Peloton - Q2 2026

Transcript

Operator (participant)

Good day, and welcome to Peloton's Second Quarter Fiscal Year 2026 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. To ask a question during the session, you will need to press star one, one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. James Marsh, SVP of Investor Relations. Please go ahead.

James Marsh (SVP of Investor Relations)

Thank you, operator. Good morning, and welcome to Peloton's Second Quarter Fiscal Year 2026 Conference Call. Joining today's call are Peloton CEO and President, Peter Stern, and CFO, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include forward-looking statements related to our business 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.

Please refer to our SEC filings and today's press release, both of which can be found on the Investor Relations website, for a discussion of the material risks and other important factors that could impact our results. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is also provided in today's press release. I'll now turn it over to Peter.

Peter Stern (CEO and President)

Thanks, James. This quarter, we made significant progress on our multi-year strategy of evolving Peloton from a connected fitness company to a connected wellness company, an ambition anchored in the societal shift from a focus on lifespan to healthspan. Peloton's platform, equipment, and beloved brand position us to capture more market share within the growing $7 trillion global wellness economy and to deliver ever greater human impact. As I shared in my annual shareholder letter last month, our path forward is focused on expanding our leadership in cardio plus strength, growing our global commercial footprints, and using AI-driven personalization to help our members across a wider array of fitness and wellness domains. As we begin the new calendar year, we are more prepared for this evolution than ever, as we have built a strong financial foundation.

Our cost discipline has enabled us to reduce our net debt by 52% year-over-year. The hard work we've done to improve our balance sheet enables us to both invest in our long-term growth and, as the year progresses, put in place an anticipated lower cost and more flexible capital structure. In the second quarter, we unveiled a number of exciting updates to our magic formula of industry-leading equipment, intuitive software powered by AI, and unmatched human instruction. This included the Peloton Cross Training Series, our first-ever hardware portfolio refresh, Peloton IQ, our AI-powered personalized software, and new instructors focused on innovative strength, Yoga, and Pilates offerings. We launched all of this going into our peak holiday sales period, which delivered 39% adjusted EBITDA growth year-over-year in Q2. We continued to drive higher margins and reduced operating expenses, thanks to our cost restructuring efforts.

This quarter also highlighted the resilience of our Subscription business as we enjoyed strong member retention. Churn was lower than expected during a quarter with a price increase, underscoring the high value members place on our integrated experience. Revenue for Q2 came in below guidance, primarily due to fewer than expected equipment sales of the Cross Training Series to existing members. However, we were encouraged by the mix of existing members who purchased a new category of equipment, as more than 70% of Cross Training Series equipment sales to existing Bike owners were Tread and Row products. Our installed base of equipment is quite durable, and member satisfaction is extremely high, as evidenced by our consistently high Net Promoter Scores and low churn. We believe these factors likely contribute to a longer upgrade cycle than we had anticipated.

In contrast, with sales to new members coming roughly in line with our expectations for the quarter, we remain confident that our product lineup, featuring the new Cross Training Series, will continue to attract new members. We are also encouraged to see sales of the Cross Training Series lean more towards the Plus line for our bikes, indicating that its premium features and camera vision-based personal coaching are important purchase drivers for consumers. Our current marketing focus is on product education, helping both existing and prospective members discover the full power of what we've built. Swivel screens on all hardware products, more comfortable saddles on our bikes, as well as Plus line feature upgrades, including the movement tracking camera that provides form feedback, rep tracking, and weight suggestions.

Reviewers from trusted publications have praised the reinvention of our product lineup, including The Wall Street Journal, Women's Health, Men's Health, PCMag, and more. We also scaled our retail footprint to 10 Micro-stores by the end of October, offering capital-efficient, Peloton-managed environments that showcase our hardware and educate consumers on the Cross Training series. In Q2, MicroStores drove more sales on average than our legacy showrooms, and more than eight times the legacy showroom on a sales per sq ft basis. In contrast, our third-party retail sales lagged expectations, so we are working with our distribution partners to share best practices in Q3 and beyond. We're committed to growing our commercial offerings and our brand touchpoints outside the home. Our Commercial business unit is well-positioned to capture more market share by leveraging the strength of both the Precor and Peloton brands.

Commercial showed strong performance, achieving 10% revenue growth year-over-year and exceeding expectations across U.S. and International markets. In Q2, we continued to make meaningful progress in improving member outcomes. We saw a 7% year-over-year increase in workout time per connected fitness subscription, a clear indication that our content and programming continue to resonate with our members and contributed to our member retention. We also see rapid adoption of Peloton IQ, which makes personal training more accessible and impactful by providing dynamic coaching that's responsive to each member's goals. 46% of active members engaged with their performance insights and recommendations during the first quarter since its rollout. All-Access member engagement with personalized plans was up more than 10% from Q1.

