Good morning, ladies and gentlemen. Thank you for standing by and welcome to Peloton's Second Quarter Fiscal 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your speaker host, Peter Stabler, Head of Investor Relations. Please go ahead.

Good morning and welcome to Peloton's second quarter fiscal 2022 conference call. Joining today's call are John Foley, our Co-Founder and CEO; and CFO, Jill Woodworth. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our Investor Relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter. With that, I'll turn the call over to John.

Thank you Peter. Good morning, everyone, and thanks for joining us today on short notice. As you've probably seen by now, we made a number of important announcements this morning, all of which are intended to ensure Peloton is well-positioned for sustainable profitable growth. I'd like to start by stating I love Peloton. I love the role we play in connecting the world through fitness. Our goal has always been to bring immersive and challenging workouts into people's lives in a more accessible, affordable and efficient way. We've done a great job of delivering on that vision and our large and loyal member community is proof of that. But we also acknowledge that we have made missteps along the way. To meet market demand we scaled our operations too rapidly and we overinvested in certain areas of our business. We own this. I own this and we are holding ourselves accountable. That starts today. Early today we announced several important leadership changes. I will be taking a new role as Executive Chair of the Board and Barry McCarthy will be assuming the role of CEO. I couldn't think of a better person for that job as we transition to Peloton's next phase of leadership. Barry is a tremendously talented executive with deep experience in growing content dependent digital subscription businesses and doing so profitably. And he has partnered successfully with two extraordinarily talented founders during this journey. Barry most recently led Spotify's global advertising business and also served as CFO overseeing their direct listing and helping to establish Spotify as the global brand it is today. Many of you may also know that Barry served as Netflix CFO for over 10 years. Plus Barry is a longtime passionate Peloton member who shares our team's enthusiasm for our company's vision of…

Thanks John. I will start with a review of our second quarter results. As you know we pre-released our summary results on January 20th. In the quarter, we generated total revenue of $1.13 billion, representing 6% year-over-year growth and an underlying 56% two-year CAGR. Excluding Precor, which we acquired on April 1st of last year, core Peloton revenue was approximately flat year-over-year. Relative to expectations, our revenue reflected lower-than-expected demand largely offset by a favorable mix towards Bike+ and lower financing penetration rate. Engagement per Connected Fitness subscription totaled 15.5 workouts per month. On a two-year basis, engagement was up 23% over the second quarter of 2020. As expected, we've seen significant month-over-month improvement in engagement from December to January with sequential growth exceeding levels we've seen in previous non-COVID years. Overall, we believe our engagement levels are very healthy particularly when viewed against fitness industry norms and are likely to remain higher than witnessed during comparable pre-COVID periods. Our average net monthly Connected Fitness churn remained low at 0.79% in the quarter. We continue to be pleased with our overall platform retention as our 12, 18, and 24-month retention rates continue to improve year-over-year. At the end of Q2, we had 862,000 app subscribers, representing 38% year-over-year growth, slightly ahead of our internal expectations. App subscribers declined modestly on a sequential basis primarily due to the 60-day free trials offered in November. Moving to gross margin. Gross margin for the quarter was 24.7%, slightly ahead of our expectations, primarily due to our subscription segment. Our Connected Fitness Product segment gross margin of 6.4% was modestly below our guidance. Relative to our expectations, our Connected Fitness margin reflects favorable timing of inventory receipts, a slightly lower-than-planned holiday promotion impact, and a benefit from a modest mix shift to Bike+. These…

Thank you, Jill. We've announced a considerable number of changes today, changes in leadership and on our Board, as well as the difficult but necessary steps we're taking to cut costs and better balance growth and profitability. These actions will make Peloton a stronger and more nimble organization than it is today, an organization that is better equipped to capitalize on our leadership position in Connected Fitness for the benefit of all stakeholders. I'm proud of the company that we have built over the last 10 years. Under Barry McCarthy's leadership, the future has never been brighter for Peloton. As I transition out of the CEO role and into that of Executive Chair, I could not be more excited to partner closely with Barry. I look forward to speaking with you next quarter and updating you on our progress. Operator, please open the lines for questions.

Thank you, sir. [Operator Instructions] And our first question coming from the line of Doug Anmuth with JPMorgan. Your line is open.

