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spk04: Good afternoon, ladies and gentlemen. Welcome to the Beachbody Company's first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I'd like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Eddie Plank, Beachbody's Group Vice President of Investor Relations.
spk07: Welcome, everyone, and thank you for joining us for our first quarter 2022 earnings call. With me on the call today are Carl Deichler, co-founder, chairman, and chief executive officer of the Beachbody Company, and Sue Collins, president and chief financial officer. Following Carl's and Sue's prepared remarks, we'll open the call up for questions. Before we get started, I would like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from the suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release. Today's call will include references to non-GAAP financial measures, such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. Now, I would like to turn the call over to Carl.
spk05: Thank you, Eddie, and good afternoon, everyone. When we reported full-year earnings for 2021 on March 1st, we outlined our strategy to make the business more productive and efficient, allowing us to deliver profits and free cash flow in every type of demand environment, regardless of whether they're tailwinds or headwinds. While the environment remains challenging, our results for first quarter 2022 reflect solid initial progress on that strategy, with revenue and adjusted EBITDA ahead of expectations. During the quarter, we saw a positive response to new product launches. We continued to enhance subscriber lifetime value, and we remained focused on the highest return customer acquisition opportunities while tightly managing expenses. While there's still more to do, our performance in the first quarter is an important first step, one we'll build on as we continue to advance the strategy over the course of 2022. I'm particularly excited about the response to our new launches in the first quarter. This demonstrates Beachbody's ability to quickly create demand through compelling content, as well as the benefit of our unique synergistic approach that combines digital fitness, nutrition, and community into each new program launch. For example, the response to the launch of our job one program was incredibly positive as its 20-minute format capitalized on the need for workouts and nutrition programs that aren't only effective but also easily fit into our busy lives. More recently, the launch of the four-week gut protocol program outpaced early expectations, driving nutritional upsells among existing subscribers as well as new customers. This performance supports our thesis that integrating nutrition and fitness and offering a total solution is a compelling value proposition to both existing and new subscribers. Our launch calendar for 2022 has so much innovation with unique Beachbody offerings that will build on this growing demand for solutions that serve our subscribers' entire well-being, from gut health to reducing anxiety, from losing weight to building muscle. to just giving people an easy-to-follow gateway to get themselves back on track. For example, in late May, we'll be launching our first hybrid program called Fire & Flow, which I think is the future of fitness because it integrates both rigorous fitness days and stress-reducing functional recovery days. This is fitness for true wellness, and it's ideal for meeting the post-pandemic mindset where subscribers are looking for solutions that not only improve their physical health, but also support their mental well-being. Led by two of our best-known female super trainers, Fire & Flow is highly anticipated by our subscriber base for its launch later this month. We're also leveraging the agility of our content-driven model to expand our addressable market and broaden our demographic appeal. For instance, in July, we're launching Lift More, a resistance training sequel to the program called Lift 4.0. which is consistently one of our most streamed programs on Beachbody On Demand. Lyft 4 is a franchise that's been particularly effective at driving acquisition of new male users, many of whom live with partners who are already committed Beachbody subscribers. Lyft More is currently being tested by a few hundred of our coaches, and we're very excited about the feedback we're getting from men and women. Speaking of our coaches... During the first quarter, we saw higher productivity within our coach network as our new launches increased focus and motivation across this proprietary sales channel. That's especially encouraging when you consider that our pipeline of fitness and nutrition launches this year is the most prolific in our history. With each launch, our coaches serve not just as our most compelling sales channel, but also as the human connection that creates community and accountability for all our subscribers and it's accountability that's been an essential lever for successful lifestyle change for so many customers since we started Beachbody. This social influencer network of coaches is not only a very special group of leaders, they're a unique competitive advantage for us that I believe we're only scratching the surface of today. This quarter, we also continued to scale our live premium tier, Beachbody On Demand Interactive, or BODY as we call it. We've refined our programming for BODY by leveraging learning from the initial launch last year, and those refinements are helping to drive viewership. For instance, we've incorporated live versions of our most popular program titles, which gives us a real competitive advantage in the fitness content space by offering these special live presentations of programs like 21 Day Fix, Morning Meltdown 100, and the Muscle Burns Fat program. And we've seen an incredible response to other special events, from live program premieres on this