Peloton - Earnings Call - Q4 2025

Executive Summary

• Q4 FY2025 revenue of $606.9M and total gross margin of 54.1% exceeded the high end of internal guidance, driven by stronger-than-expected Peloton and Precor hardware sales; GAAP net income was $21.6M and Adjusted EBITDA reached $140.0M.
• Versus S&P Global consensus, Peloton delivered a revenue beat ($606.9M vs $579.9M*) and a significant Primary EPS beat (0.114 vs -0.03*), reflecting margin expansion and lower operating expenses; management also highlighted a one-time subscription gross margin benefit tied to music royalties.
• FY2026 guidance was initiated: total revenue $2.4–$2.5B, total gross margin ~51%, Adjusted EBITDA $400–$450M, and ≥$200M free cash flow, with Q1 FY2026 revenue of $525–$545M and total gross margin ~52%.
• Strategic narrative shifted toward holistic wellness and personalization (AI-enabled coaching), with a $100M run-rate cost-savings plan targeted by end of FY2026 and upcoming product reveals before the next call—key catalysts for investor attention.

What Went Well and What Went Wrong

What Went Well

• Outperformed revenue and margin guidance in Q4; total gross margin rose 560 bps YoY to 54.1% on both segment improvement and a one-time music royalty accrual adjustment (“excluding this… subscription gross margin would have been 69.2%”).
• Strong cost discipline: total operating expenses fell 20% YoY; Adjusted EBITDA improved 99% YoY to $140.0M; free cash flow was $112.4M in Q4 and FY2025 free cash flow totaled $324M.
• Clear strategic vision and growth vectors: AI personalization, commercial expansion (Precor + Peloton for Business), microstores, special pricing programs; “we delivered what we promised operationally and then some”.

What Went Wrong

• Subscription base declined: Ending Paid Connected Fitness Subscriptions down 6% YoY to 2.800M; Paid App Subscriptions down 11% YoY to 552K; churn seasonally rose QoQ to 1.8%.
• Hardware softness YoY: Connected Fitness Products revenue declined 6% YoY to $198.6M despite mix benefits; Q1 FY2026 outlook points to continued YoY declines in hardware and subs.
• Tariff and cash headwinds ahead: FY2026 free cash flow target includes ~$65M tariff exposure; Q1 FY2026 free cash flow expected slightly negative due to inventory build and restructuring cash outlays.

Transcript

Speaker 3

Today, and welcome to the Peloton Interactive Fourth Quarter Fiscal Year 2025 Earnings 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 *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press *11 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, Head of Investor Relations. Please go ahead, sir.

Speaker 2

Thank you, Operator. Good morning and welcome to Peloton Interactive Inc.'s Fourth Quarter Fiscal Year 2025 Conference Call. Joining today's call are Peloton Interactive Inc. Chief Executive Officer and President, Peter Stern, and Chief Financial Officer, 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 shareholder letter, both of which can be found on our 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 provided in today's shareholder letter. I'll now turn over the call to Peloton Interactive Inc.'s Chief Executive Officer and President, Peter Stern.

Speaker 0

Thank you, James. Good morning, everyone, and thank you for joining today's call. As we wrap up our fiscal year, everyone at Team Peloton should take pride in our results and all that we accomplished. While Liz will review the results in more detail, our team exceeded all our key financial performance goals for Q4 and Fiscal 2025. We delivered what we promised operationally and then some, and we reignited our innovation engine on every aspect of our magic formula of equipment, software, and human coaching. As we look to the future, our team is rounding out nicely. We recently welcomed two new hires to the leadership team: Chief Marketing Officer, Megan Imbrez, who joined us from Apple, and Chief Communications Officer, Diana Kraus, who joined us from FleishmanHillard. We have also completed the search for our CIO.

Corey Farrell joined last week from Pearson and reports to our COO, Charles Keirol. As I promised when I started at Peloton in January, in today's shareholder letter, I outlined Peloton's strategy. I won't reiterate that strategy in these remarks, but I will provide some highlights and color. Our strategy is grounded in our purpose, which is nothing short of delivering human impact at massive scale by empowering our members to live fit, strong, long, and happy. We already deliver on this purpose, in part as the trusted fitness partner for approximately 6 million members in six countries. We are just getting started. Let me explain by providing historical context. Over the past century or so, advances in medical science contributed to the prolonging of life, here in the U.S., by a remarkable 30 years from 1900 to 2020.

However, as lifespan has increased, health span, the quality as opposed to the quantity of those years, has failed to keep up. People are living longer, but they are also living sicker. In the U.S. alone, we now have the largest gap between lifespan and health span in history at over 12 years. Addressing health span requires a different approach from lifespan because health span depends less on medical interventions and more on our choices and behaviors regarding exercise, sleep, stress, and diet. This is where Peloton comes in. Cardio fitness is the foundation of wellness and is critical to maximizing health span. If it were a drug, it would be a miracle drug, available to everyone without negative side effects. While cardio fitness is essential for health span, it is not enough by itself.