Great. Thanks for taking the questions. Thanks for so much detail today. John, I was hoping you could just update us a little bit in terms of the current product mix just maybe talk a little bit more about what you're seeing across the One Bike and Bike+ and then also kind of early thoughts still on the Tread here. And how does the restructuring impact your product development plans going forward? And then Jill, you talked a lot about both the COGS and the OpEx savings. Can you help just frame those kind of collectively through fiscal 2022 2023 and 2024? Thanks.

That was a lot baked in there, so you'll have to bear with us as we get through. I think there were embedded about three or four questions. I think your first question was really around mix. And I guess what I would say first off is that we've obviously learned a lot about mix over the course of the last several months, obviously with the pricing changes that we made in August, and then obviously with the promotional activity that we ran through the holiday. And so as you can imagine our Bike+ does have the higher gross profit margin in the portfolio. And what we did see through promotional impact is that narrowing that gap between our original Bike and our Bike+, does positively skew mix to Bike+. And so obviously we've had a lot of learnings there. And one of the reasons that helped underpin our confidence, as we look to slightly increase and add the delivery surcharge back to Bike. If you go – I think you also asked a question around Tread so far. And so, what I would say is, we're incredibly pleased with the performance of Tread so far. We continue to believe that the Tread category is bigger than the Bike category. And our job is to educate the consumer on the product market fit, build product awareness that leads to purchase intent. So we know that our Tread has the highest NPS of any of our products. And so we've been excited to continue to build on that momentum. We also know that our awareness continues to build. And more than half of our sales are going to new members since launch. And lastly, I hope you've noticed we've received a lot of great accolades in the press and positive reviews on the product. So we're incredibly pleased with the results so far on Tread.

And Doug with respect to restructuring impact on development and our product pipeline, one of the philosophies we entered the restructuring mindset or program with was, don't eat the seed corn. And don't touch what's sacrosanct and beautiful and important about our business. And product development, software, content, the things that impact the member experience were largely untouched. So I think you're still going to be excited to see what comes out of Peloton in the coming quarters and years.

And Doug just doubling back on the restructuring, I believe you asked about the COGS improvements that we expect to generate over the next couple of years. As we outlined, we see a line of sight of at least $300 million in run rate savings. The majority of those savings will come from efficiencies in procurement and manufacturing and logistics. And obviously some of the actions that we took on the logistics front today are immediately realized in Q4. And that plus our pricing action from our delivery surcharge implementation at the end of January will help us end the quarter Q4 with a mid-teens Connected Fitness margin. I do want to make a note that just in terms of our own mix of deliveries versus third party essentially we're shifting from 60% in-house, to around 40% in-house. So while this is a pretty dramatic move for us, we are keeping owned warehouses in our larger markets where we can drive efficiency throughout the year. So those are really our higher volume markets. We certainly have a lot more work to do to optimize around delivery growth and inventory placement and staffing levels. But all of this we think will meaningfully improve. But again, I think we're going to start off with a much healthier base by the end of Q4 in the mid-teens. The one -- and then the last point I would make, I know there's a lot here is that what we will not change is our member focus and trying to create a great member experience. We realize through the outsourcing of our delivery that that may be called into question. But our focus is as intent as it was. And we'll be working with our third-party providers to ensure that our delivery experience is consistent across the board. So, hopefully, that helps answer your question.

And our next question coming from the line of Edward Yruma with KeyBanc. Your line is open.

Hey guys. Thanks for taking my question for all the details. I just want to kind of follow-up on the last question but ask a broader question on demand. As you think about all the different things you've experimented with right tactical price reductions new products as we think about the longer term growth algorithm, what do you think restores the business back to a growth trajectory? Is it some of these new products? Is it just kind of lapping some of these comps? And I know that you did make a comment about affordability and trying to reduce that. I wanted to know how that squared with the implementation delivery fees. Thank you.