Based on our post-purchase research, Peloton IQ was ranked the most compelling feature by those who purchased the Cross Training Series Bike+, Tread, and Tread+. We expect member engagement to increase further as we refine and evolve Peloton IQ to encompass more fitness and wellness domains. As strength continues to grow in popularity, in part due to the broader adoption of GLP-1s, we will continue to evolve our programming to support both cardio and strength. We welcomed three new strength instructors, all of whom premiered in December, teaching yoga sculpt and Pilates. In addition to our content, we have a robust R&D agenda in the strength category as well. This Thanksgiving, we celebrated one of Peloton's most beloved traditions, the 12th annual Turkey Burn. We produced a full slate of live classes throughout Thanksgiving morning and saw a 6% increase in completed live workouts year-over-year.

The Feast, our strength class, featuring six instructors, had a 24% increase in live workouts year-over-year and was our biggest live strength class of all time. Our commitment to health outcomes is further evident in the strategic partnerships we initiated. In October, we announced a partnership with Twin Health to deliver personalized guidance with recommended Peloton content to improve metabolic health and reverse type two diabetes. Several thousand Twin Health members are engaging with our cardio, strength, yoga, and meditation programming. Focusing on women's health, we collaborated with Respin Health on a 60-day study, with more than 200 Peloton members experiencing menopause symptoms. Results from the program, which included cardio and strength workouts by Peloton, an online community, and coaching sessions, showed that 84% of women experienced overall symptom improvement, including relief from brain fog, lack of energy, weight gain, and poor memory.

This further validates the impact Peloton can have on health outcomes. A pillar of our strategy remains meeting members everywhere. Peloton was the official fitness partner of F1's Grand Prix in Las Vegas and filmed a first-of-its-kind class series on-site, bringing the high-energy race vibe to members through on-demand content and immersive experiences. These classes performed well above individual class benchmarks, and according to a search lift study, the activation led to a 10% increase in brand sentiment and an 11% rise in purchase intent as online conversation pivoted toward our world-class content, instructors, and excitement for the partnership. Turning to our strategy of creating members for life, we're strengthening member ties through our new loyalty program, Club Peloton, which is designed to reward our members for their engagement and consistency.

Since launching on October 1st, 24% of active members engaged with Club Peloton, exceeding our 20% internal target. Benefits thus far have included Peloton apparel discounts and access to exclusive live rides, depending on the member's tier. Members using their exclusive Club Peloton apparel discounts drove nearly 50% of apparel purchases in Q2. We also launched four new official teams: Menopause Health, HYROX, Move for Life, and Cross Training, with 25,000 members joining one or more of them in the quarter. Business excellence remains a top priority, and it shows in our balance sheet and P&L. We remain on track to achieve our $100 million run rate savings goal by the end of Fiscal Year 2026.

As we shared in August, we're achieving this by evolving our global operating model, thereby enabling us to invest in areas that give us a competitive advantage and most directly support our long-term growth. We recently entered into a relationship with a leading global business services provider to support and deliver some of our operational work, while also expanding Peloton's presence in lower-cost locations. The progress we've made in optimizing our cost structure shows in our meaningful free cash flow generation and continued deleveraging. Optimizing capital allocation is one of our top priorities, as we believe it is critical to achieving our growth goals. While our updated full-year revenue guidance does not turn positive for the year, our trajectory reflects a meaningful improvement compared to the declines Peloton sustained last year.

More important, we are making this progress while improving unit economics and profitability, demonstrating our discipline in pursuing sustainable and profitable growth. By prioritizing business excellence, we are doing what is right in the long term for our shareholders and our community of loyal members. I will now pass it over to Liz, who will share more details about our Q2 financial results and guidance for the remainder of fiscal 2026.

Liz Coddington (CFO)

Thanks, Peter. We are proud of our profitability performance this quarter, as total gross margin and adjusted EBITDA outperformed our guidance. As Peter mentioned, we continue to benefit from the loyalty of our members, with Q2 ending paid Connected Fitness subscriptions coming in above the midpoint of our guidance range. Q2 total revenue was $8 million below our guidance. In addition to the lower-than-expected equipment sales, primarily to existing members, revenue was also impacted by longer-than-expected delivery times, delaying roughly $4 million of revenue recognition into Q3. We ended the second quarter with 2.661 million paid Connected Fitness subscriptions, reflecting a decrease of 7% year-over-year and 6,000 above the midpoint of our guidance range. Q2 is typically a seasonally stronger quarter for hardware sales and seasonally lower quarter for churn.