tier to mash-up workouts that feature several of our most popular trainers performing together. They're a lot of fun. We're also initiating new three-week body challenges on the first Monday of every month. With a set program of content along with live support from our trainers and coaches, this is a format that is very attractive to getting new subscribers started on the body tier and existing customers reengaged in improving their fitness and nutrition. Okay, now let's talk about connected fitness. Home indoor cycling is a competitive space, but the Beachbody On Demand experience is really in its own category. Our customers see the value in combining a commercial-grade bike with our immersive, engaging fitness content and proven nutrition guidance, meal plans, and recipes. And it's all delivered directly on the bike's screen. We continue to ensure that the bike and digital subscription is priced competitively. But ultimately, it's the superior Beachbody content and holistic experience that defines our value proposition. While digital subscriptions remain the tip of the spear for our new customer acquisition, which is how Beachbody has always defined the category, connected fitness is an important lever for driving lifetime value for a cohort we refer to as our super users. We're pleased with the demand for the bike in the first quarter, and we continue to build brand momentum across our entire user base with approximately 2.5 million subscriptions. Moving on to marketing. Our efforts to focus solely on the marketing channels that are immediately accretive to cash flow are continuing to drive our CAC to LTV ratio back towards our historic levels. We're already seeing benefits from our recent actions to streamline and focus the marketing organization. The marketing team has been extremely disciplined at managing spend on the most efficient and profitable media opportunities for customer acquisition. We also continue to evolve our lifecycle management capabilities to deepen engagement with our existing subscriber base. In addition to the positive response to new product launches, we're also progressing on our strategy to drive up sales as we reduce friction in the purchase funnel, for instance. Later this month, we'll roll out the ability to purchase supplements and accessories from within the app for the very first time. This will allow customers to transact in the same place they go to complete their workouts at the very moment when it's top of mind for them. With a strong pipeline of product innovation and enhanced merchandising capabilities, we're confident in our ability to return momentum to the nutrition business. Our results in the first quarter are encouraging and demonstrate the consistency and agility of our content-driven business. We aren't bound to equipment or even technology to help customers get results. We create world-class content. We've done it for over two decades and we test it to make sure it delivers results that outperform the customer's expectations. Then roll it out and let the coach and customer who get results be the most effective promotional channel in the industry. That creates a unique advantage, one that's especially important when the environment is dynamic as we've seen over the last year. Okay, let me summarize. We remain laser-focused on executing on our strategy to generate profits and cash flow in any demand environment. Combined with a focus on disciplined marketing and efficient customer acquisition, we expect to not only drive revenue, but also further enhance profitability with a focus on creating long-term value for our customers, employees, and shareholders. So with that, Sue, I'll turn it over to you.
spk01: Thanks, Carl, and good afternoon, everyone. Let me begin by adding to what Carl just said. We remain confident in the long-term opportunity for Beachbody, and we continue to see significant levels to deliver profitable growth as we unlock the power of our assets, capitalize on our unique position in the marketplace, and build upon our two-plus decades of at-home fitness leadership. Now, turning to our Q1 results, our total revenue was $198.9 million. And although these results were lower than Q1 of last year, they were ahead of our guidance, reflecting the strong momentum driven by innovative launches, which started with our new fitness program, Job 1, in December, and followed by the impressive rollout of four-week gut protocol on March the 15th. Our digital revenue was 81.7 million, which was a 14% decline from prior year. And two-thirds of the decline was due to a reclassification of business service fees from preferred customers out of digital and into nutrition and other revenue. So adjusting for this geographic shift, our digital revenue would have only declined by 5%. Digital subscriptions decreased year over year against a challenging 41% comp increase from the first quarter of 2021. However, compared to the first quarter of 2019, our digital subscriptions increased 48%. reflecting solid adoption of digital fitness compared to our pre-pandemic baseline. Engagement, or DAUMAO, was down versus prior year, but increased 200 basis points compared to 2019. Quarterly retention levels remained solid throughout both last year and Q1 of 2019, demonstrating our consistency in retaining subscribers through continued content innovation. Our connected fitness revenue was 19.5 million with 16,600 bikes delivered compared to 11,900 bikes delivered in the first quarter of 2021 on a pre-merger basis. Importantly, engagement in the first quarter was higher amongst digital subscribers who own a bike versus subscribers who don't own a bike. And taken together, this demonstrates that our value proposition is resonating with our subscriber base, which further enhances LTV. And nutrition and other revenue was $97.7 million, down 25% compared to the first quarter of 2021. Historically, fitness innovation