With each passing year, we are coming to understand better the importance of strength, stress management, sleep, and nutrition to living our best lives. This creates the opportunity, no more than that, the mandate for Peloton to evolve from being a cardio fitness partner to become the world's most trusted wellness partner across the full array of behaviors that maximize health span. There is no company better positioned than Peloton to achieve this kind of human impact. Behavior change is hard, but we've spent over a decade helping millions of people start and maintain healthy habits by making it fun and by creating a real sense of community and human connection. With that backdrop, here's where we're taking the business with the goals of returning to sustained growth in revenues and members and of sustaining our progress in achieving profitability.

We plan to support our members' wellness journeys by expanding our offerings in strength, where we are already a category leader, mental well-being, sleep and recovery, and over time, nutrition and hydration. While we're exploring new wellness areas, we will continue to build on our strengths in cardio, cycling, running, walking, and rowing, recognizing the centrality of cardio for human well-being. We recognize that our members come to us at various stages of their fitness journey, and a one-size-fits-all approach fits no one. Determining what to do to meet your goals can be overwhelming. We will employ advanced technologies like AI to enhance our ability to serve as personalized coaches, delivering individual insights, recommendations, and custom-tailored plans that make it easier and more efficient to achieve your goals. To grow our member community, we will increase our global presence through hotel partnerships, retail expansion, and the launch of new markets.

An example of this is our successful microstore pilot in Nashville. Last month, we opened our second microstore, this one in Utah, and we plan to launch an additional eight stores in time for the busy holiday season. Another example is that we launched Peloton Repowered, a platform for buying and selling used equipment to sellers nationwide last week following a successful beta in three U.S. metro areas. In May, we launched a special pricing program that offers a discount on equipment to military personnel, healthcare workers, first responders, and educators. These purchases have already made a meaningful impact on first-party retail sales in Q4 while making Peloton more accessible to thousands of people we all count on for the quality of our lives. We also launched special pricing for students, offering them discounted access to our Peloton App subscriptions.

Precor is a strong asset to Peloton as it has a presence in more than 60 countries and 80,000 locations. We see a tremendous opportunity to expand our commercial presence and serve a broader range of gym operators by bringing the best of Precor and Peloton together. We have integrated Precor with Peloton for Business and formed a new commercial business unit under Chief Commercial Officer, Deon Camp-Sanders, hiring Ian Reeves as its General Manager. Dustin Groves, President of Precor, will be retiring, and we sincerely thank him for his leadership in returning the Precor business to growth. Our commercial business unit plans to expand on the success we've achieved with our Hilton and Hyatt partnerships. Peloton for Business currently operates in over 9,000 hotels, and Peloton is now a must-have amenity in quality hotels.

Growing our member base also means expanding our online and in-person presence through social channels and events. In Q4, our instructors participated in over 40 events, more than three times the amount in Q4 of last year. When you purchase a piece of Peloton equipment, you aren't just getting a fitness tool. You're also joining a supportive community. We've experimented with ways to strengthen this community and foster more engagement through our social network, Teams. We have more features on the horizon to deepen connections and engagement among our members. We are also continuing to elevate the member lifecycle with new onboarding programs and to recognize our most loyal and committed members. A core pillar of our strategy is ensuring our prices reflect the human impact we deliver to our members.

We continue to improve our unit economics and will adjust prices to reflect the value we provide to our members and the costs of operating our business, including shipping, returns, tariffs, and other fees we pay. Peloton is at a critical juncture in our transformation, a moment to invest intentionally in our future. To earn the right to grow, we must align our spending with areas of competitive advantage, specifically our equipment, software, and content, while reducing costs in areas that do not differentiate us. To that end, we plan to capture an additional $100 million of run rate cost savings by the end of FY2026 by optimizing indirect spend, reshaping our teams, and in some cases, the locations where we work, and parting ways with a number of our talented colleagues. Decisions that impact our people are the most agonizing ones we make.

We are deeply grateful for the contributions of our departing team members, and we are committed to supporting them through this transition. Making fundamental changes to the way our business operates takes sacrifice and hard work, but I'm even more confident in our team now than when I started. I will now turn it over to Liz to discuss our Q4 and full-year 2025 results.

Speaker 5

Thanks, Peter. I want to begin by highlighting our sustained progress toward improving the financial health of our business over the course of fiscal year 2025. Our successful efforts to expand gross margins, reduce operating expenses, and optimize inventory levels enabled us to generate $324 million of free cash flow, an increase of $409 million year over year. We also materially deleveraged our balance sheet, reducing net debt by $343 million, or 43% year over year. We are pleased with the progress we've made improving profitability in fiscal 2025 and continue to prioritize delivering meaningful free cash flow. Now, I'd like to touch on our fourth quarter results, which reflect another solid quarter for financial performance as we exceeded the high end of our guidance on all key metrics.

