8-K: Peloton Exceeds Expectations in Q1 FY25, Achieves Profitability Milestones

• Peloton's Q1 FY25 results surpassed expectations, demonstrating progress towards long-term sustainability and profitability.
• The company achieved a GAAP net loss of $1 million, a substantial improvement year-over-year (Y/Y) by $158 million and quarter-over-quarter (Q/Q) by $30 million.
• GAAP Operating Income was $13 million, a $145 million Y/Y and $76 million Q/Q improvement.
• Net cash provided by operating activities was $12 million, an increase of $92 million Y/Y but a decrease of $20 million Q/Q.
• Adjusted EBITDA reached $116 million, and Free Cash Flow was $11 million.
• Peloton is on track to achieve over $200 million in run-rate cost savings by the end of fiscal year 2025 from its restructuring plan.
• The company is focused on improving unit economics and making strategic investments in innovation to drive future growth.
• Connected Fitness Gross Margin improved to 9.2%, up 90 bps Q/Q and 600 bps Y/Y.
• Sales and Marketing expenses decreased by $64 million or 44% Y/Y, with media spend down 57% Y/Y.
• Peloton has over 6 million members, including 2.9 million paid connected fitness subscribers and 582 thousand paid app subscribers, generating $1.7 billion in annualized subscription revenue with a 67.8% gross margin.
• The company is seeing a 9% Y/Y mix-shift in hardware sales towards men, particularly in the Tread portfolio.
• Average Net Monthly Paid Connected Fitness Subscription Churn was 1.9% in Q1.
• Peloton ended the quarter with $722.3 million in unrestricted cash and cash equivalents and has access to a $100 million revolving credit facility.
• Q2 FY25 revenue is projected to be between $640 million and $660 million, with an Adjusted EBITDA between $20 million and $30 million.
• Full year FY25 revenue is expected to be between $2.4 billion and $2.5 billion, with an Adjusted EBITDA between $240 million and $290 million and Free Cash Flow of $125 million+.

Score: 8

Explanation: The document presents a positive outlook with significant improvements in profitability and cost management. The company is exceeding expectations and raising guidance, indicating strong progress towards financial stability. However, there are still some challenges related to subscriber growth and revenue decline in certain segments.

• Peloton achieved a significant improvement in profitability, with a near break-even GAAP net loss of $1 million.
• The company's Adjusted EBITDA of $116 million and Free Cash Flow of $11 million demonstrate strong financial performance.
• Connected Fitness Gross Margin saw a substantial increase, indicating improved unit economics.
• Peloton successfully reduced operating expenses, particularly in sales and marketing.
• The subscription business remains strong, with a large member base and consistent revenue.
• The company is making progress in attracting a more diverse customer base, with increased sales to men.
• Peloton is actively innovating with new content and product features to enhance member engagement.
• The company has a strong cash position and access to a revolving credit facility.
• Full year FY25 Adjusted EBITDA and Free Cash Flow guidance were raised, reflecting confidence in future performance.
• The company is on track to achieve significant cost savings through its restructuring plan.

• Ending Paid Connected Fitness Subscriptions decreased by 81 thousand in the quarter.
• Ending Paid App Subscriptions decreased by 33 thousand in the quarter.
• Connected Fitness Products Revenue decreased by 11.6% Y/Y.
• Net cash provided by operating activities decreased by $20 million Q/Q.
• Q2 FY25 Adjusted EBITDA is expected to decline sequentially due to increased marketing spend.
• Full year FY25 guidance for Paid App Subscriptions was reduced by 20 thousand.
• Total Gross Margin is expected to decline sequentially in Q2 due to a seasonal mix-shift towards Connected Fitness Products.
• The company is still experiencing a net loss, although significantly reduced.
• The company is still reliant on a large amount of debt.

• The company's ability to maintain and grow its subscriber base is crucial for future revenue.
• Peloton faces risks related to accurately forecasting consumer demand and managing inventory.
• The company's restructuring initiatives may not achieve the expected cost savings or may result in additional charges.
• Peloton needs to successfully develop and offer new products and services to remain competitive.
• The company is subject to risks related to supply chain disruptions and reliance on third-party partners.
• Increased competition in the connected fitness market could impact Peloton's market share.
• The company's ability to maintain effective internal controls is essential for financial reporting.
• Peloton is exposed to risks related to product defects, recalls, and legal claims.
• The company's reliance on third parties for various services poses operational risks.
• The company's ability to attract and retain skilled personnel is critical for its success.

