Peloton Interactive, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Peloton's fourth quarter fiscal year 2021 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 star 1 on your touchtone telephone. Please be advised that today's conference may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Head of Investor Relations, Peter Stabler.

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

Thank you, Peter. Good afternoon, everyone, and thanks for joining us today. Our fourth quarter brought a remarkable year to a close. We finished the year with $4.02 billion of revenue, up 120 percent year-on-year, and up 340% versus fiscal 2019. We added over 1.2 million connected fitness subscribers in fiscal 2021, and digital subscriptions ended the year up 176% versus a year ago. We introduced new products and software features, greatly expanded and enhanced our content library, and launched in Australia, which was no small feat given COVID pandemic complexities. We invested aggressively in supply chain and logistics, allowing us to bring product wait times back to pre-pandemic levels. Even with the significant investments we made in manufacturing capacity and expedited shipping, this level of growth drove far more EBITDA profitability than we had anticipated or intended to achieve at this point in our growth cycle. We recognize, of course, that there is a great debate about the growth prospects of our industry post-COVID. Therefore, I think it's worthwhile to spend a minute reflecting on the year and our path forward before we review the quarter and our outlook for fiscal 2022. Over the past two years, you've heard us speak regularly about the connected fitness opportunity we see for Peloton, how the combination of our world-class fitness hardware and software and streaming media is fundamentally disrupting an industry that has seen little in terms of true innovation in the past 40 years. How our highly engaging, motivating, and entertaining world-class fitness content is consumed in the comfort of your home, creating an unparalleled workout experience at an exceptional value. How the magic of network software and streaming media enables a near-constant innovation cycle where your experience on Peloton platform is incrementally better every time you use it. What happens when we put member engagement at the center of our business strategy and and adopt a members-first mindset across every part of our operation, the benefits that come with high subscriber retention and the advantage of industry-leading net promoter scores, and the power of the Peloton community that motivates and encourages millions of people in their pursuit of physical and mental wellness. We believe that we are still in the first inning of Connected Fitness industry growth, and we have the opportunity to extend our leadership as the pioneer of this category. our strategy remains constant. We will continue to invest aggressively behind new hardware products, software experiences, and content offerings for both cardio and strength training, the two pillars of physical fitness. We will continue to prioritize subscription growth over near-term profitability as it's still very early days in the consumer migration to connected fitness in the home. We will continue to expand our geographic footprint while leveraging additional distribution channels like commercial and corporate wellness. And we will continue to drive supply chain efficiencies via a focused hardware portfolio. From our beginnings, we have also consistently sought to make our products and content more accessible, lowering a key barrier to purchase. In 2017, we began offering a 0% financing option. In 2019, we introduced our no-risk 30-day home trial. Last year, with the introduction of Bike Plus, we lowered the price of our original bike. Earlier this year, we reduced the price of our digital app for frontline healthcare workers, active military, first responders, and full-time students. And just a few weeks ago, we introduced Peloton Corporate Wellness, further increasing the accessibility of our products through subsidy, relationships with corporate partners, and healthcare providers. Today we announce our latest step on the journey to broaden the accessibility of our products. We are lowering the price of our original bike by $400 to $1,495. Applying our 39-month 0% APR financing option, this equates to a hardware cost of just $39 per month. Adding our all-access membership comes to just $78 per month, a monthly spend that scales across an entire household, creating an incredible value versus almost any other fitness offering. For a two-person household, inclusive of the all-access membership, that's under $40 per person per month during the finance period and less than $20 per person per month thereafter. Today, we are also introducing revised financing options for our Bike Plus and Tread products, extending our 39-month option to 43-month option equating to a monthly payment of approximately $59 per month during the finance period. As before, we will continue to offer 12-month and 24-month options as well. Democratizing access to our platform has always been our goal for our team. With our supply constraints largely solved now, We're seizing this opportunity today to continue to deliver against one of our key strategic priorities. Now turning to some highlights for the quarter. Our community has now passed 5.9 million members globally, up 93% year-on-year and over 320% from the year ending fiscal 2019. Total platform workouts in the quarter reached 154.5 million, up 86% year-on-year and reflecting roughly eight times the number of workouts completed in Q4 of fiscal 2019. In Q4, we averaged 19.9 monthly workouts per Connected Fitness subscription versus 24.7 in the year-ago period. As expected, engagement levels were lower sequentially and on a year-over-year basis as typical seasonal trends associated with improved weather and consumer mobility have reemerged. Last year's engagement benefited significantly from lockdown orders, work from home mandates, and gym closures. On a two-year basis, monthly workouts per Connected Fitness subscription increased 66% from 12.0 in Q4 of fiscal 2019, validating our significant software and content investments. As a result of our efforts to keep our members engaged, connected fitness retention rates remain very strong, with average connected fitness monthly churn of 0.73% in Q4 and 0.61% for fiscal year 2021. Moving on to TREAD. As we announced on Tuesday of this week, we are thrilled to commence U.S. sales and resume U.K. and Canada sales on August 30th, finally bringing this incredible product to market in the U.S. ahead of the key holiday selling season. Similar to how we reimagined what a stationary bike workout can be, our new tread experience brings game-changing full-body workouts into the home. The early consumer reception supports our enthusiasm with a net promoter score for our all-new tread of 85 in our initial U.K. and Canada launch markets, an incredible result for a brand-new product. and to be sure the software and content is only getting better. As we have said, we believe the opportunity for our new tread is two to three times the size of the bike category. Sales of our Slat Belt Tread Plus product, which has only been available in the U.S., remain paused as we continue to work on a retrofittable hardware modification to further enhance Tread Plus' safety profile. As the category leader, we see a clear opportunity and frankly, a responsibility to innovate on safety, and we are encouraged by the progress being made across our teams. Now I'll hand it over to Jill to review our Q4 financial results and outlook for fiscal 2022. Thanks, John.