We ended the fourth quarter with 2.8 million paid connected fitness subscriptions, reflecting a net decrease of 80,000 quarter over quarter due to seasonally lower hardware sales and seasonally higher churn. Ending paid connected fitness subscriptions decreased 6% year over year. We exceeded the high end of our guidance range by 10,000, driven by both higher gross additions and favorable net churn. Gross additions outperformed our expectations due to higher unit sales of our connected fitness products in both first-party and third-party retail channels. Secondary market additions were in line with expectations. Average net monthly paid connected fitness subscription churn was 1.8%, an improvement of 10 basis points year over year and an increase of 60 basis points quarter over quarter, in line with our expectations for a sequential increase in Q4 due to seasonality. We ended the quarter with 552,000 ending paid app subscriptions.

Total revenue was $607 million in Q4, comprising $199 million of connected fitness products revenue and $408 million of subscription revenue, outperforming the high end of our guidance range by $21 million. Outperformance relative to guidance was primarily driven by connected fitness products revenue from higher than expected hardware sales of both Peloton and Precor products. Connected fitness products revenue decreased $13 million, or 6% year over year, driven by lower sales and deliveries, partially offset by a mix shift toward higher priced products. Subscription revenue decreased $23 million, or 5% year over year, driven by lower paid connected fitness subscriptions and lower paid app subscriptions, partly offset by used equipment activation fee revenue, which was introduced in Q1 of fiscal 2025. Total gross profit was $328 million in Q4, an increase of $16 million, or 5% year over year.

Total gross margin was 54.1%, an increase of 560 basis points year over year, and 380 basis points above our implied guidance of 50.3%, driven by outperformance in both segments. Connected fitness products gross margin was 17.3%, an increase of 900 basis points year over year, driven by inventory write-downs recorded in Q4 of last year, a mix shift toward higher margin products, and decreases in service and repair, warehousing, and transportation costs. Subscription gross margin was 71.9%, an increase of 370 basis points year over year, driven by decreases in music licensing royalties, personnel-related expenses inclusive of stock-based compensation, and depreciation and amortization. Subscription gross margin benefited from a one-time balance sheet adjustment to accrued music royalties associated with renewing a music licensing agreement. Excluding this one-time benefit, subscription gross margin would have been 69.2%.

Total operating expenses, including restructuring and impairment expenses, were $299 million in Q4, a $77 million, or 20% decrease year over year, reflecting the continued progress we've made in right-sizing our cost structure, partially offset by expenses associated with today's announced restructuring plan. We exceeded our target to achieve at least $200 million of run rate cost savings by the end of fiscal 2025. Sales and marketing expenses were $81 million in Q4, a decrease of $32 million, or 28% year over year, driven by decreases in advertising and marketing spend, personnel-related expenses inclusive of stock-based compensation, and retail showroom expenses. We exited 24 retail showroom locations in fiscal 2025, reducing our retail footprint from 37 to 13 showrooms at the end of Q4, excluding the addition of one microstore location.

Research and development expenses were $56 million in Q4, a decrease of $14 million, or 20% year over year, driven by decreases in personnel-related expenses inclusive of stock-based compensation and product development costs. General and administrative expenses were $125 million in Q4, a decrease of $61 million, or 33% year over year, driven by decreases in stock-based compensation associated with executive departures in Q4 of last year and other personnel-related expenses, partially offset by slightly higher professional fees. This quarter, we recognized $37 million of impairment and restructuring expense, primarily consisting of severance and personnel-related charges as a result of today's announced restructuring plan, as well as other non-cash impairment charges. Adjusted EBITDA was $140 million in Q4, which was a $70 million, or 99% improvement year over year, and $54 million above the high end of our implied guidance range.

We generated $112 million of free cash flow in Q4, an increase of $86 million year over year. Q4 free cash flow benefited from outperformance in revenue and gross margin, as well as lower operating expenses. We ended Q4 with $1,040 million in unrestricted cash and cash equivalents, an increase of $125 million quarter over quarter. Overall, our fourth quarter performance reflects a continuation of meaningful profitability improvement for our already high retention, high gross margin connected fitness subscription business. Our continued focus on right-sizing our cost structure and de-risking our balance sheet has enabled us to achieve a strong financial footing from which we can execute our strategy that is focused on achieving sustainable, profitable growth. Next, I'd like to share context for our financial outlook. For full-year fiscal 2026 and on a quarterly basis, we are providing guidance for total revenue, total gross margin, and adjusted EBITDA.

We will also continue to provide an annual target for minimum free cash flow and a quarterly guidance range for ending paid connected fitness subscriptions. Our full-year fiscal 2026 total revenue outlook of $2.4 to $2.5 billion reflects a 2% revenue decrease year over year at the midpoint. As we execute on our strategy over the course of the year, we may evaluate changes in pricing, promotional strategy, and other actions to achieve our financial targets. Q1 total revenue is expected to be $525 to $545 million and reflects a decrease of 9% year over year at the midpoint as a result of anticipated year-over-year declines in hardware sales and paid connected fitness subscriptions. Similar to fiscal 2025, we expect Q1 to be a seasonally low quarter for hardware sales.