However, we expected elevated churn in Q2 due to our subscription pricing changes announced on October 1st. Following the announcement of those pricing changes, we observed a short-term lift in cancellations that quickly stabilized, resulting in stronger-than-expected retention. Average net monthly paid Connected Fitness subscription churn was 1.9% in the quarter, an increase of 50 basis points year-over-year. Our churn performance demonstrates the underlying health and resilience of our high-margin subscription business and reinforces the value and human impact we deliver for our millions of members. Our better-than-expected performance on churn was partially offset by lower gross additions, which were primarily impacted by longer equipment delivery and activation times that delayed gross additions to Q3, as well as lower-than-expected equipment sales in third-party retail channels.

Total revenue was $657 million in Q2, comprising $244 million of Connected Fitness products revenue and $413 million of subscription revenue. Connected Fitness products revenue decreased $9 million or 4% year-over-year, driven by lower equipment sales and deliveries, partially offset by a 10% increase in commercial business unit revenue and higher average selling prices for products in our Cross Training Series. Subscription revenue decreased $8 million or 2% year-over-year, primarily driven by lower ending paid Connected Fitness and app subscriptions and lower content licensing revenue, partially offset by the benefit of subscription price increases, which contributed a partial quarter benefit due to the timing of billing cycles, which are spread throughout each month.

As we discussed last quarter, in Q1 of fiscal 2026, we began assigning executive compensation and other corporate overhead expenses associated with our corporate facilities across the P&L as we focus on driving more accountability for costs at a functional level. Prior to fiscal 2026, these costs were all recorded in G&A, but are now assigned to cost of goods sold, sales and marketing, G&A, and R&D. All of the year-over-year changes discussed today are referencing last year on an as-reported basis. Total gross profit was $331 million in Q2, an increase of $13 million or 4% year-over-year. Total gross margin was 50.5%, an increase of 320 basis points year-over-year, and 150 basis points above our guidance of 49%.

Margin outperformance relative to guidance was driven by a larger mix of subscription revenue and higher subscription gross margin. Connected Fitness products gross margin was 13.9%, an increase of 100 basis points year-over-year, primarily driven by lower warranty costs, and a mix shift toward higher-margin products, partially offset by increases in tariff import charges and inventory reserves. Subscription gross margin was 72.1%, an increase of 420 basis points year-over-year. Subscription gross margin benefited from a $9.7 million reduction to our accrued music royalties. Excluding this nonrecurring benefit, subscription gross margin would have been 69.7%, an increase of 180 basis points year-over-year, of which 100 basis points of favorability was driven by subscription pricing changes net of churn.

Total operating expenses, excluding restructuring, impairment, and supplier settlement expenses, were $320 million in Q2, a decrease of $24 million or 7% year-over-year, reflecting the continued progress we've made in right-sizing our cost structure. Sales and marketing expenses were $152 million in Q2, a decrease of $1 million or 0.4% year-over-year, inclusive of the cost assignment changes from G&A I mentioned before that began this fiscal year, driven by decreases in fixed costs for retail stores and IT and software expenses. As of the end of Q2, we had seven legacy retail showrooms and 10 micro stores, down from 28 showrooms at the end of Q2 of last year.

Research and development expenses were $65 million in Q2, an increase of $5 million or 8% year-over-year, driven by increases in personnel-related expenses, inclusive of stock-based compensation and rent expense. These increases are primarily driven by cost assignments from G&A that began this fiscal year. General and administrative expenses were $103 million in Q2, a decrease of $28 million or 22% year-over-year, driven by decreases in personnel-related costs, inclusive of stock-based compensation and rent expenses, in part driven by cost assignments to other functional areas that began this fiscal year, as well as a decrease in professional fees. This quarter, we recognized $26 million of impairment and restructuring expenses, of which $24 million was non-cash.

The non-cash charges were primarily related to plans to rightsize portions of our corporate office footprint, while the remaining $2 million of cash restructuring charges were primarily related to exit and disposal costs and professional fees. Adjusted EBITDA was $81 million in Q2, which was an improvement of $23 million or 39% year-over-year, and $6 million above the high end of our guidance range. We generated $71 million of free cash flow in Q2, exceeding our internal expectations and reflecting a decrease of $35 million year-over-year, primarily driven by a greater inventory tailwind to net working capital in Q2 of last year. Free cash flow performance in Q2 of this year included roughly $25 million of timing benefits in the quarter.

We ended Q2 with $1,180,000 in unrestricted cash and cash equivalents, an increase of $76 million quarter-over-quarter. Net debt was $319 million, a decrease of $351 million or 52% year-over-year. Overall, our second quarter profitability performance has enabled us to continue deleveraging our balance sheet. Our gross leverage ratio, defined as our gross principal debt outstanding, divided by trailing 12-month adjusted EBITDA, was 3.6 in Q2, a substantial improvement from 6.2 in Q2 of last year. Similarly, our net leverage ratio, defined as gross principal debt outstanding, less cash and cash equivalents divided by trailing twelve-month adjusted EBITDA, was 0.8 in Q2, down from 2.9 in Q2 of last year.

