Peloton: Record Revenue, Low Churn, and Logistical Concerns

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Friends,

Peloton, the fast-growing digital fitness equipment and media company, reported fiscal Q1 2021 earnings yesterday and absolutely crushed it — shattering even the most optimistic Wall Street expectations.

Before I break it down into greater detail, here’s a high-level overview (Source):

• Revenue came in at $757 million, up 232% from $228M last year.

• Connected Fitness Subscriptions grew 137% to over 1.33 million.

• Digital Subscriptions grew 382% to over 510,000.

• Connected Fitness Subscription Workouts grew 306% to 77.8 million.

• Connected Fitness Subscribers averaged 20.7 Monthly Workouts, versus 11.7 in the year-ago period.

• Average net monthly connected fitness churn rate was 0.65% vs. 0.90% a year ago.

If you want more financial highlights and FY 2021 guidance, this slide is taken straight from Peloton’s investor deck:

So with revenue up over 230% and Peloton now projecting their first billion dollar quarter on the horizon, their stock must have exploded — right?

Not exactly.

After ending the day up over 6%—and 325% on the year—Peloton lost almost 7% of its equity value after reporting their stellar quarter.

What gives?

Supply constraints.

Today we’ll dig through the the highlights, lowlights, and everything in between from Pelotons quarterly update.

As always, let me clarify — I’m not an equity analyst, and it would be foolish to buy stocks based on my opinion alone, but here are a few things I thought were interesting :)

(📸 / Peloton)

Subscriber Growth

For those that aren’t aware, Peloton has two types of subscription options:

1. Connected Fitness Subscribers - Users pay $39/month to sync workout classes directly to their Peloton equipment.

2. Digital Subscriptions - Users pay $12.99/month to access the programs separately through a phone or tablet. 

Although both subscriptions are obviously important, I tend to track their connected fitness subscriber base more closely.

Why?

Connected fitness subscribers also have a Peloton branded bike or treadmill, which inherently intertwines their subscription to the overall hardware sales of the business — making their subscription more important when thinking about Peloton’s overall revenue, monthly churn, and more.

From a Connected Fitness Subscription perspective, Peloton’s base has continued to accelerate as the pandemic deepens in length — announcing over 1.33 million subs yesterday, which represents 137% growth from last year.

The best part?

After providing guidance for another 300,000 net subscription adds in Q2 2021, it’s clear Peloton doesn’t see demand slowing down anytime soon.

Peloton isn’t just adding more net subscriptions though, they’re also slightly improving margins.

In total, about 21% of Peloton’s $757M in revenue came from subscriptions — with hardware sales making up the remaining $600+ million.

Average Monthly Workouts

Have you ever heard someone refer to Peloton’s membership base as a cult?

Here’s why…

On a per subscriber basis, the average Peloton user is working out over 20x per month.

That is a mind-blowing statistic, and on a year over year basis, it means users are doing almost 2x as many workouts per month on their Peloton device than they were last year.

The pandemic has obviously played a part, but with Peloton also crediting additional features like strength workouts, boot camp and yoga as contributing factors, it’ll be interesting to see where this number finds a floor post-pandemic.

Speaking of additional features, it seems Peloton users have taken well to the companies ambition to become much more than just a cycling company. Strength workouts were up over 500% year-over-year and Peloton announced the introduction of two additional classes—Bike Bootcamp & Barre—in response to increased demand.

Don’t forget, as we continue to see Peloton’s average monthly workouts sit at all-time highs, addictions are hard to break.

Which brings me to my next point, monthly churn.

Monthly Churn

When it comes to Peloton’s monthly churn rate, or the percentage rate at which customers stop subscribing, I’m not sure anything more needs to be said than this:

Peloton's average monthly membership churn is .64%, which is lower than major cellphone providers like AT&T, Verizon, Sprint, and T-Mobile.

Simply put, a customer is more likely to switch cellphone carriers than cancel their Peloton membership.

Sure, there are things to consider like Peloton’s upfront cost—which I actually believe is a benefit not a negative—and the prepaid portion of a cellphone carriers business, but anyway you want to phrase, that’s an impressive statistic.

Here is how their monthly churn rate has trended over time:

Perhaps even more impressive, over 95% of Peloton’s Connected Fitness Subscriptions are on month-to-month payment plans — which traditionally, once the hardware is paid off, would give them an even greater ability to churn.

With increased revenue, outsized subscriber growth, users conducting more workouts than ever, and insanely low monthly churn, what’s the problem?

Peloton literally can’t keep up with demand.

Supply Chain Constraints

It’s not often you hear a CEO say “our revenue grew 232% year-over-year” and this “has been an incredibly stressful year” in the same earnings call, but that’s exactly what happened yesterday.

Here’s what CEO John Foley had to say regarding the impact that increased demand brought on by the COVID-19 pandemic, which they didn’t anticipate or plan for, has had on their business.

P.S. — this was how he started the call.

Gotcha, so what’s his plan to fix it?

Peloton’s strategy revolves around three things.

Increase Manufacturing Capacity

This one is obvious, they’re going to scale up their manufacturing capacity to maximum levels by continuing to leverage their facility investments overseas.

Expedited Shipping Investment

In an effort to reduce delivery delays, Peloton plans to invest in expedited shipping services from their Taiwanese factories into the US by “adding air shipments of Bike+ and also utilizing expedited ocean shipping and ground truck logistics.”

Increased Customer Support & Total Transparency

In case you haven’t seen it on social media yet, it’s not only new customers that are frustrated with Peloton. Existing customers have also been frustrated with Peloton’s inability to scale their customer support team.

CEO John Foley says that’s about to change:

All in, with increased investments in manufacturing, logistical costs, and support staff, Peloton is now projecting Q2 gross margins to “temporary decline” from 43% to about 39%.

An expensive, but necessary investment.

Regardless, even for all the logistical challenges they have face, this year has been incredible for Peloton.

The real test will come as gyms open back up and consumers return to their pre-pandemic lifestyle.

Most of this information was pulled from their quarterly investor presentation, which you can read here.

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