Taken together with our guidance for revenue for the full fiscal year, which reflects a lesser decline at the midpoint compared to what we expect in Q1, you can see that we expect to inflect toward year-over-year revenue growth over the remaining three quarters of the fiscal year. Starting in fiscal 2026, we will assign executive and other corporate overhead associated with our New York headquarters and other corporate facilities as we focus on driving more accountability for costs at a functional level. Historically, these costs were all reported in G&A, but going forward, will be assigned across COGS, sales and marketing, G&A, and R&D. Our guidance for total gross margin reflects these assignments, which drives a roughly 70 basis points headwind to total gross margin. Full-year fiscal 2026 total gross margin is expected to be roughly 51%.

Adjusting for the impact of assigning executive and corporate overhead expenses, our outlook reflects a total gross margin improvement of roughly 140 basis points year over year as a result of our continued focus on optimizing costs. Our Q1 fiscal 2026 total gross margin outlook is roughly 52%. Our fiscal 2026 adjusted EBITDA guidance range of $400 to $450 million reflects an increase of $21 million, or 5% year over year at the midpoint, primarily driven by operating expense savings connected to the new restructuring plan we introduced today. We've actioned roughly half of the run rate cost savings as of today and expect the remainder to be realized over the course of the year. Roughly 15% of the $100 million run rate savings goal is expected to come from lower stock-based compensation.

Q1 adjusted EBITDA is expected to be within the range of $90 million to $100 million, reflecting a decrease of $21 million, or 18% year over year at the midpoint, primarily driven by our expected revenue decline. We have decided not to provide annual guidance for ending paid connected fitness subscriptions because, over time, we plan to make trade-offs between pricing for both subscriptions and hardware and subscription growth. We also believe that we have many vectors for growth that do not result in an increase in subscriptions. We will continue to provide quarterly guidance for ending paid connected fitness subscriptions. Going forward, total revenue will be our primary top-line metric because it is a better measure of Peloton's long-term health. Q1 ending paid connected fitness subscription guidance of 2.72 to 2.73 million reflects a year-over-year decrease of 6% at the midpoint.

We expect gross additions to decrease year over year as a result of an expected year-over-year decrease in Peloton hardware unit sales. Average net monthly paid connected fitness subscription churn is expected to follow our historical seasonal pattern, with higher churn in Q1, but still slightly lower than Q1 of last year. Before we cover free cash flow, I wanted to share a quick note on tariff policy, which, as you know, is a dynamic situation. While we manufacture some Precor products in the U.S., we are subject to country-specific reciprocal tariffs for Peloton and Precor equipment, including but not limited to Peloton and Precor equipment imported from Taiwan and other Precor products imported from China. While Peloton tablets are currently subject to a tariff exemption for computers, we anticipate that our imported tablets from Thailand may become subject to a country-specific reciprocal tariff rate within the coming months.

Peloton and Precor imported equipment are also currently subject to a 50% tariff on their aluminum content. We remain committed to generating meaningful free cash flow, with a target to achieve at least $200 million in fiscal 2026, inclusive of anticipated tariff exposure of roughly $65 million. As tariff rates continue to evolve, this exposure could change. In fiscal 2025, we reduced our inventory position, creating a significant net working capital benefit to free cash flow. While we do expect a small cash benefit from inventory in fiscal 2026, overall, we expect changes in net working capital to be a free cash flow headwind this fiscal year. We also expect greater one-time cash restructuring charges within the fiscal year as a result of our $100 million run rate cost savings plan.

These headwinds are partially offset by improvements in gross margin and operating expenses as a result of our focus on improving monetization and optimizing costs. For Q1 specifically, our typical seasonal sales pattern for connected fitness equipment requires us to build up inventory ahead of the holiday season and puts pressure on free cash flow within the quarter. When compounded by cash outlay for restructuring costs, we expect Q1 free cash flow to be slightly negative. By continuing to generate meaningful free cash flow in fiscal 2026, we expect to continue to make progress on reducing net debt and deleveraging our balance sheet over time, while also investing meaningfully in innovation so that we can make progress on our long-term objective to return Peloton to sustainable, profitable growth. Now, we'd like to open the line for Q&A.

Thanks, Liz. We'll begin the Q&A process this morning by taking a couple of questions from investors that sent their topics in advance. We received more than two dozen questions this quarter. While we can't answer all of them, we did pick a couple of representative ones that we'll tackle before the operator opens the line for additional questions. Our first question was asked by a number of U.S. investors, so I'll paraphrase. How does Peloton see the opportunity for growth as Americans focus more on health and fitness? In particular, can you speak to how this impacts the younger demographic? Peter, maybe you can jump on that one.

Speaker 0

Thanks, James. The attitudes of younger people are a big reason for the strategy that we announced today. When we look at young people, they're expanding their definition of what it means to live well. From a narrow focus on cardio as a tool for weight loss toward a more holistic approach that brings together cardio and strength and sleep, stress management, and nutrition to improve the quality of their lives and, as I talked about, their health span. We also see that younger people are more likely to do training for their mental health. They pursue a more diverse range of training approaches with more of an equal approach to strength and cardio. They're also adopting functional nutrition, thinking about food as a tool to enhance their wellness.