Thanks Ed. I'm going to take this and I think John might chime in. There's a lot here. Certainly, our second half demand is a softer demand picture. And so it obviously exemplifies the fact that it has been difficult for us to forecast and predict demand coming out of COVID. But I do want to highlight that there are three other factors that we believe are relatively short-term in nature that are driving our revised outlook. No doubt we are going to see an elasticity response from the price increases on our original Bike and Tread. And those as you know are in the form of the delivery and installation surcharge. We also are intending to purposefully reduce our marketing spend in the back half of the year so that we better understand baseline of demand post-COVID. And I think it's just important as we move forward, we're making a lot of OpEx cuts. But to be clear, from a marketing perspective, that is an engine that we are not shutting off. Marketing will be critical to our success going forward. And so what you'll see is that what we want to do is one get to better marketing and media efficiency and also reduce a lot of the fixed costs within sales and marketing so that we can allocate more to that variable marketing spend. So, that is something that we are not going to sacrifice on. We want to grow. We want to change more lives. And then third I think we would be I think naive if we didn't think that there could be some operational disruptions as we work through this restructuring. And so those are sort of the three short-term headwinds that we're seeing. But stepping back, we believe that the opportunity is unchanged.…

And our next question coming from the line of John Blackledge with Cowen.

Great. Thanks, two questions. First, are you seeing any difference in the demand for Tread on a market-by-market basis? And then secondly Jill, you talked about changing the CapEx after this year. Could you provide perhaps a range on CapEx as a percent of sales after fiscal 2022? Thank you.

Thanks very much. The first question, is on Tread by market. I mean we're still in the very nascent stages of building product awareness in all of our markets. There's really no discernible difference, although, as you can imagine right our brand awareness is lower than it is in the US in our international markets. So you'd expect to see a potentially slower ramp there. But again when you look at Q3 and you think about the fact that we only launched this product, just over five months ago, it's a significant percentage of our sales. And I'll just go back to what I said before with Doug, that we absolutely are very pleased with the launch. And the most important metric for us is NPS and it's got the highest NPS of any product. From a CapEx perspective, with a lot of the changes today, around the restructuring and management changes, I'm hesitant to provide you an exact dollar figure on CapEx. I would just reiterate the fact that, we want to move to a CapEx-light model. We believe we can do that. And so I think what you can expect, is a considerably lower CapEx spend than what we're spending in fiscal 2022. Plus, also expect that we'll have the tailwind of any sale proceeds from the POP facility.

Real quick. John I also want to weigh in on kind of dovetailing with Ed's question on growth and your question on Tread, is that to Jill's point in the early days of our Tread, we have an awareness opportunity and we had this in the earliest days of the Bike of why do I need this stationary bike that in the earliest days felt expensive? And the answer is, because it's a portal to a fantastic boutique fitness experience at home. We have a similar challenge or opportunity with the Tread now of one, just the awareness that Peloton has a Tread. And two, why is our Tread dramatically different than the Treads you've known about for decades? Both of those are marketing opportunities that we're really excited to lean into. And you should know, that our marketing efficiency goes up with the awareness of the Tread product and why it's so special, why it brings these boutique -- boot camp circuit workouts into your home where it's not just get on the treadmill for 45 minutes, because a lot of people don't look forward to that. I think it's the variety of content -- the variety of class content the on and off tread workouts that are so popular in the off-line world, in the boutique world, that our treadmill was the first Tread and the best Tread to bring those to your house and to your home in an efficient and affordable manner. So as we grow awareness in the coming quarters and coming years, our marketing becomes more efficient and that's going to lead to more profitable marketing and obviously, growth as Jill pointed out that we think that category, is going to be even bigger than Bike. And it has been historically treadmill market has been two to three times bigger than the stationary bike market. So, between those two things we're super excited about the Tread product line.

Thank you.

And our next question coming from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thanks so much for taking the question. Maybe just a two-parter on the CEO change for you John. Can you give us a little bit of a better sense of the process behind bringing Barry in, what you saw in Barry's sort of past on the media side and the subscription side that fits well with the role and maybe some of the elements of hardware and logistics and manufacturing that Barry has a little bit less experience with historically. That would be part one. And two when would we expect to hear from Barry and the broader investment community? When is he starting in the role? Can you give us a little bit of an update there? Thanks so much.