We believe we have more cash on the balance sheet today than we need to run the business and are evaluating opportunities to optimize our capital structure. We will pay down roughly $200 million of zero percent convertible notes this month as they come due. Our $1 billion term loan has a 1% prepayment penalty through May 2026. We are mindful of this timing of when this prepayment penalty expires. As we evaluate our capital allocation strategy, we expect a refinancing to deliver a lower cost of capital and more flexibility over time. Next, I'd like to share context for our financial outlook for Q3 and the remainder of the fiscal year.

Our full-year fiscal 2026 total revenue outlook of $2.40 billion-$2.44 billion reflects a decrease of $30 million compared to a prior guidance and a 3% revenue decrease year-over-year at the midpoint. The decrease relative to prior guidance is primarily driven by lower equipment sales to existing members observed in Q2. Our Q3 total revenue outlook of $605 million-$625 million reflects a decrease of 1% year-over-year at the midpoint, and a decrease of 6% quarter-over-quarter as a result of seasonally lower equipment sales expected in Q3, partially offset by the benefit of higher subscription pricing recognized across the full quarter.

We are raising our full-year fiscal 2026 guidance for total gross margin to roughly 53%, which is an increase of 100 basis points from our prior guidance and an improvement of 210 basis points year-over-year, primarily driven by a larger mix of subscription revenue, as well as higher subscription gross margin. Q3 total gross margin is expected to be roughly 54%, an increase of 300 basis points year-over-year, due to a larger mix of subscription revenue, as well as favorable gross margins in both segments. We are raising our full-year fiscal 2026 guidance for adjusted EBITDA to $450 million-$500 million, an increase of $25 million from our prior guidance and an improvement of 18% year-over-year at the midpoint.

The improvement relative to prior guidance is driven by expected favorability to gross profit, and operating expenses, including recalibrating media spend in response to equipment sales trends. We also anticipate additional upside by realizing cost savings sooner than previously anticipated. Our Q3 outlook for adjusted EBITDA of $120 million-$135 million reflects an increase of 43% year-over-year at the midpoint, and an increase of 57% quarter-over-quarter, primarily due to seasonally lower sales and marketing spend in Q3 relative to Q2. Our Q3 guidance for ending paid connected fitness subscriptions of 2.650 million-2.675 million reflects a decrease of 8% year-over-year at the midpoint.

Average net monthly paid Connected Fitness subscription churn is expected to improve both year-over-year and quarter-over-quarter, with the sequential improvement due to elevated subscription cancellations following pricing changes announced in Q2 that have since stabilized, in addition to Q3 as a historically seasonally lower churn quarter. Our guidance reflects an expectation that our net churn rate will be roughly flat year-over-year in full year fiscal 2026, while gross additions are expected to decrease year-over-year as a result of lower equipment sales. Generating meaningful free cash flow remains a top priority for us. We are raising our full year fiscal 2026 minimum free cash flow target by $25 million to at least $275 million, reflecting our continued progress in lowering operating expenses.

Our free cash flow target reflects an expectation for a roughly $45 million impact from tariff exposure, in line with our expectations last quarter. Tariffs remain a dynamic situation that may change in the future. Overall, our guidance reflects continued improvement in profitability and progress inflection toward revenue growth. While our full-year guidance reflects a 3% year-over-year revenue decline at the midpoint, this rate of decline is moderating significantly compared to last year's revenue decline of 8% year-over-year.

We are balancing our pace of inflection toward growth with remaining disciplined about unit economics, ensuring the customers we acquire are profitable and continuing to optimize our costs. All of which are enabling us to invest responsibly and deliver on a path towards sustainable, profitable growth over the long term. We still expect to achieve the important milestone of positive operating income on a full year basis in fiscal 2026.

Peter Stern (CEO and President)

Okay, before we move to Q&A, I want to address the news that we announced this morning regarding Liz, who will be leaving at the end of March to pursue an opportunity at a private clean tech energy company. Because of Liz's leadership, we are a significantly stronger company today than when she arrived in 2022. Liz is leaving us with a solid financial foundation and a world-class team. We've launched a comprehensive search for Liz's successor, who will have very big shoes to fill. Liz, I'd love for you to share a few words.

Liz Coddington (CFO)

Thank you, Peter. It has truly been a privilege to serve as CFO of Peloton. I am incredibly proud of the work we have done together to dramatically improve our financial profile, put in place a winning strategy, and position the business for the future. When I leave in a couple of months, I will do so with mixed emotions, knowing that Peloton's best days lie ahead. I really want to take this moment to thank Peter, our entire board, and our team members for the opportunity to serve as your CFO.