At the same time that we're seeing all those positive trends, we're also seeing just upsettingly high levels of stress and depression and anxiety among young people. While we're reorienting Peloton with the announcement of today's strategy to maximize human impact for everyone, we know young people need us more than ever. That means we're going to be focusing even more on personalized training programs that cut across the many disciplines that we offer. It means even more investment in strength, including things like our Strength Plus app, because young people are more likely to pursue hybrid workout regimens both at home and at the gym. It means more investment in areas like meditation and sleep for mental well-being. We have something really cool on the way. Can't wait to talk more about it soon, using a mix of software and human coaching.

Last but not least, our special pricing program that I talked about earlier offers discounted subscriptions on the Peloton App for students because not everyone has access to our equipment at college.

Great. Our next question comes from Barack in San Jose, California, leaderboard named B Menton. He asks, "Stock-based compensation expenses have been growing disproportionately to the growth in your business. What are management's thoughts on current levels of SBC?" Peter?

Yep, thanks, Barack. Great question. I'll start by just noting that some stock-based compensation is a good thing. It aligns the interests of the company's employees, especially senior leadership, with the interests of shareholders. We all benefit when we see stock improvements in the value of our stock. It's also retentive. Typically, cash payments happen within the year, but parts of stock-based compensation require employees to stay for multiple years in order to receive the benefits. It also encourages a long-term mindset as a consequence. That being said, your question was, you know, what's our thought on the current level of stock-based compensation? I'd say, historically, it's been too high. I'll note that in FY2025, we were able to reduce our stock-based compensation expense by $77 million, which is a 25% reduction year over year. We do expect that to decline further in FY2026.

I think we are definitely focusing on dilution. It's important. The other thing that we're doing is trying to even more closely align the interests of our leadership with the interests of our shareholders. To that end, in FY2025, we introduced performance stock units, PSUs, as a component of our executive compensation. We are planning on increasing the mix of PSUs as a fraction of total stock-based compensation as we enter FY2026. Thanks again for the question.

Thanks, Peter. Sheree, can you open up the question part of the line for questions, please?

Speaker 3

Of course. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 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. That will come from the line of Arpine Kocharyan with UBS. Your line is open.

Hi. Thank you for taking my question. Good morning. I was wondering if you could go over what's baked into your revenue assumptions for the year. You provided some good context in terms of current strategy of why all you're doing could increase higher engagement, and that can lead to better churn and outcomes and ultimately, hopefully, stabilization in subs. I know it may be challenging to get into pricing given there was no price increase announcement from Peloton in the release. Maybe you could go over the key inputs of how you get to your revenue numbers for the year, and then I have a quick follow-up for Liz. Thank you.

Speaker 5

Thank you, Arpine, for the question. We talked about a little while ago that our Q1 revenue guidance reflects a 9% decline at the midpoint, and our full-year guidance reflects a 2% decline at the midpoint. That does imply that we expect to inflect toward year-over-year revenue growth in the following three quarters of the year. We intend to achieve this through a combination of growth levers that are available to us, including sales and subscriptions as a result of some exciting product updates that we hope to be able to share with you soon, adjusting prices to reflect the value that we provide to our members, and cost of operating our business. This includes things like charging delivery and return fees and adjusting pricing and promotions. In today's shareholder letter, we did note that we'll have more details to share about our product innovation before our next earnings call.

We're very excited about these, and they make us optimistic for the holidays. In our next earnings call, we'll be able to provide some more color on how these are impacting our full-year expectations.

Thank you. That's very helpful. Maybe this one is for you as well. Would it be possible to go over the cadence of that $100 million of cost saved? You alluded to where they're coming from outside of headcount. Where else do you see opportunities? There's always that concern that incremental cost cutting is almost always more difficult when the low-hanging fruit has been harvested. If you could help us sort of break down the cadence of those costs saved throughout the year, it would be helpful. Thank you.

Today's announced restructuring plan is designed to achieve at least $100 million in annualized run rate savings by the end of FY2026. As of today, we will have actioned about roughly half of the run rate savings through the reductions in our workforce. We expect to achieve the remainder throughout the balance of the year. One of the areas that we are focused on is indirect spend optimization and also potential workforce relocations. The $100 million run rate savings target consists of reductions across our operating expenses. The biggest area is G&A. We also expect some savings across R&D, sales and marketing, and COGS. I mentioned it earlier, but I'll mention it again, that our stock-based comp represents about 15% of the run rate savings target.

That's very helpful. Thank you.

Speaker 3

One moment for our next question. That will come from the line of Youssef Houssaini Squali with Truist Securities. Your line is open.