Great. Yes. I'll take the first one. He starts in earnest tomorrow morning. It's the first day of the job. And so he's drinking from a firehose right now as you can imagine. On your first question, the Board and I ran a thoughtful collaborative succession process over several months and determined that Barry is definitively the right CEO for Peloton for the next several chapters. We're super excited that we found him. We fell in love. We saw what he has to offer. And he also was similarly excited. So it was -- it moved fast once we established and got in contact with him. The reason why he's so good as you probably know Erik following successes over the last several decades is he is a visionary media software subscription business. He might be number one in the world with understanding subscription businesses with his building -- helping rebuild Netflix and helping Daniel build Spotify. And so it's -- as I said to, The Journal last night he's kind of an embarrassment of riches as it relates to the Peloton story and this is a third opportunity for him to help build one of the best global consumer products media company brand. I said in my pre-remarks that we were delighted that he and his wife are big Peloton members and users. And so they get the magic. They get what's special. So it's been a really exciting thing for me as one of the founders to get to know Barry see his passion already start to learn from him and his understanding to these businesses. And so we're excited. With respect to hardware, he is as smart as anyone I've ever met. So we're not worried about his any perceived lightness on hardware. And again. I'm going over the Executive Chair role. We have a fantastic team. He's going to add value starting tomorrow morning and we couldn't be more excited.

To your second part of the question, I think there's a lot of internal focus for Barry for the next couple -- several weeks or months. But obviously at the appropriate time I'm sure well prior to our next earnings call we'll get Barry introduced around. But I think Eric you'll be seeing a lot of familiar faces.

Erik to your question as well with respect to supply chain and/or hardware I do want to point out that we've added Angel Mendez to our Board who is a global supply chain leader and super experienced executive and we plan to benefit from his strategic thoughts at the Board level. Barry is also joining the Board. So there's going to be a lot of collaboration. And we are stronger on the supply chain side today than we were yesterday which is exciting.

And our next question coming from the line of Jason Helfstein with Oppenheimer. Your line is open.

Thanks for taking the question. I guess two. I mean it seems a large part of what you're struggling with is we took a product that was potentially a long consideration product similar to a car that people might think about over 3, 6 months and we shrunk it to literally an impulsive purchaser and COVID. And now we're going back to long consideration. And so maybe help us understand as you do your research like -- just how do we think about it right? Because investors are trying to understand if they've miscalculated the TAM opportunity or really just going back to again a long consideration purchase. And then just second, John, can you address your super-voting stock? Now that you're joining the Board, does it still make sense for you to keep that super-voting stock? And kind of how do you think about that in the best interest of shareholders? Thank you.

So, I'll take the first. I think the real question you're asking is has our market opportunity shrunk. We don't think the opportunity or the strategy to attack that opportunity has changed. Our cost actions are all independent of the growth opportunity that exists for Connected Fitness and for Peloton. I think we're simply acknowledging two points regarding fiscal 2022. We accelerated our growth into the TAM more than we thought and assessing demand coming out of COVID has been a significant challenge. And you're right. Our number one purchase barrier has always been price. And we -- there is a consideration period involved. But -- and certainly during COVID, I'm sure that was somewhat truncated. We did no marketing. We obviously saw very large increases in conversion. But even coming out of COVID, while traffic is down, right, we are still seeing sustained increases in conversion. And as you also think about COVID, you think about our price change in August, you think about promotional activity over the past several months, which is again very typical for us in that time of year, we have to work over the next six months to rebuild that lead database and that -- and we've had many events over the past couple of years, to your point, that have kind of somewhat drained the lead database. So we have work to do, but I think we're going to study what our post-COVID demand is with going dark on marketing to better understand the baseline. And we're going to get back to efficient marketing next year. But again, we don't think the opportunities change. We believe our value proposition is commensurate with the pricing of our products. And we'll go back I think, to the basics over the next several quarters again rebuilding the lead database and using marketing to drive awareness and purchase intent and convert more people. So, I think we feel good about that.

And Jason, with respect to super-voting stock, we have no changes planned at this time. But I will say we have a very mature seasoned experienced Board of Directors and -- that operates in the best interest of all shareholders. And I think the announcement this morning that we're bringing in an incredible -- incredibly experienced and talented and proven CEO to strengthen our leadership team is just one of the many things that I would do to show my commitment that this is not about John Foley and/or my super-voting shares or TCVs or anyone else's. This is about what's best for all shareholders Peloton, of which I am one of them.

Our next question coming from the line of Shweta Khajuria with Evercore ISI. Your line is open.

Okay. Thank you. Just a question on your growth initiatives following up on one of the prior questions. Will there be any initiatives in the near-term that you may have to hold or sort of pull back on whether it is international market expansion or some of the new products that were in the pipeline around corporate wellness anything around that that you can comment on? Thanks.

