Q4 2024 Earnings Summary
- Peloton anticipates an approaching inflection point in the Connected Fitness market, with year-over-year declines lessening dramatically since fiscal '22, indicating that the category could start growing again within the next few quarters. Over the long term, Peloton remains bullish on the growth potential and expects to grow its share of total fitness and wellness spending through investments in product and content innovation and evolving its marketing strategy.
- Significant untapped market opportunities ("white space") exist for Peloton to expand beyond its perception as just a bike or cardio company. With 16 modalities, including strength training (their #2 modality) and Tread (running), which are not yet widely known, Peloton aims to capitalize on these areas. Efforts to promote strength and Tread, along with new content and features, could drive new subscriber growth and deepen engagement with existing members.
- Peloton is investing in innovative software and enhancing the overall member experience with social features, personalization, and gaming-inspired workouts. These innovations are expected to drive member retention and organic acquisition over time, enhancing the value proposition and potentially leading to sustainable, profitable growth.
- Peloton expects a decline in connected fitness subscribers in fiscal 2025, citing challenges such as reduced marketing spend, cessation of the original bike rental program, and macroeconomic uncertainties. The company stated, "our outlook does not assume subscriber growth from these new initiatives in fiscal 2025" and "our ability to grow subscribers remains unlikely" .
- The churn rate for connected fitness subscriptions increased to 1.9% in Q4 and is expected to remain at this elevated level, marking an uptick year-over-year. Factors contributing to higher churn include "mix shift into our higher-churn populations, namely our secondary market subscribers... and also... our bike rental program" .
- Peloton's LTV-to-CAC ratio remains below their target range, at 1.5x in the last quarter compared to the company's goal of 2x to 3x, indicating ongoing challenges in acquiring profitable customers efficiently .
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Subscriber Outlook and Growth Initiatives
Q: What's causing subscriber decline in FY'25? Plans to reverse it?
A: Peloton anticipates a subscriber decline in fiscal 2025 due to macroeconomic factors and strategic decisions to focus on sustainable, profitable growth. The company is reducing inefficient marketing spend and has ceased the original bike rental program because refurbished inventory is limited. Despite this, Peloton is optimistic about growth opportunities through investments in product and content innovation, evolving marketing strategies, and focusing on high-potential areas like Tread and strength training. -
Gross Margin Improvement Plans
Q: How will you improve Connected Fitness gross margins in 2025?
A: Peloton expects substantial improvement in Connected Fitness gross margins in fiscal 2025. Strategies include rightsizing inventory to avoid write-offs, focusing on hardware pricing, reducing promotional activities, and enhancing supply chain efficiency. The goal is to restore Connected Fitness margins to at least the low double-digit range and continue improving over time. -
LTV-to-CAC Improvement
Q: What are key factors to improve LTV-to-CAC ratio?
A: Peloton is focusing on both sides of the LTV-to-CAC equation. Improving financial foundations and gross margins will enhance lifetime value (LTV). On the customer acquisition cost (CAC) side, the company is becoming more efficient with marketing spend, reducing promotions, and targeting key audiences, which lowers CAC. The LTV-to-CAC ratio was 1.5x last quarter, showing progress but still short of targets. -
Churn Rate Increase
Q: Why is churn higher and expected to remain so?
A: The churn rate increased to around 1.9% in Q4 and is expected to remain at that level in Q1, representing a year-over-year uptick. This is partly due to a one-time benefit last year from members unpausing subscriptions after a seat post recall. Additionally, a slight worsening in churn rates and a mix shift toward higher-churn populations, such as secondary market subscribers and bike rental users, contribute to the increase. -
CEO Search and Potential Strategy Changes
Q: How will the new CEO affect current strategies?
A: The CEO search is a high priority and is far along with highly qualified candidates. While the new CEO will weigh in on strategy, current initiatives—like being judicious with spending, ensuring unit economics and margins make sense, and planting seeds for growth—are foundational and will likely continue. Preparations are underway to provide a strong runway for the next leader. -
White Space in Connected Fitness Market
Q: What opportunities exist for market expansion?
A: Peloton sees significant white space beyond biking and cardio. They're excited about growth in Tread and running, strength training, and expanding their 16 modalities. Strength training is already the #2 modality but is underrecognized. International markets also offer growth opportunities, with a focus on capital-light, efficient go-to-market strategies. -
Ceasing Original Bike Rental Program
Q: Will you restart the bike rental program?
A: Peloton has ceased the original bike rental program due to challenges in supplying it with refurbished inventory, as return rates are low. Currently, there are no plans to toggle the program back on, with refurbished inventory allocated to sales instead. However, the Bike+ rental program remains active and performs well. -
Pricing Strategy
Q: Any changes to subscription or hardware pricing?
A: There are no immediate plans to increase subscription prices; Peloton believes it offers great value and aims to enhance it with new experiences. Hardware pricing is under evaluation, especially in markets with significant third-party distribution where higher margins are needed. The focus is on optimizing unit economics across all products and channels.