and digital acquisitions have been key drivers for our nutrition business, along with new product launches that serve multiple needs states. Given the early positive reads from recent launches and a robust pipeline of additional new releases set to launch throughout the year, we're confident that our nutrition portfolio will return to growth over time. Now turning to gross margin. Our gross profit was $93 million or 47% of revenue in the first quarter versus 70% last year. Over 80% of the year-over-year reduction was related to the negative margin in connected fitness. The remaining 20% was due to higher content production costs and additional COVID-related supply chain surcharges. Now, over time, we expect to improve the margin on connected fitness sales as well as enhance total LTV. And we'll do so as we capture more attentive, high-margin subscription revenue and increase the cross-sell of nutritional products with targeted upsells made directly on the bike's touchscreen, which are due to launch in Q2 of this year. Our connected fitness gross profit was negative 25.2 million and was impacted by three key drivers, Firstly, we incurred a 14.9 million NRV charge. This is a non-cash charge applied to our quarter-end bike inventory and open PO balance in accordance with GAAP and is added back to net income in our calculation of adjusted EBITDA. Secondly, our margin was impacted by lower AOV as the operating environment remained highly competitive. And the third driver were higher shipping and freight costs. which deleveraged our connected fitness gross profit. Our digital gross margin was 79.9% and declined by 840 basis points versus 2021, primarily due to higher content production costs. And these costs predominantly related to the launch of BOD Interactive and the mixed content library, which we acquired last year as part of the merger, as those costs are now being amortized within digital cost of revenue. Our nutrition and other gross margin was 54.2%, which was a 230 basis point decline from 2021. The change in margin was evenly split between additional supply chain surcharges and a change in our product mix. Now turning to operating expenses. Our total operating expenses decreased approximately 22 million, or 12% year over year, to $167.4 million. This change can be seen in four line items in the P&L. In selling and marketing, you'll notice a lower but extremely targeted acquisition expense focused only on the highest return, lowest risk opportunities. And that reduction in selling and marketing expenses were partially offset by an increase in technology and development costs to support new program releases that drive customer acquisition, engagement and retention, as well as higher G&A due to public company-related accounting legal and insurance costs, and the addition of a restructuring line totaling $7.2 million from our strategic realignment to one brand. Finally, our first quarter adjusted EBITDA loss was $19.1 million, and our net loss was $73.5 million, or negative $0.24 per basic and diluted share. Now, turning to the balance sheet. We ended the quarter with an unrestricted cash balance of $63.4 million and no debt. And the change in cash since the end of Q4 reflects the timing of working capital outflows and is not indicative of an ongoing quarterly cash burn rate. Specifically, the first quarter also represented the peak of inventory purchases and technology investments for 2022 capital projects, which we expect to significantly decline over the remainder of the year. And given our increased efforts to control costs and preserve cash, we remain confident that we can continue to manage the business from cash flow from operations. Now I'd like to move to our outlook. As we look forward, our emphasis will remain on profit maximization and cash flow generation. For the second quarter of 2022, we're guiding total gap revenue of between $175 to $185 million. which reflects a return to more historical seasonality trends, the impact of lower digital subscriptions versus prior year as we exit in Q1, and the timing of new product launches. Additionally, in terms of EBITDA guidance, we expect an adjusted EBITDA loss of between $7 to $12 million in Q2, as we benefit from cost savings from the One Brand Strategy and other organizational efficiency initiatives that we deployed in the first quarter. For the full year, we expect to realize a combined adjusted EBITDA improvement and CAPEX reduction of approximately 120 million versus last year. This is $10 million more than we previously guided as we continue to identify opportunities across the organization to drive efficiencies and reduce costs. Regarding our full year 2022 outlook, while we're not issuing specific guidance, I'd like to provide some directional color. We expect total revenue to be slightly weighted to the back half of 2022 and our third quarter revenue to be higher than our fourth quarter revenue in line with historical seasonality and the cadence of our fitness and nutrition launches which drive our revenue flywheel. Also, while we expect to deliver a significantly lower full year adjusted EBITDA loss versus 2021, we're not forecasting linear improvements quarter to quarter. However, overall, we expect our adjustity with the loss in the back half of the year to be materially lower than the first half of the year. Now, before turning it back to Carl, I'd like to take a moment to say what a privilege it's been to serve as president and CFO for the past seven and a half years and work alongside so many talented, dedicated, and passionate individuals at Beachbody. I couldn't be prouder of what we've accomplished together as I hand over the reins to Mark Soudan. Mark has a really strong background, especially in technology transformations, and I have every confidence in the team's capabilities and the growth ahead of each body. So with that, I'll turn it back to Carl.