Good morning. Congrats on that solid quarter. Maybe just a follow-up to the prior question about growth. Just to be clear, it's great to see you guys going from having shrunk for the last several years to looking at a pivot in revenue growth, starting hopefully in Q2 through the rest of the year. As we look at the business, maybe longer term and maybe beyond the price adjustments that may get you there near term, can you maybe just talk about your expectations for kind of the secular growth in this business? Is this business still at a holistic level, still flat to maybe declining from an overall market standpoint, or do you see that having maybe improved? I have a quick gross margin question from Liz after that.

Speaker 0

Yeah, Youssef, thanks for that question. We have great optimism for the future of this business. One of the things that we've done here is some research focusing on the U.S. and looking at what we believe the market opportunity is, even if we just focus on fitness for a moment. We looked at, in this case, just people with household income of over $75,000 who spend money on fitness. That's 117 million people in the U.S. just alone. If we further qualify that group to add that they're willing to spend money on both fitness equipment and fitness subscriptions, we believe that's about 17 million households in our service-addressable market. In the U.S., we have only a fraction of those households as subscribers. We've got plenty of upside just in the market as it's been, as sort of as it exists right now.

I talked earlier about the trends that we're seeing in the marketplace as well, with people becoming ever more focused on their quality of life and recognizing that that creates a real need for them to engage in behavioral change. That has the potential to further increase those numbers that I just described. For us, it opens up additional vectors for growth for our company. We've basically only really been serving people through cardio. The rest of the disciplines, while we have amazing offerings and really impressive uptake of those, are essentially adjuncts to that. As you start to think about each of those as a vector for customer acquisition and potentially drivers of incremental value from our members, you can start to see a significant potential for growth.

As I've said earlier, I believe that there's no company better positioned as a matter of credibility and the resources that we have and the amazing people that we have in our company to capture those opportunities. I view this as an expanding market and one that we have barely scratched the surface of.

That's awesome. That's really helpful. Liz, could you please double-click on your expectations for gross margin for 2026, particularly across both subscription and hardware? I think you guys have done a really good job improving margins on the hardware business. How does that progress throughout the year as you keep seeing maybe some headwinds to that top line? Thank you.

Speaker 5

Sure. Let me talk a little bit about Q1, and then I'll talk about the full year. In Q1, we do expect our total gross margin to decrease sequentially, and that's due to lower margin across both of our segments. Our connected fitness gross margin will be impacted by the fact that we will have less, we expect to have less hardware sales. That causes some fixed cost to leverage. Similar to prior years, you know, we do expect to have just a lower seasonal mix of revenue from connected fitness in Q1. Q1 submargin is expected to return into the 68% to 69% range that we are typically in. We outperformed a bit in Q4, but we expect to be back in kind of our 68% to 69% range.

Now, on a full-year basis, if you look at our fiscal 2026 guidance, it reflects a year-over-year improvement of 140 basis points after you adjust for the impact of assigning the executive and corporate overheads costs to COGS. I talked a little bit about how we are making that change in the assignment starting this year. We do expect margin improvement in both of our segments. Connected fitness segment, we expect to benefit from things like lower service and repair costs, lower warranty costs, and also some of the benefits associated with our FY2026 cost savings plan. The subscription segment, we do expect to benefit from optimizations to our content production and music royalty expenses.

Super helpful. Thanks, Liz. Thanks, Peter.

Speaker 3

Thank you. One moment for our next question. That will come from the line of Curtis Nagle with Bank of America. Your line is open.

Yeah, great. Thanks very much for taking the question. Maybe just switching gears a little bit. We touched on this a bit on the call, just thinking about capital allocation and potential refi now that you guys have demonstrated very strong EBITDA and cash flow. How are we thinking about that, I guess, in relation to the term loan?

Speaker 5

Sure. Let me just sort of recap a little bit on our capital allocation strategy and kind of where we've been and where we're going. Many of you may recall that in May of 2024, we were approaching a maturity wall, and we successfully completed a $1.35 billion refinancing of our balance sheet. Since that time, we have grown our adjusted EBITDA from $4 million in fiscal 2024 to over $400 million in fiscal 2025. We also generated over $320 million of free cash flow. With that progress, which we've been really pleased with, we have been able to quickly deleverage our balance sheet, and our net debt has decreased 43% year over year. We ended the quarter with just under $1.4 billion of unrestricted cash and cash equivalents.

We also are mindful that we do have those $200 million in convertible notes that are due in February of next year. Obviously, we have enough cash on our balance sheet to be able to pay them down and then some. We don't intend to pay them early at this point because they are a 0% coupon. Now, as we think about our capital allocation strategy going forward, we do believe that we have more cash on the balance sheet than we need to run the business. Our top priority is just to continue to deleverage as we believe this will create more optionality for us in the future. Regarding our $1 billion term loan specifically, it is a five-year term loan. It's priced now at SOFR plus 5.5%. It used to be 6%.