I will start with a review of our fourth quarter results. In Q4, we generated total revenue of $937 million, representing 54% year-on-year growth. The primary drivers leading to our revenue outperformance versus guidance were higher than expected bike deliveries and better than expected connected fitness churn. This was partially offset by a higher than anticipated tread and tread plus return rate. We made significant progress on product wait times with bike and bike plus order to delivery windows at pre-pandemic levels for the past several weeks. We added 250,000 net Connected Fitness subscriptions in the quarter, bringing our end of quarter Connected Fitness membership base to 2.33 million, up 114% year on year. This was ahead of expectations, reflecting strong bike and bike plus demand, as well as better than expected growth additions helped by secondary market sales. Despite typical seasonality and increased consumer mobility, average net monthly connected fitness churn was also better than anticipated at 0.73%. As of June 30th, we had over 874,000 digital subscribers, representing 176% year-over-year growth. This was a modest sequential decline from the previous quarter, which mostly reflects the seasonality of our digital business, which is more pronounced than for connected fitness. In addition, our growth in digital quarter to quarter is influenced by our marketing spend with acquisition efficiency and LTV in mind. As we discussed last quarter, we see digital as a healthy emerging business as well as an effective path for many to upgrade to connected fitness. Further, Teletron's digital accessibility and compatibility with multiple operating systems is very attractive to potential corporate wellness partners. As a result, we expect continued growth in our digital subscriber base in fiscal 22, albeit with some quarter-to-quarter growth rate variability. Moving to gross margin. Gross margin for the quarter was 27.1%, which came below our expectations. This was entirely due to our Connected Fitness product segment, which had a gross margin of 11.6% below our 21% guidance. As I mentioned a moment ago, initial TRED and TRED Plus return rates were higher than our forecast as of the third quarter call. We are now recognizing a higher than anticipated expense associated with actual returns and have updated the return reserve rate accordingly. Please keep in mind that we always expected some uncertainty in modeling returns, and we do not believe the delta versus our expectations is meaningful. The impact of recall-related returns is added back to our adjusted EBITDA, but it's fully reflected on the revenue and gross profit lines. The tread recalls also have some carryover impact on our logistics and warehousing costs, which came in higher than anticipated rounding out the balance of the shortfall in connected fitness margin versus expectations. As we are now largely past these recall-related activities, we expect a rapid return to more normalized and predictable execution across our logistics platform. Subscription gross margin was 63.3%, and subscription contribution margin was 69.3%. modestly ahead of expectations as we continue to leverage fixed costs associated with content production. As a reminder, quarter to quarter, we will continue to see some variability, but we have strong visibility to our goal of a subscription contribution margin target above 70%. Turning to operating expenses. Total operating expense as a percent of revenue was 59.3% compared to 32.7% in Q4 last year. Operating expense deleverage was driven by our planned shift in marketing spend from Q3 to Q4, lower revenue due to recall impacts in the quarter, and the impact of adding pre-core to our financials. Sales and marketing expense was 24.5% of total revenue versus the prior year period of 13.9%. As planned, we ramped marketing in Q4 given our improved order to delivery windows, and we lapped a year ago period in which we paused the majority of our advertising spend. G&A expense was 24.8% of total revenue versus 14.2% in the prior year. As you know, our business grew significantly during fiscal 21. We made substantial investments across member support, financial systems, and other functions so that the organization can scale effectively with the growth of the business. With our member experience as our North Star, these investments will help us continue to improve our end-to-end member touchpoints. Also, we added PreCore to our organization, which was a driver of some of the sequential increase in G&A, inclusive of legal and integration costs related to the acquisition of PreCore and Q4. R&D expense was 10% of total revenue versus 4.7% in the year-ago period. Similar to recent quarters, we continue to invest in developing best-in-class hardware and software teams, both organically and through AquaHires. Fiscal 21 Q4 adjusted EBITDA was better than expected at a loss of $45 million, representing an adjusted EBITDA margin of negative 4.8%. Net loss for Q4 was $313.2 million, or a loss of $1.05 per basic and diluted share. We ended the quarter with $1.6 billion of cash in liquid assets and have additional liquidity in the form of an untapped $285 billion credit facility. As a reminder, our balance sheet benefited in fiscal 21 from approximately $900 million in net proceeds from our convertible note offering completed in February. Now on to our outlooks. As you know, fiscal 2021 was a very unusual year in which both supply and demand shocks impacted our performance. We are now lapping those comparisons, which makes predicting our year-over-year performance more challenging than normal. The Q1 and fiscal 2022 outlook we are sharing today reflects our best current estimates and includes the following assumptions. A return to normal seasonal patterns where Q2 and Q3 combined comprise roughly 60% of sales, with Q1 being our lowest sales and delivery volume quarter. As in the years prior to COVID, we expect fiscal 22 sales trends to be impacted by seasonal weather as well as holiday and New Year's resolutions purchases. We saw these trends going into fiscal 22. Two, strong demand for bike and bike plus. with higher unit sales expected than in fiscal 2021. Three, strong acceptance of our lower-priced tread, with our expectation that approximately 50% of treads globally will go to existing Connected Fitness households, and therefore, those sales will not result in an incremental Connected Fitness subscription. Four, compelling net customer acquisition costs with rapid payback. continued high engagement and healthy retention across all cohorts, including those added during the pandemic, implying expected low churn of our connected fitness subscriptions. Six, operating expense growth ahead of revenue growth as we restore sales and marketing following pandemic-related cuts and recognize the annualized impact of recent G&A investments we've made to scale our organization for growth. And last, number seven, sequentially improved connected fitness gross margin and positive adjusted EBITDA in the second half of this year as we leverage our fixed investments in our supply chain and logistics platform and generate operating expense efficiencies. Moving on to revenue. In Q1, we expect revenue of approximately $800 million, representing 6% year-over-year growth and an 87% two-year CAGR. Please note that our Q1 revenue assumption contemplates a very small contribution from the upcoming launch of TREAD in the U.S. and resumption of sales in the U.K. and