spk05: Thanks, Sue. I'm extremely grateful for your partnership and leadership throughout your time with the company. You've made many contributions over the past seven and a half years and have played such a key role in some of our most important milestones. I'd also like to welcome Mark Swedan, who officially starts tomorrow as Beachbody's new CFO. Beyond his expertise in various finance functions, Mark also brings with him deep experience in the high growth technology space, and we're confident he'll be a great addition to our leadership team. Mark is joining us at an exciting time. While the environment remains dynamic, we're executing with focus to create profitable, productive subscribers and a lean, efficient operating model. For more than 20 years, A discipline of our company has been our commitment to evaluate our business through the lens of the current reality with a willingness to adjust as conditions evolve. First quarter results are a testament to that. Our new products are resonating with customers, and we have a solid pipeline of new releases throughout the year. And when you combine that with our proprietary coach network and unique flywheel with nutrition and connected fitness all united under the Beachbody brand, It creates a powerful, virtuous circle that builds momentum over time and positions us to create value for our shareholders while delivering on our mission to help millions of people lead healthy and fulfilling lives. And with that, operator, I'd like to open it up for questions, please.
spk04: Thank you. We will now begin the question and answer session. If you'd like to ask a question, you can do so by pressing star 1 on your touchtone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. We'll pause here briefly to allow questions to generate in queue.
spk00: The first question is from the line of Joanna Zhao with Bank of America.
spk04: You may proceed.
spk02: Hello. Thank you for taking my question. I have two questions, if I may. First one is on the mixed bike segment of the business. Just curious to understand, you know, there are three reasons that's causing the quarter-over-quarter decline on the margin. Do you have a long-term margin expectation on the mixed bike? And what was the margin like prior to the mixed acquisition, if you could provide some color on that? And then my second question is on the cash flow needs in the second half of this year. Do you foresee the need to raise capital? And if so, what are the plans for the capital rate? Would it be through the debt or preferred equity? Thank you.
spk01: Okay. Hi there, Joanna. Thanks very much for those questions. Happy to take the bike and then cash flow and then Kyle, feel free to jump in. So in terms of the bike, you know, we know that the bike business ultimately drives value by enhancing LTV with more retentive customers and from the cohorts with seen recently, we're starting to see those trends. So we feel like we're well positioned in the long term to deliver positive growth margin over time. But it needs to be resolved by two factors. One is price and one is cost. And right now, the AOV has been challenging because the industry works through excess supply. But fortunately, we don't need to participate in an AOV race to the bottom because our business model is differentiated by the digital and nutritional offerings that we give, which definitely gives us an advantage. In terms of the cost, also as the supply chain normalizes, our shipping and freight costs will start to reduce, and that will help margin. For us in Q1, one of the factors that impacted our negative connected fitness margin was the $15 million NRV non-cash charge. So on a pro forma basis, if you back that up, Joanna, gross margin would have been around negative $10 million, not the negative $25 million. And as I mentioned, we're seeing encouraging sign-on-the-bite cohorts retaining longer. For the rest of the year, though, our focus will be on increasing the bike margin to closer to break even. And that gap to break even reduces if you take a holistic view from the digital and nutritional upsells. Unfortunately, we expect to see bike margin improves from now on basically Q2 through the end of the year as the nutrition upsells go live on the bike tablets. which is scheduled for late Q2, which will improve the economics considerably.