Peter Stern (CEO and President)

Thanks for everything, Liz. Now let's open it up for questions.

James Marsh (SVP of Investor Relations)

Our first question comes from Leaderboard name, Trav Russell. His question is: Do you expect hotel partners to upgrade to Peloton Pro products as assets reach end of life? And how should we think about the pipeline for new hospitality and enterprise relationships?

Peter Stern (CEO and President)

Thanks, Trav Russell. In short, yes. We launched the Peloton Pro Series so that we would have products designed for light commercial environments like hotels and this is the first time we've actually designed Peloton equipment for commercial use at all, and it's our first ever tread that enables use outside the home. We also have an exciting roadmap of commercial equipment as we look ahead, including commercial grade equipment designed for heavy use environments like commercial gyms. One thing to keep in mind is that we've transitioned the management of our commercial technical support and our field service from Peloton's residentially focused organization to Precor, given Precor's expertise in providing maintenance and other services for higher use locations. So that should help extend the life of the products that are already out there.

But our Commercial business unit has a really healthy pipeline of relationships across categories. You can see that in last quarter's 10% year-over-year revenue growth and our expectations for continued growth looking ahead. With regard to hospitality in particular, our research shows that many consumers make the choice of where to stay based on whether they have Peloton equipment. We have very strong relationships with Hyatt and Hilton, and we're in thousands of their hotels worldwide. The plus strength solution in a really compact footprint. So we feel great about what we can do for travelers.

James Marsh (SVP of Investor Relations)

Great. Thank you, Peter. Our next question comes from Leaderboard named Steve C 109. Steve asks: How does Peloton think about creating new revenue streams and deeper monetization of the brand beyond the core subscription and hardware sales? For example, are there $100 million+ revenue opportunities in sponsorship, ads, in-person events, and/or brick-and-mortar expansion? Peter?

Peter Stern (CEO and President)

Thanks, Steve, for that question. I think the crux of your question is whether we can create meaningful new revenue streams and deeper monetization, leveraging our brands and our relationships. We believe the answer to that is yes. While we're not exploring advertising on our platform, which is one of the ideas you just raised, we do see additional ways to monetize our content and our brand, for example, through content licensing. The largest examples of that, to date, have been what we've done with lululemon Studio and with Google and the Fitbit app, but we're actively pursuing additional opportunities. We also, you mentioned, in-person events and brick-and-mortar expansion. Those are less about new revenue streams.

They're more about making more of the revenue streams that we have, and we're doing that as part of our strategy to meet members everywhere. So for in-person events, in Q2 of this, just this past quarter, our instructors appeared at more than three times the number of events that they were in, in Q2 of the year before. We were able to expand our brick-and-mortar retail presence to 46 states in Q2, including our micro stores and our third-party relationships. Oh, I spoke. Another vector for growth here is one that I just spoke about, which is our commercial business unit.

That's an area where the combination of both Precor, but also the Peloton brand, is really compelling, because what we hear from gym operators is that the one brand that people ask for by name is Peloton. So that's another way that we can create revenue streams and deeper monetization of the Peloton brand. We see significant additional opportunities to expand our Connected Fitness business with hardware and software innovation, so those will be additional drivers of growth and our internal market research shows that consumers have a lot of demand and trust in us in other categories. Strength, we've talked about extensively, mental well-being, nutrition, hydration, sleep and recovery. Those are all areas we'll share more about when we're ready.

James Marsh (SVP of Investor Relations)

Great. Thanks, Peter. Operator, can you open the line for Q&A now?

Operator (participant)

Yes. Thank you so much. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one, one again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Youssef Squali with Truist. Your line is open.

Youssef Squali (Managing Director and Head of Internet and Digital Media Research Group)

Great. Thank you very much. Good morning, guys. Hi, Peter and Liz. Best of luck in your next endeavor. Maybe to the... Peter, so the story looks great from a profitability, from a gross margin perspective. Also, from a balance sheet perspective, you guys have done a lot, but top line growth remains elusive, as you kind of showed in your top line report this morning. Can you maybe talk about the elements you have in place that gives you the confidence that growth is around the corner?

I think if my math is right, the high end of your 2026 guide implies some growth, anemic, but still some positive growth in Q4 and then, I guess, the miss on the top line seems to be related to existing customers, not upgrading in period rather than new customers, not buying, which is good. Can you maybe flesh that out a little bit, and what's baked in, in the new guide as far as that's concerned? Thank you.