Canada due to our anticipated order-to-delivery expectations of three to four weeks and the fact that we recognize revenue upon delivery, not sale. For fiscal 2022, we expect total revenue of $5.4 billion, or 34% year-over-year growth and a 72% two-year taker. Given our significant manufacturing capacity and logistics investments during the past year, we are entering fiscal 2022 with a normalized backlog for our bike portfolio and guidance reflects our expectation of continued strong demand. Please note, we are assuming 15% of full year revenue will occur during Q1, which is below 19% in the COVID-affected fiscal 21, but modestly above the 13% contribution we saw in fiscal 2018 and 2019. Moving to connected fitness subs. We expect to end Q1 with 2.47 million connected fitness subscriptions, or 85% growth versus last year's Q1, implying 140,000 net ads. For Q1, we expect monthly average net churn for our connected fitness subscriptions of 0.85%. Please note that after this quarter, we will no longer guide monthly average net churn of our Connected Fitness subscriptions on a quarterly or annual basis. As we have discussed in the past, this is a difficult metric to forecast with precision and we therefore do not see the value in continuing to provide guidance. However, churn remains a very important metric to us and we will continue to report our actual results each quarter. Everything we do at Peloton is designed to keep our members engaged and our churn rate low. And over time, we expect our churn and retention rates to remain relatively consistent. For fiscal 2022, we forecast ending Connected Fitness subscriptions of 3.63 million, implying 56% growth year-over-year and 1.3 million net ads. Similar to revenue, our guidance assumes normalized seasonality with Q1 net ads representing 11% of the full year total, down from 20% last year, but similar to the 12% we saw in fiscal 2018 and 2019. Moving on to margins. We expect total company gross margin of 33% in Q1 and 34% in fiscal 2022, which is based on a connected fitness product gross margin of 15% in Q1 and 23% for fiscal 2022. The year-over-year gross margin compression reflects the following factors. One, the impact of our price reduction on the original bikes that we announced this afternoon. Two, the sales mix impact from launching TREAD, which currently carries a lower margin than our bike portfolio. And three, significantly elevated costs of certain commodities, including steel and semiconductors, as well as freight rates multiple times higher than normal. As we've mentioned previously, We manage our connected fitness product segment to optimize for gross profit dollars rather than gross margin percentage. While introducing a more accessible price point for bike and a higher sales mix of tread will lower our gross margin percentage in the near term. These are strategic actions that expand our addressable market and will be highly accretive to gross profit dollars over time. We continue to expect connected fitness gross profit to largely offset our fully loaded CAC over time, and our fiscal year 22 guidance assumes a modestly positive net tax, which follows a significantly negative net CAC in fiscal year 2021. While our current guidance reflects our best estimates of today for commodity costs and freight rates, it's possible we may see additional pressure on our connected fitness margin if costs are materially worse than we expect, or if component shortages necessitate expedited shipping costs. We continue to see tightness in component supply, but we have and are taking steps to prepare for a strong holiday season and balance of fiscal year 2022 demand. Lead times for certain components continue to be abnormally long, and we're therefore utilizing longer-term commitments with our supplier base while expanding our supply chain partnerships in order to limit any disruptions. Connected fitness margin in Q1 will also be significantly impacted by last-mile delivery costs given the seasonality of our business. Teleton's last-mile logistics is an important aspect of our member experience. The fixed investments we have made in warehouses, vehicles, and people in our delivery network are carried throughout the year. Therefore, we will experience higher fixed cost absorption during our smaller volume first quarter, but expect significant leverage of these expenses in the remaining quarters of fiscal 2022. We expect a subscription contribution margin of 68% in Q1 and for the full year, with the improvement to last year reflecting continued fixed cost leverage. Turning to operating expenses, As I alluded to earlier, we are planning fiscal 2022 as an investment year in marketing our products and optimizing operations after making significant investments to scale our organization. During fiscal 2021, we dramatically curtailed media spend due to supply constraints and were largely off air during important holiday and New Year's resolution selling periods. which created a synthetically low spend level that we will lack in the coming year. As we restore media investments in fiscal 2022, we expect material year-over-year deleverage in sales and marketing during Q1 and for the full year. During fiscal 21, we also scaled our organization to support the higher than anticipated growth in our member base since the onset of the pandemic. Much of the needed investments are now largely in place, but the annual impact of a higher G&A base will drive year-over-year deleverage in fiscal 2022. As we expect more modest sequential G&A growth going forward, we expect to achieve healthy leverage on this expense base starting next fiscal year. Finally, R&D will continue to increase as a result of both organic and acquisition-related spend on hardware and software development. Based on these factors, we expect adjusted EBITDA loss to be $285 million in Q1 and a loss of $325 million in fiscal 22, or a negative 6% adjusted EBITDA margin. Keep in mind that in the absence of COVID, we would not have anticipated or intended to be profitable during fiscal 21. Although our profitability will step back in fiscal 2022 for the reasons I've outlined, we are very confident about the economic profile of our business model and expect to be adjusted to be profitable again in fiscal 2023. Lastly, we'd like to provide some thoughts on forward capital expenditures. As you know, we officially broke ground on Peloton Output Park a couple of weeks ago. We're glad to be underway with this project, and we're looking forward to building Peloton products here in the U.S. As we outlined previously, we expect to invest approximately $400 million over the next two years on this plant, with much of that spend expected to occur in fiscal year 2022. In addition, we continue to make material investments in our supply chain, IT systems, and our retail footprint, both domestically and internationally. These investments, which will position us for continued growth, will bring total capital spending to approximately $600 million in fiscal 2022. Looking out to fiscal 2023, we expect capital spend to taper. Lastly, we continue to see a decline in customer deposits with the rollout of deferred payment capture. While this migration does not impact revenue recognition, It will continue to apply modest working capital pressure until fully deployed. We've completed the full rollout of deferred payment capture in the U.S. and expect a full global rollout in the coming quarters. Operator, please open the line for questions.