spk05: I'll just add to that, Sue, if I could. Sue, if I could just add to that. It's an important note. This is just the difference in our business model is we don't have to sell the bikes really to turn our sales flywheel. We always expected it to be a balance of an acquisition tool, but also really a back-end business where... people who have visibility to, they experience our content, they start to see the bike content through their subscription, and they self-select to become one of these super users that want to purchase the bike. But for two decades, the business has been driven by content releases, creating demand for subscriptions and then nutritional subscriptions, and now that can lead to the LTV contribution of a bike purchase. In the first quarter, we did move bike inventory at a price that was responding to the environment. Now we've calmed that down and we're really focusing on delivering content at the appropriate value to drive profitable sales transactions into this flywheel that then those subscribers can buy the bike when they see that content and want to participate.
spk01: Right. And I think you also asked about the bike margin before the acquisition. It was still below break even. I think it was, you know, negative 10, negative 15%. But as I said, the goal will be for us to close that gap between where we are now and the rest of the year due to the bike tablet upsells and nutrition will help us do that together with the digital sales that we have to consumers stream that. Just talking, answering your question related to cash flow and our need profile there. So you can see in our earnings release that we've got no debt. We've ended Q1 with $53.4 million of cash and we can fund the business comfortably with cash flow from operations. And we know this because since December we've actually focused on deploying several initiatives to return to profitability. and manage our cash very judiciously. And in Q1, those initiatives that enabled us to do that and manage working capital from our cash flow included, there were basically three key drivers. One was the one brand strategy and the platform consolidation that came with that and the reduction in personnel, which is a significant saving Q2 going forward. The second was the reprioritization on media investment to those in-year ROI activities. And the third was really actioning the Alex partner savings that focused CapEx to in-year payback. And so now we're in a very good place so that, you know, in Q1 now cash burn actually was relatively high because it still included various investments in technology, media, and inventory. And those commitments were higher than what we expect for the rest of the year. While we have adequate liquidity to manage the business, given the macroeconomic environment, we're also evaluating other liquidity alternatives to give us additional flexibility. But at the same time, we're constantly looking at additional levers to enhance profitability and efficiency. So I think we're approaching it appropriately on all angles.
spk02: Okay, thank you.
spk04: Thank you, Ms. Sao. The next question is from the line of John Heinbacher with Guggenheim Partners. You may proceed.
spk08: Hey, so I wanted to start. $20 million sequential reduction in revenue, right? Your 2Q plan versus 1Q. Is the bulk of that coming from nutrition? Curious in terms of segment. And then if it is coming predominantly from nutrition, is that basically ARPU or as opposed to subscribers? Maybe break that out or thoughts on that.
spk01: I think the Q2 guidance that we gave John really reflects the return to more historical seasonality and a focus on immediately high return sales and marketing expenses. And that Q2 sales mix will maintain the general high to low rank of nutrition being the highest, then digital, then connected fitness. But the current competitive dynamics in connected fitness market and the AOV doesn't merit us chasing that race to the bottom that I mentioned because our business model isn't aligned on those connected fitness sales. So we basically plan to fulfill the bike demand from awareness created last year as well as in Q1, but expect the Q2 sales to be more weighted toward nutritional and digital sales. versus connected fitness per se in Q1, which will also improve margins.
spk08: Okay. And maybe secondly, right, and more long-term, right, so you think about the connected fitness business. Is there an opportunity to somehow partner with hardware providers so you basically get out of the bike business, right? You know, your strength is content. Maybe somebody else's is the hardware. Partner with someone to do that. I guess that could be done on bikes or you could deliver your content, bikes, treadmills, anything. Can you do that? And then secondly, before COVID, right, EBITDA margin was 8% to 10%. Can you get back there if you're in the connected fitness business? And does that matter?