We achieved a 50 basis point rate step down for achieving our first lien net leverage ratio of less than 5x a couple of quarters ago. If we were to take the term loan out today, it comes with a penalty of 1% or roughly $10 million. That reduces to par in May of 2026. We are always looking at optimizing our capital structure, but we do want to be mindful of that $10 million penalty, which as we get closer and closer to May of 2026, it's less of a benefit to take out and restructure ahead of that date. We're always looking at what opportunities we have, and we do believe that our much stronger balance sheet should enable us to achieve better interest rates at the right time when we do restructure.

Okay. Got it. Peter, a quick one for you, just in terms of sizing commercial opportunities. You have a new working group dedicated to that. In terms of how material that could be to revenue and results this year, just any thoughts there?

Speaker 0

Yeah, Curtis, thanks. The commercial business unit that we launched has already turned back to growth. That is a consequence of the amazing work of the Precor team in rebuilding relationships with gyms around the world. I love this combination. You've got basically Precor, which builds world-class heavy-duty equipment for the commercial environment. Just as important is a service model that they've got that's ideal for the high-use environments and the expectations of commercial gym operators. You've got Peloton with our magic formula of beautiful high-quality equipment and software and human coaching. When you put those things together, you've got a foundation in terms of the equipment, software, content, and the services that just no one can match for gym. You add to that the fact that Precor is already in 80,000 facilities across 60 countries. Peloton's in 20,000.

We haven't deduped the whole thing, but we're talking about relationships with close to 100,000 facilities around the world. When you do what we're now working on, which is you get to one combined sales force with two powerful complementary brands, we think commercial fitness and wellness is ours to win. It is an important vector for growth for us.

Okay, thank you.

Speaker 3

One moment for our next question. That will come from the line of Brian William Nagel with Oppenheimer. Your line is open.

Hi. Good morning. Thanks for taking my questions. I want to balance, and I apologize, I think this will be a little repetitive, but I do want to bounce back to the revenue guidance for the year. The question I want to ask is, as you've laid it out, here in fiscal Q1, revenue is expected per your guidance to be down to high single digits and then improve through the year. What are you seeing to help us understand better that guidance or the achievability of that guidance? Can you point to anything you're seeing in the business now that gives you that confidence? I guess with that, how should we think about the split, if you will, between any changes you plan to make on subscription pricing versus new member acquisition within that guidance?

Speaker 0

Brian, why don't I take a little bit of a crack at this? Because Liz sort of did the first pass at this question. As you noted, the first point is that from a revenue standpoint, if you look at Q1 versus the rest of the year, we go from down at the midpoint minus 9% to at the rest of the year, minus 2%. We are inflecting toward growth in the back part of the year. What are the vehicles for accomplishing that? It's growing our new member acquisition. You'll see that happening as a consequence of some of the innovations that we are not talking about today, but that we will reveal before our next earnings call. We believe that will attract more new members to the company, alongside the fact that Q2 is usually a seasonally strong business. We hope to achieve an acceleration of that progress.

It comes from higher revenue per member. We believe we'll be able to accomplish that by selling more equipment. We're very excited about our innovations, but more to come on that. Some of that can be to existing members. Some of that can be to new members. You're pushing on questions around a price change. What I would say is the best time to announce a price change, if you're going to do that, is when you've actually got the value lined up, looking both backwards and forwards. Looking backwards, we are delivering tremendous value to our members, and we feel great about where we are. We've more than doubled our instructor-led programs since we last did a price change over three years ago. We've significantly increased our library workouts.

We've done so much on strength, whether it's the launch of the Strength Plus app or launching new categories like kettlebells and weighted vests. We've expanded many of the features of our product, like we launched entertainment options like YouTube and Disney Plus and NBA League Pass to our product. I've talked a lot about personalized plans. We're now up to 700,000 of our members taking advantage of personalized plans that are based on their goals and their preferences. I think looking backwards, we feel really great about the value we've provided. A lot of members will feel like, well, I already got that. What are you going to do for me going forward? Today is not the day for me to talk about those sorts of things. When we do, I think our members are going to be even more excited about what Peloton has to offer.

I'm not going to comment anymore on that particular topic except to just signal the value we already deliver and intend to deliver as being really positive. There are those things. The other point that I'd like to make is that there are a lot more ways of driving growth now for us as a business. Selling a second or even a third connected fitness product to our existing subscribers. I talked a moment ago about the revenue that we generate from our commercial business unit, and we're seeing so much momentum now from that unit. We're starting to see some real interest in the marketplace on content licensing opportunities because there is simply nothing like Peloton out there in the world. All of those basically aggregate up to give us the confidence that we can turn the tide on the revenue side.

Peter, I appreciate all the color. I'll leave it there. Thank you.

Speaker 3

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

Thanks a lot for taking my questions. Let me try two, please. Peter, thanks for the context on how Peloton could evolve. It sounds like there will be more details coming here in the next few months. To the degree that you can comment on any, is Peloton going to, the value proposition going to be one of a wellness app rather than a fitness app? If we are thinking about it that way, the value proposition that will be added on, are you thinking about offering different types of tiering? If I just want to have a part of it versus the full package. The second is the TAM has been big. I think it is pretty well understood in terms of how big your TAM is. One of the concerns has been adding new subscribers at the price points because it's a premium product.