At this time, to ask a question, please press star then 1 on your touchtone telephone. Again, that's star 1. On your touchtone telephone, to ask a question, to withdraw your question, press the pound key. We ask that you ask one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Doug Anmuth of J.P. Morgan. Your line is open.

Great. Thanks for taking the questions. One for John and one for Jill. John, we know there's seasonality, but just given the light 1Q guide, is the price, is the bike price, got it offensive or defensive? And how do you think about demand for Bike Plus currently? And then, Jill, I hope you can walk through a little bit more detail around the tread gross margin structure. perhaps relative to Bike or even Tread Plus a couple years ago when it first came out. Thank you.

Thank you, Doug. So as Jill said in her opening remarks, we feel like the demand for Bike Plus and Bike is robust, and we feel good about the entire year's forecast. The price drop with V1 was absolutely tremendous. offensive as we think about the competitive landscape and we think about democratizing access to great fitness, which is, as you know, always been in our playbook. This is actually the first year since we founded the company that we had the opportunity to do this. And we're super excited that the investments we've made in our supply chain, certainly over the last few years, but definitely in the last 12 months, are bearing enough fruit that we have the capacity to make what will become what will look like close to 2 million fitness units of hardware this year, which is just incredible considering when we founded the company, we approached the biggest contract manufacturer we could find. And they said that they were confident that they could make up to 10,000 bikes a year. That was only eight years ago. So the scale of which we've, seen and put in place and invested in across our entire supply chain with bikes. And now obviously it includes treads and the lower price tread as well, allowed us to consider lowering the price of V1. And we think it's the right thing for our business, obviously solving for net new sub ads, which was kind of our true North of getting more people into the tent and thinking about the LTV of those users. not just, Doug, interestingly, not just as a subscriber for the $39 for a new bike sub, which has always been kind of our true north and the golden goose of our business model, but think about selling those same people, those same households, future treads and future products, apparel, and all the other stuff that becomes a much broader LTV picture over time.

Hi, Doug. Sorry? Sorry? Oh, sorry, did William, did you want to chime in?