spk05: So I think – The answer on the last part is connected to the first part. You know, the connected fitness business, short of some of the supply chain issues which we reacted to by getting ahead of that in terms of inventory, now we've got that inventory. So we're not in a position where we're forced to support an entire infrastructure to produce that bike. We've got the bikes. We deliver the bikes and the customer's having a great experience with it. However, that experience with that screen and the heart rate based training is sort of integrated into that content that we're creating. So while it's quite possible that we will partner with other equipment providers to stream our content on their devices, we do think that the proprietary experience on this bike that we've sourced through the mixed fitness purchase is really the best experience, big screen, the commercial grade bike. So now we get the benefit of really just purchasing additional inventory as demand follows. So we don't have to be ahead of it as much. And I think connected fitness will always be a part of the business. but the tail won't wag the dog as much as it did really on the back half of 2021 of the first quarter of 2022. Now we get the benefit of really returning to this cadence of content launches, leveraging that content to drive nutrition starts, and those subscribers that come in then who admire or appreciate the genre of stationary or indoor cycling, will recognize the quality of that content that comes along with their subscriptions. So I absolutely do expect to return to the kind of margins that we've seen historically and better as we scale the business. And I don't think that connected fitness will continue to be a drag on the overall business performance.
spk08: Okay, thank you.
spk04: Thank you, Mr. Heinbockel. The next question is from the line of Jonathan Komp with Baird. You may proceed.
spk03: Yeah, hi. Good afternoon. Thank you. Carl, I want to ask first just on the digital subscribers, the two and a half million, can you share any more light on how many of those are bot interactive premium subscribers and then how many are the super users that you mentioned that sort of go across multiple platforms?
spk05: Yeah, we don't break those files out, Jonathan. I'm sorry, but I will say that the business model is such that the primary subscription pool is the BOD subscriber, and then what we do is, as we're onboarding them, we offer people a free trial in the live content, and we get a significant percentage of the people that will take both subscriptions, through this free 30-day trial. And then also, obviously, a significant segment of those digital subscribers also become nutrition subscribers. And then in terms of the super users, those track the bike sales. But I don't believe we break out those cohorts in our discussions on these calls.
spk03: But when you look at the live content, any thoughts on how the uptake's been now a few quarters in, just as you've made some adjustments to the content and had some time to spend with it?
spk05: Yeah. Actually, that business, frankly, as a unit unto itself, I feel very good about what it's done since it's launched last fall, just in terms of the relationship of subscriber count or subscriptions to the cost to produce it. I will say though that one of the significant things that we did in the last two or three months is now is sort of finesse the production so that we maintain our quality and this incredible experience where the subscriber gets to be up there on the screen with the trainer But we've taken some costs out without sacrificing that distinction, that differentiation in the marketplace. And I would say if that was a business unto itself, we would consider that a success in this environment. And now we just get to really just pull certain expenses out, get a little bit more efficient. For instance, as we're integrating the platforms, moving from a two-platform company to this one single Beachbody on-demand platform, we get to reduce our footprint in terms of how we're producing that live content, and that has a significant decrease in cost. So overall, we're moving in the right direction, and I feel good about the cost structure relative to the demand for those live workouts.
spk03: Okay, that's helpful. And then maybe one broader question just on the outlook to get back to profitable growth and positive free cash flow. I'm wondering – The path from today to that point, if you could provide any color on sort of when you expect to get there and then when you look at the bridge and the major moving pieces, how much is coming from the mixed business versus how much from the rest of the business and any comments on the major moving pieces to get there would be helpful. Thank you.
spk05: Well, the primary driver... Oh, go ahead. Well, I'll just start it up, Sue, and then you do the technical stuff. The primary driver of this business is new content launches. And as we said in the last call, the back half of 2021, the post-pandemic environment was just like spring break. Nobody wanted to get healthy. And we've seen this gradually turn with the launch of Job 1, which is quite successful, and now the launch of this four-week protocol program was just an enormous success for us. And what that does is it turns the flywheel for our social influencer network, our coaches. As they get more productive, they bring in more coaches who are also more productive. Those people get results. They're promoting them on social media. That generates more productivity. This is a snowball effect. And now that the environment of the post-pandemic mindset has given way back to a more normal environment, mindset of people wanting to take care of their health and well-being. We're seeing a return to the productivity of our launches. And I want to, you know, make a specific point here. We only had one new program launch in the back half of 2021. And this year, we effectively have seven programs launching in 2022, plus some additional nutrition launches within our catalog. So we've never had more fuel to work the flywheel and to keep the coaches productive. So this is our normal. This is our two decades of normal that the business has been so profitable for so many years. And again, selling the bike on the back end of that is accretive to LTV versus trying to force it and make the bike an acquisition tool. Now that we've made that correction and stabilized the business from a cost perspective, it really feels like we're back to our knitting, the way we grew this business since 1999. Sue, I don't know what you want to add to that.
