 2021 would be a challenging task, and that has certainly proven to be true. With reduced backlogs, our visibility into our future performance has become more limited. From forecasting consumer demand to accurately predicting logistics costs, our teams have never seen a more complex operating environment in which to guide our expected results this year. As noted in our shareholder letter, we are reducing our guidance for fiscal year 2022. We have returned to presenting ranges given the uncertainty.
While we continue to see a nearly 100% two-year growth CAGR in both traffic and unit sales in Q1 and into Q2, we've seen a greater-than-anticipated taper of our website traffic levels over the past two months and a slower-than-expected pickup in retail showroom traffic, both of which are important inputs into our forward-looking demand model.
To maintain a premium end-to-end member experience, we made significant investments over the past year to scale manufacturing, logistics and operations. Overall, we believe we met the challenge, but there's no doubt that in some cases, we overcorrected. That combined with the reduction to our demand picture and higher than expected costs across product, transportation and delivery are causing a near-term compression of our hardware margins.
The original Bike price reduction accelerated sales, allowing us to convert more price-sensitive households. While we believe the wider price gap between Bike and Bike+ has resulted in some trade down impact, we're comfortable with that outcome.
And lastly, headwinds in our commercial or Precore business. Traffic and conversion are the key inputs in our demand forecast. Many of the modeling assumptions that predict e-commerce traffic that we made in August were too optimistic. Our baseline traffic forecast reflected our unchanged view of the growing consumer interest in Connected Fitness, our growing market share in the category, our leading brand awareness and expected increased word-of-mouth. However, it is clear that we underestimated the reopening impact on our company and the overall industry. Importantly, we also expected the price drop to further drive a traffic uplift and increased conversion. While the price drop led to conversion rates that exceeded our forecast, overall traffic has not met our initial expectations.
Lastly, we have reduced expectations for our commercial channel or legacy Precor business given both supply and demand dynamics. While the commercial gym industry has made significant gains as a country reopen, overall visits remained below pre-COVID levels, leading operators across some commercial segments to delay capital investments in new equipment. However, more importantly, sourcing certain component parts is become materially more challenging since we gave our guidance in August. This has led to supply concerns some Precor products, leaving us unable to fulfill some of our commercial demand.
In response to our revised sales and margin outlook for fiscal 2022, we have identified material savings across our operating expenses. So, some of these actions may take a quarter or two to show improvement. Some of these identified areas of savings include making significant adjustments to our hiring plans across the company, optimizing marketing spend and limiting showroom development, identifying areas of efficiency, improvement in member support and streamlining our product development teams, while maintaining a focus on new products and expanding software features.
We're seeing growing momentum behind our all-new lower price Tread and we are optimistic regarding new products in our pipeline, the commercial and corporate wellness opportunities and continued international growth.
I think just cutting to the chase we don't see the need for any additional capital raise based on our current outlook. As we mentioned, we're taking significant steps to adjust our expenses across COGS and OpEx with this revised revenue guidance. And we have a lot of levers to pull.
But I do think going forward, as we think about our growth, right, we're now going to have a more seasonal business again, right? And - so I do think as we think about future growth layered on top of those fixed costs, right, I think we have to get more creative in thinking through how to strategically use 3PLs, right? So - it's not like we're going to just keep building out our warehouse footprint, we're just going to have to think about.
Personally, I do like Peloton's product and I believe they are more than a stationary bike with an iPad strapped on. Having said that, the stock has been under a lot of pressure recently, mainly led by how management has navigated some of their recent challenges. Shares of PTON are trading 75% lower from the peak back in January nearly one year ago.
This is strictly my opinion, but my take after re-reading these earnings transcripts is that the company has over-invested in supply chain infrastructure and over-spent on expedited shipping. During a time when they experienced the biggest tailwinds a company may have ever seen, they were still unable to turn a profit and actually saw margins compress lately due to supply chain issues. Peloton underwent rapid expansions including the Precor acquisition (most likely bought the company at peak valuation), and now seems like they have an over-supply of inventory as demand has softened greater than their expectations. Management also stated their Precor segment is also experiencing supply chain issues, bottlenecks, and a softening in demand as well.
Moving forward, a lot of these expenses and challenges are in the past and may already be reflected in the share price considering that the share price is down by so much. Many of these expenses were also fixed costs and will begin to scale as the company turns the corner and gets back on track with reducing inventory levels.
Peloton already noted that they were over-optimistic with their forecasts of how much demand would increase after lowering the price of their Bike product. Management has stated they are preparing for their "best holiday season ever", but will that really be the case? Only time will tell and I look forward to following Peloton as they continue on their journey.
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