No, I was just going to say on the price, Jill, thanks. This is William. Just on the pricing, Doug, just underscoring the point about it being offensive and strategic, as Jill said, we've, as you might imagine, done extensive testing on elasticity for pricing on bike, both in terms of in-market testing as well as qualitative and quantitative. And That testing gave us a lot of conviction that this price point will drive the kind of growth that's in the guidance, but also makes this price drop very strategic as we look at unit economics going forward. And so it's super consistent, as John noted, with our strategy around accessibility. We introduced financing in October of 17. That was one of the first moves, the 30-day home trial. Jill talked about our app moves and accessibility around frontline businesses workers and what we've done with the military and student rates. So we feel like this is just a continuation of that strategy and allows us to continue our lead in Connected Fitness as we add more and more households to the membership.

Great. And I might just add and then obviously answer your question around tread growth margins is for fiscal 22, we are expecting a slightly positive net customer acquisition costs, which we think is an incredible trade-off for the LTV of the sub that we get, which John mentioned. And so the economics for us were incredibly compelling, especially doing so in a position where we had order to delivery in a really good spot and manufacturing in a great spot. As it relates to tread gross margin, just a couple of pieces in the backdrop. Obviously we noted that we are facing commodity cost and freight rate increases at the moment across all of our products. So as a starting point, and as you know, too, as a starting point, we've only just started producing treads over the last several months. So we have a very long runway to get economies of scale there. So think about our margin profile in the low teens. But also I would put in the back of your mind Think about what we did with bike over the last five years. On an index level, let's say five years ago, it cost us a dollar to make a bike. It costs us 40 cents today, even with the commodity and freight rate increases. So I think given our very lean portfolio and our ability to build very few SKUs with great capacity, will give us a tremendous margin power over the next few years. And then I might just add, especially with tread, as we think about moving production to the U.S., avoiding those shipping costs and freight costs is also going to be very margin accretive going forward. So this is just the beginning. It's a little bit of a double whammy effect with tread this year. You're going to have less efficient marketing as we build product awareness, and we're going to have lower gross margin, and both of those will become more efficient over time.

Thank you. Our next question comes from Justin Post of Bank of America. Your line is open.

Great. Thank you. We do get hit on the tread. Can you help us all understand – I appreciate the 50% subcontribution per unit – how you think about units this year, and how you thought about the launches in Canada and U.K., what you learned there, and maybe the differences between the U.S. launch and the Canada-U.K. launches. Thank you.

Justin, this is John. Thank you for asking. We love the tread category. We have said we are going to win the tread category, and so I'm glad you're asking about it. I'm going to back up a little bit further to your question about what we learned in Canada and the UK and tell you what we learned with the Tread Plus, which has been in the market for even longer. We've been learning a ton about the experiences and the programming with the software and the content evolving significantly over the past two years since the Tread Plus has been in the market. So we kind of, you could think about it as a proof of concept with that platform so that when the lower price Tread hits the market, here in the US next week and back on sale in the UK and Canada as well, and then very quickly in Germany. We kind of have a two-year head start on ourselves of protecting that experience. But specifically to your question about the reception in Canada and the UK, I have to point out the 85 net promoter score that we saw in those markets right away, which is just incredible for a new product, considering that the software and the content are going to continue to get better In the early days of selling bikes, I would talk to individual members who were on the fence. I said, listen, buy the bike. Trust me, every quarter, the software and the content is going to get better. And going back, if you talk to some OG Pelotoners who have had their bike for six or seven years, that's absolutely what they've experienced. And so that same promise holds true with the tread and we're super excited about. that category, not just for running, of course. And I think, you know, this Justin, but, uh, for everyone on the call, it is also a strength platform of sorts. When you think about the bootcamp content and the circuit workouts that you get on and off the tread with the, um, with the, uh, uh, strive scores and the, uh, the, the, the tethering when you're off the tread and your heart rate monitor is still helping you stay connected in the experience. Um, so it's an incredible platform. We're super excited about it. We're super proud of it. And, uh, And we're very pleased that it's going to be back on sale next week.

And then just to chime in on the 50%, we wanted to give you all just a guidepost just so that you could better understand the contribution to Connected Fitness subscriptions with TRED and wanted to make sure that wasn't overstated in any way. I think as you think through the trends that we saw, of course, when you have very low brand awareness in a product, your existing member base are going to be the ones first raising their hands to buy the product. And that's what we saw in the UK. That's also, to John's point, what we saw with TreadPlus in the very early days. So that 50%, think about it like a blended average. But of course, as we get the word out, And we ramp up our incredible marketing efforts around our all new lower price tread. I think what you're going to see is very high existing members buying the tread, but that percentage coming down as we get the word out and we launch our marketing campaigns around that and attract incremental subscribers to the platform.

Thank you. Our next question comes from Ed Yeruma of KeyBank Capital. Your line is open.

Hey, guys. Thanks very much for taking the questions. Jill, just first on the gross margin differential on V1, I know you gave some color there, but just to try to really understand again, have the price reductions over time been funded by your manufacturing efficiencies? You know, kind of how much is still left? And kind of what's the timing in terms of getting the gross profit generated by one device to offset CACs? And then as a follow-up, you know, lots of exciting stuff in corporate wellness. How should we think about the margin profile there? Thanks, guys.