spk01: Yeah, I would just say, you know, John, we're modeling conservatively because of the macro environment, which we believe is prudent. And I will tell you that, you know, if we look back over the last 20 or so years between the dot-com bubble and in 2001 or the global financial crisis in 2008 or even COVID in 2020. You know, our business model has been resilient because the primary sales lever has been new content, as Carl just said, and only paying coaches, for example, when a sale is made. And it's meant that we've had variable costs versus fixed costs that rule and are fundamental to driving revenue. And that's why we can pivot and realign our costs faster than most because our core business is actually quite capex light with variable cost structure. I think the second comment I'd make just in terms of, you know, returning to profitability, despite the conservative modeling, you know, clearly, you know, accelerated demand in the network, or, and profitable connected fitness, so definitely requirements for that path to profitability, but we're really focusing one quarter at a time now and only guiding you know, with our Q2 guidance, but we feel very good, as Karthus said, about the 2022 launches and also the lineup for 23. And with various levers that we've deployed that I, you know, mentioned associated with One Brand and the consolidated platform efficiencies and Focusing Media and then the Alex Partner CapEx savings, all of those are prerequisites and important initiatives that we've taken that will help us achieve the path to profitability And, you know, we're obviously working on getting there even faster, but those initiatives were critical and we've executed very diligently and we are well on our way.
spk03: And just to follow up to clarify, I know that the advertising expense increased by more than $100 million from 2019 to 2021. But with the sales lower than I think, you know, obviously what was expected at one point, Do you think you could make a lot of progress getting back to that 2019 level or is that not a fair way to look at it?
spk01: I think the selling and marketing expenses in Q1 2019 were about $109 million compared to $106 million this quarter. So relatively similar. And I think what's interesting about the $106 million that we just spent in Q1 is that roughly over $70 million relates to not just media, but also the commission revenue that we pay our coaches. So I mention that because we continue to make sizable investments in selling and marketing, despite the fact that media, which might have a longer-term payback, has been curated and pulled in. But we are targeting those highest ROIs. initiatives with immediate payback by the coach commissions and investing in media through the direct marketing channel with again a really strong lcb to cac payback now so um i think you know it's something that that line item is something that we will flex on as we see opportunity and as but the priority for us right now is getting back to profitability managing cash And, you know, continuing to launch products that engage customers and ultimately drive the flywheel of business.
spk03: Okay. Understood. Thank you.
spk04: Thank you, Mr. Komp. The next question is from the line of Ben Sherland with Cantor Fitzgerald. You may proceed.
spk06: Hey, guys. Thanks for taking my question. I just kind of wanted to double-click a little bit on the free cash flow burn. You mentioned in your prepared remarks that 1Q free cash flow is impacted by timing, but you cut free cash flow burn in half relative to 4Q21, and it seems like you're kind of betting big on the market normalizing in the next quarter or two with the investments you made in 1Q in technology, media, and inventory. So I guess our question is, if the market doesn't improve in 2Q or 3Q, What levers do you have just to really significantly cut down on this cash burn?
spk05: I think I'll start with that, Sue, if I could. Really, the way the business model is built, I would sort of change the perspective. I don't believe we're betting big. I think, frankly, what we've done is conservatively model against predictable outcomes from our product launches based on a profitable or a more reasonable expectation of return on media based on investing only in those media opportunities that are immediately accretive to cash flow. So we've just tightened what we would call our media allowable. At the same time, we've maximized the efficiency and productivity of our coach network and continue with training programs and incentives to mobilize this incredibly powerful promotional force and marketing team, if you will, that only generates an expense if a sale is made. So the tempo of launches that we have for the balance of 2022 is something that we have a very good line of sight to predictability to the outcome of those launches at the same time that we haven't leaned into it. We're not over our skis because we've cleaned up our cash berm. We've cleaned up or pulled back on CapEx expenses because we're still digesting those investments that we've made last year to take advantage of those. Now we're using content and nutrition to turn the flywheel and return the company to its appropriate relationship of revenue to EBITDA. So that's the way I look at it. I really don't think that the bet in the final quarters is hoping that demand returns is actually more looking through the lens of our 20 years of experience in terms of what the outcome is when we launch a new program into this ecosystem.
