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Peloton (PTON) reports Q4 2022 losses mount

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Brody Longo works out on his Peloton exercise bike on April 16, 2021 in Brick, Recent Jersey.

Michael Loccisano | Getty Images

Peloton on Thursday reported widening losses and slumping sales for its fiscal fourth quarter because the connected fitness equipment maker attempts to win back investors with cost cuts and strategic shifts.

The corporate’s shares declined greater than 20% – a day after the stock surged greater than 20% on news of its partnership with Amazon.

It marks Peloton’s sixth consecutive quarter of reported losses. The corporate said it goals to succeed in break-even money flow on a quarterly basis within the second half of its fiscal yr 2023.

Still, Peloton CEO Barry McCarthy said he expects the marketplace for connected fitness will remain difficult for the foreseeable future, as consumer demand for at-home workout machines wanes from Covid pandemic highs.

Since McCarthy took over as chief executive from Peloton founder John Foley in February, the corporate has pursued sweeping changes which have yet to completely repay. Peloton raised membership fees, hiked prices on some equipment, laid off 1000’s of employees, tested a rental option, exited last-mile delivery and transferred all production over to 3rd parties. On Wednesday, Peloton also began selling a portion of its products on Amazon in america, its first such cope with one other retailer.

“The naysayers will take a look at our [fourth-quarter] financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses,” McCarthy wrote in a letter to Peloton shareholders.

“But what I see is important progress driving our comeback and Peloton’s long-term resilience,” he said. “We still have work to do.”

Peloton didn’t offer an outlook for its upcoming fiscal 2023. For the primary quarter that ends on Sept. 30 it said it sees subscribers staying flat, and revenue ranging between $625 million and $650 million, which is wanting analysts’ estimates. Peloton said this takes into consideration near-term demand weakness and seasonal fluctuations to the business.

There was a silver lining for the corporate: This marked Peloton’s first reported quarter where higher-margin subscription revenue accounted for the vast majority of total sales.

During a call with analysts, McCarthy also touted plenty of things Peloton remains to be testing to drum up sales. Those include selling pre-owned bikes, renting bikes for a monthly fee and adding recent tiers to Peloton’s digital app, including a premium tier where people would pay more for expanded content and higher features.

“It will not be enough to simply cut expenses, we have now to grow revenue,” he said.

Using the movie rental wars for example, McCarthy said that Netflix was capable of come out on top of Blockbuster, a movie rental business that filed for bankruptcy in 2010, since it offered its customers personalized content and plenty of selections.

Losses mount

Peloton’s net loss widened within the three-month period ended June 30 to $1.24 billion, or $3.68 per share, from a lack of $313.2 million, or $1.05 a share, a yr earlier.

McCarthy said the losses stemmed from Peloton’s efforts to avoid a listing glut, cut fixed costs and address other supply chain issues. The corporate earlier this yr launched into an $800 million restructuring plan. Peloton ended the fourth quarter with inventory of $1.1 billion, compared with $937.1 million a yr earlier.

Revenue fell 28% to $678.7 million from $936.9 million a yr earlier. That got here in wanting the $718.2 million that analysts had been searching for, in response to Refinitiv estimates.

Inside that figure, connected fitness revenue that features the contribution from Peloton’s Precor business dropped 55% to $295.6 million.

Peloton’s connected fitness gross margin was one other bleak point, at negative 98.1% compared with positive 11.7% a yr earlier. Peloton said it experienced higher logistics expenses per delivery, increased port and storage costs, plus charges related to the recall of its Tread+ treadmill machine.

Peloton booked $383.1 million of subscription revenue, up 36% from the prior yr and representing 56.4% of total company sales. Subscription gross margin ticked as much as 67.9% from 63.3%.

McCarthy, who previously worked at Netflix and Spotify, has made it clear he’s more interested by pursuing growth on the subscription side of Peloton’s business, fairly than putting such an emphasis on hardware. He believes Peloton’s digital app will probably be core to the corporate’s future success.

Peloton burned through $412 million in money within the fourth quarter, after it averaged negative money flow of $650 million in each of the prior two quarters. It ended June with $1.25 billion in money reserves and a $500 million revolving credit facility.

BMO Capital Markets analyst Simeon Siegel applauded McCarthy for making some “very constructive decisions” to stem a money bleed in recent months. But, he said, Peloton could also be facing an even bigger issue of brand name saturation.

Member count drops

Peloton ended its latest quarter with 2.97 million connected fitness subscriptions, about flat with prior-quarter levels and up 27% from a yr ago. Connected fitness subscribers are individuals who own a Peloton product, reminiscent of its original Bike, and in addition pay a monthly fee for access to live and on-demand workout classes.

Its total member count, though, declined by about 143,000 people from the prior quarter to six.9 million. McCarthy, following Foley’s initial vision, has said the corporate hopes to in the future amass 100 million members.

Peloton’s average net monthly churn levels for connected fitness users ticked as much as 1.41% from 0.73% a yr ago.

The corporate said this was ahead of its internal expectations partly resulting from a consumer protection ruling in Canada that forced all customers within the country to approve the subscription price hikes that took effect in June, and about 85% of them have done so up to now. Peloton said it had expected that some people would drop their memberships after prices rose.

But investors may be wary of the leap. A lower churn rate could be higher news for Peloton, because it means persons are sticking around and continuing to pay for his or her memberships.

McCarthy said within the letter to shareholders that the fourth quarter should prove to be the “high water mark” for write-offs and restructuring charges related to inventory and provide chain challenges. It also needs to mark the start of Peloton’s comeback story, he said.

Peloton shares have dropped around 60% yr up to now, as of Wednesday’s market close. Its market cap has fallen below $5 billion, after reaching as high as almost $50 billion in early 2021.

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