Great. So on the first one, obviously what we've seen over the last several years, as I said earlier, is that we've been able to get incredible costs of our bike product over the last five to six years. to the tune of about 70 to 80% versus what we were paying for a bike five or six years ago. And as you look at our original bike, it's our most mature supply chain. But for us, we think at a 1495 entry point, it is absolutely worth the ability for us to grow our addressable market and sacrifice gross profit margin percentage because we do think the gross profit dollars matter here more. And over time, even though we are going slightly net positive in cash this year, that will revert very quickly with marketing efficiencies and with the conversion uplift that we expect. So we think it's an absolutely right tradeoff for that very valuable high margin long lifetime sub. William, did you want to take that? I mean, we won't be offering just a breakout in terms of the economics of that business. It is very, very early days, I would say. We are still building a lot of the infrastructure, both from a sales and e-com flow perspective. So We have, I think, fairly conservative estimates in this year, although we think it's a massive multibillion-dollar market, which I think William can address further.

Sure. It's tens of billions of dollars annually now if you look at employers and what they invest in wellness for their employees. As Jill noted, it's early. John talked about us announcing it within the last few months. I will say that the initial sales rate through the partners we announced, the Accentures, Samsung, Skies of the World, has exceeded our expectation. But we feel great about that team, Cassidy, Rouse, and the team we put in place. We feel great about the business model. The way we think about that, just to answer your question, is very similar to the way we think about our consumer business and getting to that net CAC equation. this is a super efficient channel for us to acquire customers. So that relationship between gross profit on the hardware and how we acquire this customer is very similar to how we make decisions in our consumer business. And so it's an acorn, but we're emboldened by the early results and not a whole lot difference as we think about margin between those channels.

Thank you. Our next question comes from Ron Josie of JMP Securities. Please go ahead.

Great. Thanks for taking the question. Just a quick one and a follow-up. John, you talked on new products being positioned for just additional product launches later this year. Is there any details you can share on the product, insights, type of workout, et cetera, would be really helpful, and any insights on the manufacturing capacity ahead of that? And then on a follow-up on the lower-priced bike, Can you just talk about the impact of what that means for CPO pricing? Thank you.

Ron, new products, unfortunately, we can't talk too much about them, which is frustrating to me because I am super excited about a lot of these new platforms that I get to experience and see in the R&D pipeline. We have said that strength is a key priority for this year. There's some rumors of some other products that we might be working on. But I will say to Jill's earlier point about manufacturing scale, we're pretty focused. We don't have 50 new platforms in the R&D pipeline. We have a few that we're very excited about that we think are going to be staples in our portfolio. And several of them we've been working on for several years. This should be a big year for our members and the new product pipeline, and we look forward to sharing information as it's available. I think you also had a question on CPO.

Yeah, I mean, I can take that. Nothing really to update there. As we've talked about in the past, we just haven't had, given our incredibly low return rate of our bike and bike plus, we have just not had the inventory yet. So it's a little bit of a moot point for now, but obviously if we ever are in an inventory position where we can launch CPO, it would certainly be priced below the new pricing for original bikes.

Thank you. Our next question comes from Yusef Squally of Truist. Your line is open.

Thank you very much. So two questions. John, can you maybe speak to just the quarter-today trend in demand you're seeing? Obviously the guidance implies demand. sequential decline, but maybe you can parse out the effect of the reopening relative to others like pullback and ad spend, et cetera. And then, Jill, I think you said something to the effect that you expect higher unit sales of bikes in 22 than you did in 21. If you just do a back of the envelope, Matt, it looks like that would imply not a whole lot of sales for the new tread. So I was just wondering if you can maybe provide a little more color on that. Thank you.

Yeah, I might take the second question first, and then we can double back on the first one. So I think what you're probably noticing is that this year we're forecasting 1.3 million net ads, and last year we added 1.24 net ads. Is that correct? Yep, yeah, exactly. Great. Well, it's a really great call-out, but what I might note is that in fiscal 21, our net ads were boosted a lot, by the backlog that we went into. If you remember when COVID hit in March, we went directly redline on manufacturing and went in with a pretty massive backlog going into fiscal 21, given the long OTD. So first I would say we have much better alignment in sales and delivery timeframes in fiscal 2022. And then, so from my perspective, yes, we do, forecast growth in our bike portfolio this year on a year-over-year sales basis, but you have to take into consideration how big the backlog was that we went in. And I think you'll see that that would then imply, even with the 50% of tread buyers being existing members, that would imply a healthy first year of robust sales of treads.

And Yusuf, we can't comment too much on the quarter-to-day trends, as you can imagine, but I will say, and Jill alluded to this in her opening remarks, is that we historically have been a very seasonal business where not only are people out running and riding their bikes in the summertime and getting outside, and this summer, I think, is exceptionally true in that sense, coming out of last summer where people are on lockdown. But... We obviously don't market aggressively. And then I think Jill's opening comments talked about this in the digital business. We couldn't be more excited about the digital business. I think I've been one of the biggest champions since day one in that business. And we think that it's an incredible lead gen business as well as a standalone business on its own. And it's just not smart for us to market it aggressively in the summer vis-a-vis other times of the year. So when you think about a basket of advertising dollars against your businesses, summer is generally one of the least efficient. So we're trying to run a little bit more disciplined business, certainly on digital, and you could extrapolate that more broadly. But I will say, even in the face of light marketing, sales have been robust across our bike business. And I guess I'm not supposed to tell you, but how... how incredibly strong the leads have been for our tread business. So we are excited about how many leads are in the hopper for people wanting treads. And we're excited about the demand that we've consistently seen this quarter. And frankly, you know, since COVID hit, as you know.