Peter Stern (CEO and President)

Thanks, Youssef. There are a bunch of pieces to that, so let me try to address them all. One, we are super proud of the work that we've done on profitability and improving the balance sheet, and those are foundational for us addressing. The second, part of your question, which is, relating to growth. It's clear from your question that that you'd like us to do better on growth, and I'm with you on that. I will not be satisfied until this company is back to healthy, sustained, top-line growth and while we didn't reach that this quarter, I will note that the full-year guidance that we just announced of the 3% decline at the midpoint compares favorably with last year's 8% and includes Q1's -6%.

So as we start to look at the trajectory here, like you got last year at -8%, you have Q1 -6%, you have this at -3%. Obviously, that implies continued improvement as the year progresses. Again, not enough, but progress. Let me talk about the path back to growth, and there are a number of points to that. The first one is we are developing a more complete set of product offerings across the right array of fitness and wellness categories and with the right price points. I'm not here to share our product roadmap today, and this is a hardware business, so it takes time, but we're making real, real rapid progress on this.

And if you want a proof point of our ability to do that, I joined in January of last year, and within months, we were shipping a completely revamped product lineup. So this is an organization that is capable of doing hard things and producing quality products on the hardware side. Second thing is that we got to make sure that we've got appropriate pricing for our subscriptions. We took the key step on that in Q2, and I think it went according to plan, if not better. Third piece, we've got to keep the members that we've got in order to get to growth, so we have to keep improving our net churn and as you can see from our results and our remarks, we're projecting net churn flat this year despite the pricing action.

So the underlying trends here are absolutely heading in the right direction. Fourth, we have to exploit new avenues for growth. I talked about the commercial business unit. That's again a proof point of our ability to generate new forms of growth. In this case, we grew 10% in the last quarter on the top line there and then, of course, coming back to the first part of your question, we've got to demonstrate that we can do all of this efficiently. So we have to have an appropriate overhead structure. We have to have a positive return on our sales and our marketing investments, so that when we deliver the growth, it's real sustainable growth.

You can see that we're on track to deliver against that, including with the full-year adjusted EBITDA guidance, reflecting the year-over-year increase of over 40%. Now, let me go to the third part of your question, which is to explain what's happening with the sales to existing members and the versus existing members. Oh, yes, revenue missed our expectations for the quarter, but I don't think it's a reflection on the new generation of our equipment. I think that's a reflection on our old equipment. What happened here is we simply overestimated the rate with which existing members would want to upgrade their existing equipment to new equipment.

The only historical data point we had as a company on this was when we launched Bike+, a few years ago, and that was a really fundamental reinvention of the entire frame of the bike. So we did not, as it turns out, see the same rate of upgrade from existing members. I think that just speaks to the quality and durability of the existing equipment that our members have and the satisfaction, which I've spoken about at length, with that equipment. The other side of this coin, though, is that our sales to our new members met our expectations, and so it shows that our products do resonate with prospective customers.

If we step back on this, the existing members, that sales, that impacts our revenue, but it doesn't impact our subscribers, because they're already existing members. So, the consequence of that is that, our subscriber performance was strong, and we performed 6,000 or so subscriptions above the midpoint as a result.

Liz Coddington (CFO)

I was just gonna add one thing. You had asked about how the existing member sales miss influences our guidance for the back half of the year, and I just want to clarify that our guidance doesn't assume any of the softness that we observed in Q2 from lower sales to existing members is timing, and that we will see any of it in the second half. So, you know, with the holidays, the Cross Training Series launch, and our subscription pricing changes behind us, we feel we have greater visibility to revenue for the rest of the fiscal year. Really, the changes in our guidance reflect the sales mix from Q2 to existing members, and then that is partly offset by favorable subscription revenue relative to our prior guidance.

Youssef Squali (Managing Director and Head of Internet and Digital Media Research Group)

That's great. Thank you both.

Operator (participant)

One moment for our next question. That will come from the line of Shweta Khajuria with Wolfe Research. Your line is open.

Shweta Khajuria (Managing Director of Global Internet)

Okay, thanks for taking my questions. Let me try two, please. The first one for Liz. There's some, you know, noise and media coverage around the recent headcount reductions. So could you please clarify how much of that is incremental, if any, at all, and what is already accounted for in the guidance already? And then the second question is for Peter on the Commercial business unit. So a Commercial business opportunity, how do you view that in terms of where you see the biggest impact? Is this a retention sort of a driver, where you improve net churn because those who use Peloton are gonna choose hotels and places that have Peloton equipment? Or is it a lead gen, where you are better positioned to get new subscribers? Thanks a lot.