spk01: Yeah, I couldn't agree more. I would also just say, Ben, that We have modeled conservatively, which isn't to be confused with the fact that if demand were to increase, we would get to profitability faster. But we are absolutely not modeling that. And, you know, you can see that burn reduction. If you just look at OPEX, you know, from Q4, which had literally had impairment in it. But even if you go back to Q3, you know, our OPEX sales is 99% and it's reduced to 84%. CAPEX, as Carl mentioned, you know, we're now in a position to reap the benefits, especially with the consolidation of OpenFit and BOD and enjoying that foundation to run the business. And CapEx is reduced from 28 million in Q4 to 18 million in Q1. And inventory, you know, when you go through the payment of cash flows has gone from cash used in Q4 to cash provided of about $16 million in Q1. So you're going to continue to – and Q1 will be our highest-earned quarter of the year. So you will continue to see improvements in the back end of the year using our conservative model. And again, if demand were to pick up, there'd be upside from that, but that's not what we're forecasting.
spk06: Okay. And then, you know, maybe just a follow-up on the OpEx lines. you know, how much of the sales and marketing expense is variable? And I'm kind of looking at, at one cue, you know, it's come down off of the peak. You know, even excluding connected fitness, gross loss, you know, it's not really is barely covering, you know, kind of the gross profit from digital and nutritional. So, you know, if you guys had to cut down, sales and marketing expense dramatically, you know, kind of what would that look like? I was on Google trying to compare the price of the bike to Peloton, and I noticed, you know, you guys are still bidding on Google keywords, and Peloton was not. Is there something that you see in the market that says, you know, demand is coming back and soon, or, you know, just trying to get a sense of modeling this free cash flow burn?
spk05: Well, I'll answer the question on bidding. We're quite disciplined about the way we approach the whole ecosystem. Obviously, the most difficult thing about media purchasing is attributing orders to particular media. And so our team has done an incredible job of managing media spend to the the appropriate ratio of awareness and last-click media. And they've really pulled that in to the most profitable near-term cash flow accretive media mix, frankly, that we've seen in the last three years. And the Coach Network, which is the variable side of it, really delivers significant value, taking advantage of these new launches and, in fact, the coaches will create within 72 hours of us launching a new program or announcing a new program, it will become a trending term on social media and a searchable term and come up in the top 10 searches for a particular word. But that expense doesn't cost us anything until sales actually happen. And I don't know, Sue, if you want to break out – the sales and marketing expense as Ben was asking or not. I'm not sure if you have that note.
spk01: Yeah, Carl's exactly right that our coach expenses are completely variable and they are, without a doubt, the biggest line item on our P&L. And as Carl said, we only pay our coaches when a sale is made. And for Q1, I think the total amount was about $70 million dollars. total media and commission expenses in Q1. So that's a material, what is that, about two-thirds, I think, of that selling and marketing line for Q1. And then, you know, again, we continue to optimize other line items in Q1. technology and development and general administrative but the other key line item that impacts cash burn quite significantly is capex you know in 2001 for example it was about 120 million versus 33 million of capex in 2019 and 2020 it was still you know reasonably high and this year it again we haven't shared that number for the full year but it's a materially lower number than each of 2021 and 2020. Okay.
spk00: Thanks, guys.
spk04: Thank you, Mr. Sherland. That concludes the Q&A session. I'll now turn the call back over to Carl Deakler for closing remarks.
spk05: All right. Thanks so much. And I appreciate everybody jumping on for us again. Thank you, Sue, for an incredible tenure with us. I look forward to our next earnings call. We'll introduce you to Mark Swedan and hopefully have encouraging news as we really work hard to deliver the shareholder value that we expect and also the results that people need to live healthy, fulfilling lives. So thanks for your faith in us, your belief in our mission, and thanks for joining us today.
spk04: That concludes today's conference call. Thank you for joining and enjoy the rest of your day.
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