Thank you. Our next question comes from Jason Hellstein of Oppenheimer. Your line is open.

Thanks. So is there anything in the data that suggests the longer pending tread launch, meaning just it's been talked about obviously for a long time and all the issues, that that could have weighed on bike sales, meaning you have some consumers who would only buy one device and they were kind of waiting, and so that kept people potentially on the fence to decide what they wanted? And the second question on the supply chain is, we can see the inventory numbers up pretty dramatically quarter to quarter on the balance sheet. Outside of the cost headwinds that you talked about for supply chain, are you worried at all about actually getting product to the consumer over the next, basically through the holiday season? Thanks.

Okay. Well, I can take the second question first. This is William. In terms of the guidance that Jill provided, we feel like we built, and the investments that John and Jill talked about, we built the infrastructure to support our holiday plans. As Jill noted, we feel like fiscal year 22 is going to be a return to more seasonality. So a large part of our business is in Q2, Q3, and certainly that's true of deliveries. And so everything in the supply chain from inventory that you're noting the accumulation of on the balance sheet to warehousing and how we've expanded our warehouse footprint to our delivery infrastructures, people, vans, our last mile facilities, all that we're staging for what will be our biggest holiday ever. We're very excited, both in terms of the bike growth that Jill noted, and then the launch of tread, which we expect to be very large over time. And so, there's a lot of companies aren't in that position. You're reading an automotive, some of the shortages on chips and semis. So we're very proud of our team. We thank our partners, TI, others who have helped us get in that position. So inventory is up. We are building inventory. As you know, the lead times with ocean freight and freight in general have extended. And so we've been diligent about learning from the past and, I feel like we're in a really good position to execute this plan this year.

And just to answer the first question around tread potentially having an impact on bike sales. I mean, it's hard to know for sure, but I think based on our data, I think, you know, when you look at the leads that we have for tread, there's a lot of existing members. There's a lot of new people. We think it's a pretty massive category, but there's still very low awareness for us in the tread category. So I personally don't think it has influenced bike sales over the last few months.

Thank you. Our next question comes from Jonathan Kopp of Baird. Your line is open.

Yeah, great. Thank you. Jill, can I follow up on your comments? about the first half and the second half adjusted EBITDA outlook and any more color on the factors that you're expecting to drive the inflection to positive adjusted EBITDA on the second half?

Yes. And so I would say, first off, the connected fitness margin is really one of the main drivers of adjusted EBITDA profitability and that variability throughout the year. If you look at Q1, the connected fitness margin is fairly depressed, largely due to delivery cost inefficiencies, given that we're having lower volumes in the quarter. And, of course, what that will do is reverse in Q2, Q3, and Q4, where we will leverage a lot of those fixed cost investments in our field operations with warehouses and people and bands. So that's going to get us a lot of leverage as we move through. And, of course, on OpEx, we will get substantial leverage here, too, as we move through the year and have higher revenue quarters. And as I said, 60% of our revenue is going to be generated in Q2 and Q3. And really Q1, I will say, is just a little bit of anomaly, right? We've built up a cost structure to support and scale our business. You know, we've grown member support. We've grown manufacturing 9X over the last 16 months. And so it will take us a couple of quarters to really see that leverage back into the system, but we expect it in the back half of the year.

Okay, that's really helpful. And then one other follow-up. I think, John, you mentioned at one point a unit capacity close to 2 million fitness units of hardware, I think, for this year. How should we think about the horizon to which you're building out the capacity and just any other context to how you see the hardware business scaling over the next few years relative to that 2 million unit comment? Thank you.

Yeah, I mean, that's something we spend a lot of time on. I'll extrapolate it also in the context of business that's growing rapidly. You know, we're adding subs at 56% this year, and we will continue to be a high or hyper growth company for years and years to come. I'll extrapolate into the idea as well with real estate in the context of our headquarters and our field ops and member experiences. You have to try and walk the line of seeing where you're going five to 10 years out, but not getting over your skis with fixed costs and overheads. And that's kind of the balance that we've had to strike over the last six or eight years as we've grown the company. And to answer your question, we're excited about our investments in Ohio and stateside manufacturing. We're excited about our continued relationship with Rexon, which is a big manufacturing partner of ours, and Tonic, which we brought in-house a couple years ago. And continued contract manufacturing relationships in-house. Um, we have, uh, uh, obviously partners on the, um, on the tablet side as well, which, uh, has, has great scale and we will probably always use contract manufacturers for that. But, uh, yeah, you, you do have to think about how do you make millions of treadmills, you know, a year, uh, three or four years from now. And, uh, and our team is, is planning that and getting ready for it again, trying not to get over our skis with the. the OpEx or the CapEx way too far in advance, but you've got to make some bets. And as always, we're going to bet on success, not bet on failure, because they kind of become self-fulfilling. So other than that, I don't have much color for you other than we have incredible people who are planning it and continue to land the planes like they did last year and we plan to do this year.