Liz Coddington (CFO)

Yeah. So, let me address the first part of the question, first around our OpEx, and the announcement that we had last week. So when we announced in August, our goal to achieve $100 million at annualized run rate cost savings by the end of fiscal 2026. You know, this action that we took in January, just last week, was always been part of that plan and so as of last week, we've actioned the remainder of our run rate savings plan, with changes in our workforce, as well as shifting work to lower cost locations, including moving some work to a global business partner.

Doing all of this from a P&L perspective, you know, we're reducing both G&A and sales and marketing as a percentage of revenue, and that's enabling us to reinvest more into R&D, while still reducing total OpEx as a percentage of revenue. With these actions, we are on track to deliver against our $100 million cost savings target.

Peter Stern (CEO and President)

Then, Shweta, thanks for the question about the CBU. There's been an interesting evolution in our goals regarding the Precor business since Peloton first acquired it. When it was first purchased, it was done for essentially supply augmentation for the company. Then subsequently, there was a belief that it was essentially a way of driving new subscribers for the Peloton, let's call it Residential business. But today, we've realized that the opportunity in commercial fitness is extremely large. It's a multi-billion dollar market, and we have a relatively low share there and we're now demonstrating the ability to not only grow that business, but to grow that business profitably.

So, we're approaching the CBU primarily as a new vector for profitable growth for the company and to generate value for our shareholders on a standalone basis. Let me just talk a bit about some of those opportunities. Some of that's just blocking and tackling, like we know, just adding back salespeople, getting more focused on key accounts, will help grow the business. We also have the potential to bring Peloton equipment to commercial customers through new products like the Peloton Pro Series, and also using the Precor team's existing relationships in 60 countries and with tens of thousands of gym operators. Then we also have an opportunity to reinvest in Precor's product roadmap. For example, we just relaunched Precor's first slatted belt treadmill, and the pre-orders on that exceeded expectations.

We're also seeing strong performance in Precor's strength equipment, both on the plate loaded and the free weight side. So, we think this is a sustainable driver of growth on a standalone basis. That all being said, we know that our Peloton members are looking for Peloton equipment when they travel, and that getting Peloton equipment into gyms is a terrific way for us to generate new relationships and awareness of our product. So I would view those as an ancillary but important benefit of us achieving the success with our CBU that we're aiming for.

Shweta Khajuria (Managing Director of Global Internet)

Okay, thanks, Peter. Thanks, Liz.

Operator (participant)

One moment for our next question. That will come from the line of Arpine Kocharyan with UBS Investments. Your line is open.

Arpine Kocharyan (Managing Director)

Hi, thank you so much for taking my question, and good morning. So churn was overall better than what you had talked about earlier for the quarter, but you had also talked about flattish churn for the year, and it seems like today you're reiterating that guidance together with a decrease in growth sets, which was also expected. Could you maybe update us now that you have a quarter behind you, post-price increase and kind of better churn than expected, where you're thinking growth sets trajectory could end up for the year?

Liz Coddington (CFO)

Sure. So we don't actually, we aren't providing guidance on subscribers or on gross additions for the year. You know, we've talked about our Q3 guidance. First of all, you know, it's, I do wanna reiterate the fact that our churn was lower than we expected in Q2 and as a result of that, you know, we have been able to update our expectations around subscriptions for the end of the year and for Q3, our outlook, you know, we shared that as well. Q3, just to give you a little bit about our guidance for that, that is, you know, 2.65. Our subscriber guidance is 2.65-2.675 million paid Connected Fitness subs.

That reflects an increase of 2,000 subs quarter-over-quarter, and a decrease of 218,000 year-over-year. Q3 is typically a seasonally low quarter for churn, and it's also a seasonally stronger quarter for new sub additions and that is, you know, that's just something that we tend to say, you know, tend to see every year, especially with the winter months in the northern hemisphere. Now, we're not guiding for Q3 net churn, but we do expect churn to improve year-over-year in Q3 and as Peter said earlier, we do expect it to be flat, relatively flat on a year-over-year basis.

Peter Stern (CEO and President)

Arpine, this is Peter. I'll just jump in a moment on gross adds, because you specifically asked about that. Reiterating Liz's point, we don't guide to it, but if we look at the last quarter, our, you know, our equipment sales were roughly in line with what we expected and we had slightly lower third-party sales, but slightly higher first-party sales. So that's kind of what comprised the sales piece. But then our activations were delayed and Liz talked about the revenue impact of that in the quarter, but that was basically delayed by the delivery dates and then some sense that it was the holidays, and people were taking some time to activate. So that had some impact on gross adds in Q2 that then we should flow into Q3.

Liz Coddington (CFO)

Yeah, I just wanna reiterate that when Peter said sales were in line, he meant sales to new members-

Peter Stern (CEO and President)

Thank you.

Liz Coddington (CFO)

We're in line overall with our expectations, with the outperformance really coming from first-party sales orders, again, with that delay, and then the underperformance coming from our third-party retail partners.