Could you please address that? In the past, it has been fitness as a service and/or certified refurbished. Are those going to still be strategies that you're going to be doubling down on, or where do those stand? Thanks a lot.

Speaker 0

That's great. Lots to cover there. I want to start with the fact that cardio is and will continue to be the foundation for Peloton, as it is the foundation for our members achieving their health and wellness outcomes. Our leadership in that space and the trust that we've built with our members in that category are what entitle us to be able to offer these additional offerings. Right now, strength is already a key part of our approach. If you were to listen to the CDC, they will tell you that a mix of cardio and strength is optimal for adult fitness. We are seeing 2 million of our members engaging in our strength classes again this quarter, and we've been doing even more in that area. I talked about kettlebell classes, the dedicated Strength Plus app, which now allows you to take Peloton into the gym.

We're evolving our software capabilities in the strength space, and we'll have some very exciting updates in that area coming soon. Mental well-being, we continue to see strong levels of engagement in our meditation classes. As I indicated a little while ago, we have something cool coming along those lines that I can't wait to tell you more about that I think will make a big difference for people. It'll help with sleep as well. We're basically using our content team as an R&D lab on nutrition. In Q4, we launched our Peloton Kitchen series on social media. We've been working in partnership with Dr. Jamie Schur, who's an expert nutritionist and dietitian. We're going to be testing and iterating on nutritional content over time. In terms of your questions, there are a number of them that followed from that, Shweta.

With regard to tiering, we already do have a tiering structure between app one, app plus. We've got the Strength Plus app that's available à la carte, and those we think are really nice gateways for people to discover Peloton and ultimately ladder up to the all-access membership. With regard to our TAM, as I discussed earlier, there is a big, there is 117 million people who spend money in the category and have the capability to invest in our type of equipment. There's a big gap between that and the people who are ready for a subscription. It's important for us to be able to tell our story and to reignite the innovation engine that excites people in the way that Peloton once did and most certainly will in the very near future.

By the way, in so doing, we will essentially close the gap between the 17 million and the 117 million. That is where there's so much opportunity for us. With regard to Fast and Refurbish, we are committed to both of those programs as well as to the secondary market, which is contributing a very large fraction of our new members. Essentially, what you see here, and this is the tiering of our equipment prices, is that without having to produce, in the case particularly of our bikes, without having to produce a lower-end bike, we're able to use our premium products and use the combination of the refurbishment and that secondary market to offer a lower price access point for people. Because we build that equipment to last, it's basically as good as new for secondary owners. Yes, we're committed to all of those. I appreciate the question.

Great. Now we're at the bottom of the hour here. Sheree, I'll ask the last question. It comes from Debbie in New York, leaderboard name Get Busy Living. Debbie asks, "What are some of your strategies and ideas for keeping Peloton interesting and exciting, particularly for loyal and long-time users?" Peter?

Debbie, thank you. I love that question because I'm one of them too. I'm approaching my ninth-year anniversary as a Peloton member in September. There are occasions when I find myself just getting in the rut of my go-to instructors and just doing the latest classes from them. Fortunately, I'm privy to all the amazing things that we're doing here. Here's some advice, and this is what I've been doing. One, try to branch out. We support about 15 different disciplines, and that's not just good for keeping your interest in Peloton. It's good for your body. It's good for your mind. Do strength in addition to cardio. If you belong to a gym, please download and try the Strength Plus app. It's amazing. Add in meditations, whether you're doing them during the daytime for focus or whether you're doing it at nighttime to help you sleep.

It'll reduce your stress. It might even improve your interpersonal relationships. Try one of our new approaches, like weighted vest classes or kettlebell workouts. Again, branch out on the instructors. I've had the privilege of meeting all of them. We have more than 50 remarkable instructors, and every one of them is an inspirational expert. Please go ahead and set up a personalized program. We've improved them a lot, even in the last quarter, to make them more flexible around your schedule. What the personalized program will do is it'll recommend a mix of both newer and older classes that'll help you achieve your goals faster. Definitely join a team. I'm a member of one of them, and that is basically now this supportive environment. It's like a safe social network that gives you tips on what works for other people and encouragement.

We also recently just added the ability in the team's feed to link to workouts. Our members are now recommending workouts to each other, which is awesome. If you can afford it, add another piece of our equipment into the mix. I know that sounds self-serving, but if you add, let's say you're a cycling diehard and you add tread or row into your routine, it's going to activate different muscles for you, both physically and mentally. Last but not least, and since you're a long-time member like me, I think you're going to really appreciate the work that we're doing to recognize and reward healthy habits and loyalty to our community. That's one of the cool things we're going to be announcing really soon, and it's going to grow over time. With all that, stay with it, Debbie. Stay tuned. I welcome your feedback as we share more.

Great. I want to thank everyone for joining us today. Have a good day. Thank you.

Speaker 3

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