And maybe just to add to that, just the $400 million investment in POP, the Peloton Output Park, that is a decade-long – we view that as a decade-long plus investment to support that capacity growth that John's referencing. And so our goal – we feel like we're there, but our goal is to continue – to provide, be the capacity leader, cost, quality, and safety leader in fitness. And there are very few companies in this fragmented market and very few factories that are producing at the kinds of volumes that we produce. So these moves, including POP, are all laid out. And to John's point, we look at things 10 years out to support robust growth that we're expecting in the future.

Thank you. Our last question comes from the line of Camille Kajrawala of Credit Suisse. Your line is open.

Hi, everybody. Thanks for taking the call. A couple years ago at your analyst day, you talked about the TAM and the SAM, and the SAM, given the pricing at the time, being around 15 million potential members. With the new lower price for the new $1,500 price point, Do you have an idea on what those numbers may look like now?

Yeah, so I think you're talking about last September of 2020, so it was about a year ago where we talked about a household SAM, and again, that's existing products and product verticals at existing prices. We said an addressable household of $15 million And that represented 20 million in connected fitness unit sales, obviously given the overlap that some households will own multiple products. And that had increased 43% from the last time we had done that analysis. Of course, we have not rerun that analysis. But as you can imagine, with the observed data that William discussed in terms of the elasticity and the research that we had done, we believe that 1495 significantly, significantly expands our addressable market. And so we're really excited about it. And it was one of the key reasons why we did this was to continue to make our products more accessible and of course expand that addressable market. And then, you know, there are other things that will factor into increasing SAM like the extended financing terms that we announced on BytePlus and Tread. And then, of course, just the building of awareness, which frankly has been the biggest needle mover for us over the course of the last several years as we've looked at the dressable market. And tread, just as a reminder, and digital still have very, very low awareness relative to our bike portfolio. So I think there are tremendous gains that we're going to see over the next year now that we finally are bringing that product to the U.S.

Got it. Thank you. And quickly on innovation is with the kind of timing delays with what's going on with TREAD and TREAD+, does that change the cascading of some of the other products you may have planned to roll out or whatever the calendar may have looked like where you'd prefer to have them spaced out? Or are any original plans for new products still running on whatever the timeline might have been before the recalls? Yeah.

Well, I was just going to say that we think tread and being able to execute this tread launch in the U.S., this is arguably, as John has noted, our research. And if you look at industry research, tread is just a much bigger category than even bike. And if you look at the amount of runners, boot camp, the amount of boutiques that offer this type of workout, circuit, boot camp, vis-a-vis, spin, by every metric tread has the real possibility of being our biggest product. And so we're definitely focused on this opportunity. We think it's an incredible product, as John noted. Having said that, if you look at our R&D spend that Jill noted, we've never been this prolific in terms of investment in exciting new products. And so we do think about the marketing and sales calendar. We do think about how to make sure we execute and drive the awareness that we need to in each product and we're not mixing messages in the marketplace and, and tread, uh, with low awareness right now we see as a massive opportunity. Having said that, um, as John noted, uh, we're not done and we're investing heavily. We, uh, the strength category has definitely, um, been something, um, we've been thinking about and investing in for a long time. And so we'll, uh, as John noted, nothing to announce here, but, um, definitely something we're looking towards in the near future.

Thank you. At this time, I'd like to turn the call back over to CEO John Foley for closing remarks.

Thank you. Before we wrap up, I want to share a bit of non-financial but interesting and important news nonetheless. In recent surveys conducted by Comparably, Peloton earned the number one position in a ranked list of 100 top global brands. And again, the number one position for best place to work in New York, besting a who's who of established brands and household names. For me, this is particularly gratifying recognition as these rankings point to both our member experience and the internal culture we've been building at Peloton since day one. By definition, powerful brands are recognized for their extraordinary product and service experiences. By always putting members first and obsessing over their experience, we're building the most powerful brand in fitness and potentially one of the most powerful brands in any category. It explains why we're so focused on net promoter scores, by the way. And when we couple our dedication to member experiences with a commitment to expanding accessibility, we see an opportunity to extend our leadership position for years and years to come. Peloton being named the best place to work in New York is personally rewarding as a leader and a co-founder, but it's also a big strategic advantage, as you can imagine. Recruiting and retaining the best talent is the foundation of every great technology business and separates the truly great companies from the good ones. Lastly, and most importantly, I want to thank the entire Peloton team around the world for their hard work in a tough year of rapidly scaling while managing through a global pandemic. I also want to thank our members for allowing us to play a significant role in their health and wellness journeys. As you know, we don't take this opportunity nor responsibility lightly. We care deeply about every one of you. And with that, we're going to sign off for the night. Thank you all for joining. We'll speak to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.