Arpine Kocharyan (Managing Director)

That's very helpful. Thank you. One quick follow-up, and I know it's probably hard to speak of exact timelines, given you just introduced a bunch of new products this fall. I was wondering if, Peter, you could talk about your broad sort of takeaways or thoughts around new hardware product roadmap that you're looking at over the next, I don't know, 12-18 months, and how you are thinking about the timing of a separate strength SKU, as well as your thoughts around more affordable tread product.

Peter Stern (CEO and President)

Yeah, Arpine, I think an earnings call is not where we would make a major new hardware product announcement. But what I can say is that I remain incredibly impressed by the capabilities of our hardware engineering teams here at Peloton and as I mentioned earlier, they have demonstrated the ability to produce really high-quality equipment in a very short period of time. That being said, hardware is... You know, it takes time not only to design and engineer it, but to make sure we test it, because this is the kind of equipment that, you know, that people run on it, and they engage in other physical activity with regard to this equipment, and so we have to be incredibly careful about it.

So, with all of that said, I feel very confident that we will be able to make some meaningful announcements in the next 12-18 months, and that those will start to create new opportunities for us as a company.

Arpine Kocharyan (Managing Director)

Thank you very much.

Operator (participant)

One moment for our next question. That will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Eric Sheridan (Managing Director)

Thanks so much for taking the question, and wishing you the best going forward, Liz. Building on some of the comments you've made so far, Peter, would love to understand where—what you prioritize from a strategy perspective. When you think about building increased value across the member base, how should we be thinking about investments and product cadence around content and the services layer, and maybe even going a little bit deeper in what some of the early signals you've gotten with respect to IQ and the adoption rate there? Thanks so much.

Peter Stern (CEO and President)

Absolutely, Eric, and thank you for the question. So here are some of the things that, you know, I'm prioritizing. One is delivering even more differentiated cardio experiences. You could see that in our innovations with the Cross Training Series, and the Pro Series, both of which we announced and launched on October 1. The second area is providing a much more full array of fitness and wellness experiences, so that's, of course, leaning into strength. Some of the things that we're doing with sleep and recovery, you could see that with our partnership with the Hospital for Special Surgery. Mental wellbeing, building on that acquisition we did with Breathwork and then, of course, beginning to personalize our offerings for every member, and Peloton IQ takes our personalized plans to the next level there.

So that's another way for us to be able to add value for our members and encourage them to try, for example, more categories of content, like getting people who are principally focused on cardio, to do more with strength, which we know is good for the member and good for us. In terms of your question about Peloton IQ, one, let me just start with this: I am incredibly proud of the fact that The Wall Street Journal, when they put Peloton IQ up against the AI fitness coaching from Apple and Google, we came out on top and as a dedicated fitness company, I'd expect to beat them at our game, but it's still gratifying, given that these are some pretty well-resourced companies to be compared against.

As we mentioned earlier in the call, nearly half of our active members engaged with their performance insights and their personalized recommendations during the quarter, and that was the first quarter that Peloton IQ was even out there. The engagement with personalized plans among our members with connected fitness equipment increased 10% quarter-over-quarter. Another thing that we're seeing Peloton IQ do is it's changing the purchasing patterns of our customers. So when we ask customers why they bought what they bought, Peloton IQ was ranked the most compelling feature by those who purchased the Cross Training Series, Bike+, Tread and Tread+. All of this is just going to keep getting better because we plan to expand Peloton IQ to cover more domains besides strength.

James Marsh (SVP of Investor Relations)

Great. Thank you, operator. I think we're gonna wrap up the call at this stage so we can get this wrapped up before market open. Thank you for joining us today. Oh, closing remarks, Peter?

Peter Stern (CEO and President)

Yeah. I'll just say a couple of words before we wrap up. Fitness and wellness isn't a quarterly goal for our members, and it shouldn't be for our business either. With Peloton's disciplined operational focus, we're providing the foundation necessary to fuel continued innovation. We remain committed to returning the business to sustainable growth, and we're encouraged by our steady progress. I wanna highlight a few classes and programs that you may be interested in between now and the next call. First, Rebecca Kennedy launched HILIT, which is a four-week, high-intensity, low-impact cross-training program. For those of you who are looking to take up running this year, Kirsten Ferguson can help you with her Call Yourself a Runner program, which we also released a few weeks ago.

If you haven't tried our new strength instructors, I encourage you to take a Sculpt Flow, Pilates, or Kettlebell class with Greta, Johanna, or Zacharias. Okay, with that, we look forward to seeing you on the leaderboard. Thank you.

Operator (participant)

This concludes today's program. Thank you all for participating. You may now disconnect.