Peloton’s numbers aren’t good. In its fourth quarter 2022 earnings release this morning, the company reported an operating loss of $1.2 billion, a 28% drop in revenue, lower memberships and a monthly churn rate of over 1. % for the first time in a long time. (Maybe never?) And that’s just the tip of the iceberg. In a nutshell, the losses were bigger than Peloton and investors had anticipated.
And yet, Peloton CEO Barry McCarthy would have you believe that the numbers paint a picture of “substantial progress” and the true beginning of Peloton’s comeback story.
“Opponents will look at our financial performance in the fourth quarter and see a falling revenue crucible, negative gross margin and higher operating losses. They will say this threatens the viability of the business,” McCarthy said in his letter. to shareholders. But he clearly disagrees. According to McCarthy, investors should be happy that much of that $1.2 billion figure – $415 million, to be exact – or simply what it costs to get back on track.
Still, it’s hard to turn such a big loss into a win when it’s your sixth consecutive quarter of losses and you refused to give an outlook for 2023 – perhaps that’s why McCarthy invoked a dramatic metaphor involving fast cargo ships and daring rescues in the Mediterranean.
To close his letter to shareholders, McCarthy writes:
In high school, I spent three summer months working on a freighter. After midnight on my second trip, I was sleeping when the headquarters alarm woke me up. My reporting station was on deck. Fear is a great motivator. I got dressed while I was running. The 720ft vessel was making 27 knots and the helm was tough. The ship was suddenly healing to starboard and the steel hull was shaking. The captain was trying to turn around, but a ship this big, going this fast, takes miles and miles to change direction. We saved the lives of two men that night. They had been lost at sea, in the Mediterranean, for several days. A happy, happy ending.
Peloton is like this freighter. We sounded the alarm for headquarters. Everyone is at their station. We continue to add new inputs to evolve our go-to-market strategy to restore growth. When the ship will respond is the question. Our target is FY23.
There is a kernel of truth somewhere in this convoluted metaphor. Peloton recently made significant changes to “get back on track”, including a third round of layoffs, increased subscription costs, experimentation with product pricing, planning for outlet closures, reducing its distribution and manufacturing network and redesigning its bikes so that they can be self-assembled for easier shipping. All of these efforts have resulted in financial advances. Instead of burning $650 million in cash per quarter, that figure improved in the fourth quarter to $412 million. As in, that $1.2 billion loss could have been worse.
And while overall churn was on the rise, Churn rates for its One Peloton Club pilot program were lower than expected, at less than 3%. The program allows members to pay a flat monthly fee of $89 to bundle the cost of a bike and a membership. In September, the company plans to begin expanding marketing of the program nationwide. He also pointed to the fact that the program has attracted younger, more value-oriented buyers.
That said, McCarthy was hesitant to commit to “really looking into” bike leasing as a panacea for the company’s financial woes. That’s because the company has yet to determine whether the program is a “nuclear bomb or the path to the promised land.”
Subscriptions were also less disastrous. They were mostly flat compared to last quarter, but up 27% compared to the same period last year. Subscription revenue also rose 36% from a year ago to $383.1 million and topped hardware revenue in the overall mix. McCarthy has been bullish on Peloton subscriptions as the key to success since day one – and it looks like his efforts are starting to pay off.
McCarthy also highlighted the members’ enthusiasm for the reopening of Peloton studios in New York and London as a sign of continued commitment. Specifically, he named Lizzo in the shareholder letter as a superfan, saying a surprise studio visit by the singer led to 426,000 workouts and “the highest turnout of any cycle class in 7 days following its broadcast date.
It will take more than pure optimism, barrel scratching, and bombastic turns to convince investors. Peloton’s stock fell 13% despite rising 20% less than 24 hours earlier after learning it was teaming up with Amazon to sell its bikes. That said, McCarthy acknowledged there’s still a lot of work to do and the company likely won’t see the fruits of its efforts until 2023.
Peloton CEO thinks losing $1.2 billion is a sign of ‘substantial progress’