Peloton expects Q2 FY25 revenue to be between $640 million and $660 million, with an Adjusted EBITDA between $20 million and $30 million. Full year FY25 revenue is expected to be between $2.4 billion and $2.5 billion, with an Adjusted EBITDA between $240 million and $290 million and Free Cash Flow of $125 million+. The company anticipates a seasonal increase in hardware sales in Q2 and is focused on improving unit economics and member engagement throughout the year.

• Our Q1 FY25 results reflect continued progress toward Peloton's overarching financial goal of making our business sustainable and profitable for the long term.
• We had a strong Q1 FY25 and performed above our guidance on all of our key metrics.
• We're especially pleased with our bottom line results and Free Cash Flow – we're achieving our cost savings targets faster than we expected.
• We remain hard at work and on track to achieve the goals we set for FY25.
• We are focused on optimizing costs across our business and it shows in our P&L and cash flow.
• We are proud of our Q1 performance in our non-GAAP profitability metrics, which we believe are useful to investors for understanding and evaluating our operating results.
• We continue to see what we believe is low Average Net Monthly Paid Connected Fitness Subscription Churn.
• We expect these improvements to put us in a better position to deliver a great customer experience throughout the quarter.
• We look forward to welcoming Peter Stern in January and continuing to execute our fiscal year goals under his leadership.

Peloton's results reflect a broader trend in the fitness industry towards digital and at-home fitness solutions. The company's focus on cost optimization and profitability aligns with investor expectations for sustainable growth in the sector. The shift towards a more balanced marketing approach, targeting both men and women, is a strategic move to expand its market reach. The partnerships with companies like Costco, Amazon, and Hyatt indicate a move towards a more diversified distribution and engagement strategy.

• Peloton's improvement in gross margin to 51.8% is a positive sign, but it still lags behind some established fitness equipment manufacturers like Nautilus, which has historically maintained gross margins in the 50-60% range.
• The company's subscription model, with a 67.8% gross margin, is comparable to other subscription-based fitness services like Apple Fitness+, which also benefits from high margins on digital content.
• Peloton's reduction in sales and marketing expenses is a strategic move to improve profitability, but it needs to be balanced with the need to acquire new subscribers, similar to how companies like Lululemon manage their marketing spend.
• The company's focus on free cash flow generation is a key indicator of financial health, and its target of $125 million+ for FY25 is a positive step, comparable to other companies in the sector that prioritize cash flow management.
• Peloton's churn rate of 1.9% is relatively low compared to other subscription-based services, indicating strong customer loyalty, similar to companies like Netflix that have a focus on content and engagement.

• Shareholders will benefit from the improved financial performance and increased profitability.
• Employees may experience changes due to the ongoing restructuring and cost-saving measures.
• Customers will benefit from new product features, content offerings, and improved customer support.
• Suppliers may be impacted by changes in Peloton's supply chain and distribution strategies.
• Creditors will be reassured by the company's improved financial health and free cash flow generation.

• Peloton will continue to focus on cost optimization and achieving its FY25 financial targets.
• The company will increase media spend for the holiday season while maintaining discipline to ensure profitable subscriber acquisition.
• Peloton will continue to test new products and features to drive higher member engagement.
• The company will evaluate a more cost-efficient retail model by testing a reimagined smaller store concept.
• Peloton will welcome Peter Stern as CEO and President on January 1, 2025.
• The company will continue to strengthen its delivery experience and improve the quality of its global member support.

• Peloton recognized $23.5 million of supplier settlements primarily due to accruals for the three months ended September 30, 2024 related to settlement of disputes with a third-party supplier about certain alleged past and future commitments.

• May 2024: Peloton announced its cost restructuring plan.
• September 2024: Peloton launched a partnership with Google Fitbit.
• September 30, 2024: End of the first quarter of fiscal year 2025.
• October 2024: Peloton launched a new partnership with TrueMed.
• October 31, 2024: Peloton held a conference call regarding its financial results for the quarter ended September 30, 2024 and issued a shareholder letter.
• November 1, 2024: Chris Bruzzo will step down as Interim co-CEO and return to his role on the Board of Directors.
• January 1, 2025: Peter Stern will join Peloton as Chief Executive Officer and President, and Karen Boone will return to her role on the Board.