Thank you. So the question centers around how we -- as we look at our restructuring what does it mean and what does it not mean. And I think again it's about preserving member experience. It's about creating great products. It's about changing more lives. This is not a call for a slowing of growth or product development. This is all about rightsizing our cost structure, variabilizing our cost structure so that we can operate in any environment and not have demand dictate the bottom line. So we went through a very meticulous process with our entire senior leadership team to ensure that as we were making these cuts across our organization, we're doing so without preserving the acorns of growth that we have ahead of us. So it still is prioritizing product innovation, software innovation, new hardware products, corporate wellness and channels. So no impact to all of the various growth initiatives. Now that doesn't mean to say that we're not going to take a harder look as we go into international markets or as we look at our showroom footprint to make sure that we're operating in the most efficient way but all of this was done with the fact that we want to remain a growth company. That's our priority along with profitability and we're not cutting in the places that would hurt that growth.

Okay. Thank you Jill.

Our next question coming from the line of Bernie McTernan with Needham & Company. Your line is open.

Great. Thanks for taking the questions. Jill you mentioned a net investment and customer acquisition costs over the next few quarters. As we think about 2024 and beyond what's the right way to think about net customer acquisition costs whether it's going to be neutral positive or negative? And then just -- I wasn't sure if you would be willing to share given these restructuring -- implementation of this restructuring, any reasonable target range to think about EBITDA margins going forward?

Sure. So it is our priority to get back to net CAC neutral. For those of you not familiar with our terminology, essentially what was great about our unit economic model was that our customer acquisition costs were largely if not fully offset by the gross profit margin in our hardware. So to get back to that place we really have to attack it from both sides. And so it's going to take time as we work through our restructuring plan. We talked about some of the immediate benefits for getting to margin through logistics restructuring and through our pricing increase that gets us to a mid-teens Connected Fitness margin, but there's more work to do there. So, obviously, we know that some other longer lead items such as the manufacturing and procurement efficiencies that we hope to achieve will take much longer than the next six months. So we, obviously, have the goal to get back to net CAC zero. And then on the flip side of the equation what I had said earlier, it's attacking that fixed cost infrastructure in sales and marketing and then looking at our variable cost structure and marketing and how we can be more efficient. So, we're attacking it at both ends. Net CAC zero or neutrality is certainly a goal of ours or to potentially do better than that. And we're also-- again, it's not just about unit economic model. We're also very, very hard -- looking at the efficiency of our complete OpEx picture not just net CAC. And then, in terms of the target Connected Fitness margin, I would actually just reframe it to be what I just said, which is our goal is to get back to net CAC neutrality. We're not prepared today to offer a margin target in Connected Fitness. But as I said to get back there, we know we need to progress from where we're going to end this year. We have a line of sight to do it. And we're attacking it from sales and marketing.

Our next question coming from the line of Jonathan Komp with Baird. Your line is open.

Yeah. Hi. Thank you. First question just high-level of thinking into 2023 the comments about expecting to work through inventory at full price, I mean that implies you're still planning some level of growth, some level of Connected Fitness Product sales, some level of subscription growth. So can you just shed any more light on sort of the near-term growth trajectory just to, sort of level set our expectations?

Yeah. I think the first thing to note is obviously our inventory won't be static, right, in terms of incoming inventory over the next 18 months. So we obviously wanted to put a guidepost out there that we felt comfortable with, knowing that, we'll continue to work with third-party providers. We'll continue to have a minimum amount of production out of our Tonic facility. And so it's not a static question. It's not like we're starting from a certain inventory level and just working that down over time. And therefore you can imply a demand forecast based on working down that inventory. It is -- so you can't kind of read too much into that. But of course we know the importance of getting that inventory down. And I guess what I would say is, I expect it to be a good cash tailwind in fiscal 2023. And we're making all the right moves in order to bring down our production to a minimum level, to allow us to do this in the most effective way possible, while keeping this really important infrastructure that we built in manufacturing intact and keeping our supplier relationships very much intact which are very critical to us. So this is just something that I didn't want to commit to a much shorter timeframe, knowing that we will be taking on some more, inventory. But I will reiterate in Q3 and Q4, our inventory levels are expected to come down.

And as we're approaching market open, we'll have to wrap the call here. Thank you everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.