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Peloton Interactive, Inc. (PTON) SEC Filing 10-Q Quarterly report for the period ending Monday, September 30, 2019

Peloton Interactive, Inc.

CIK: 1639825 Ticker: PTON
Q1 2020 SHAREHOLDER LETTER


 
PELOTON INTERACTIVE, INC. FIRST QUARTER HIGHLIGHTS All financial comparisons are on a year-over-year basis unless otherwise noted. • Connected Fitness Subscribers grew 103% • Gross Margin was 46.1% representing to 562,774, expanding our Member base to a 14 basis point improvement; 43.0% over 1.6 million Connected Fitness Gross Margin, 56.1% Subscription Gross Margin, and 63.0% • Total revenue grew 103% to $228.0 million, Subscription Contribution Margin demonstrating the continued strong demand for our connected fitness experience • We reduced our Net Loss to $(49.8) million, a $4.8 million improvement • We continued to experience low churn and high retention; 0.90% Average Net Monthly • Adjusted EBITDA was $(21.0) million Connected Fitness Churn and 94% 12-month representing an Adjusted EBITDA retention rate Margin of (9.2)% and 283 basis point improvement • Engagement, a leading indicator of low Churn, remained strong with 11.7 Average Monthly Workouts per Connected Fitness Subscriber versus 8.9 in the same period last year CONNECTED FITNESS SUBSCRIBERS QUARTERLY TOTAL REVENUE 563 600 511 350 316.7 457 300 262.9 500 223.3 228.0 362 250 400 246 277 200 142.4 300 218 129.8 169 150 106.6 112.1 200 100 100 50 0 0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2018 FY 2019 FY 2020 FY 2018 FY 2019 FY 2020 (in thousands) (in $ millions) QUARTERLY WORKOUTS AVG. MONTHLY WORKOUTS PER SUB 13.9 19,171 11.7 20,000 17,988 17,759 14 12.0 12 9.6 9.7 8.7 8.9 15,000 10 7.4 9,336 8 10,000 7,069 5,902 6,223 6 3,231 5,000 4 2 0 0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY 2018 FY 2019 FY 2020 FY 2018 FY 2019 FY 2020 (in thousands) PELOTON Q1: 2020 | 02


 
Peloton Shareholders, We had a strong start to our fiscal year ended June 30, 2020 with revenue growth of 103% in our first quarter versus last year. We benefited from continued strong demand for our connected fitness experience, attributable to our effective brand and performance marketing and growing word- of-mouth referrals from our loyal Members. Despite the significant investments we are making to grow internationally, scale operations, and enhance our end-to-end Member experience, we narrowed our Net Loss by $4.8 million to $(49.8) million and improved our Adjusted EBITDA margin of (9.2)% by 283 basis points versus last year. We’ve also achieved major milestones including: Photography by Libby Greene/Nasdaq, Inc COMPLETION OF OUR IPO We closed our Initial Public Offering of 40 million geographical footprint, continue to build our brand shares on September 30, 2019 raising $1.26 billion and product awareness, and innovate our products, in gross proceeds, including $100 million through content, and software features with the goal of a concurrent private placement from entities creating the best fitness experience in the world affiliated with TCV, an existing shareholder. The for our Members. We ended Q1 with a strong cash proceeds from the IPO will help us expand our balance of $1.4 billion. PELOTON Q1: 2020 | 03


 
LAUNCH OF HOME TRIAL On September 12, 2019, we launched Home Trial. a full refund, including delivery and subscription First-time Bike purchasers in all of our markets fees, and we will pick up the Bike at their home are now able to try the Peloton Bike at home for free of charge. 30 days after delivery, risk-free. Within the 30-day trial period customers have unlimited access to Allowing our potential Members to try the Peloton our library of thousands of live and on-demand Bike at home is an important step in continuing to classes allowing them to try our immersive at- offer the best Member experience possible, while home cardio experience. This includes access to helping us reduce a known barrier to purchase. Peloton Digital where Bike purchasers can also While it is still early, we are very pleased by the experience our running, strength, yoga, and med- initial sales impact from Home Trial and the itation classes. Customers can decide to return marketing efficiencies gained by an increase in the Bike at any point within the first 30 days for conversion from this program. 30 DAY HOME TRIAL FREE PICKUP. FULL REFUND. PELOTON Q1: 2020 | 04


 
“WE’RE PLEASED THAT, AFTER A LONG-TIME TRUSTED PARTNERSHIP, PELOTON HAS DECIDED TO DEEPLY INVEST IN THE FUTURE OF TONIC AND OUR TEAM. WE LOOK FORWARD TO PLAYING A SIGNIFICANT AND IMPORTANT ROLE IN HELPING PELOTON TO GLOBALIZE AT-HOME FITNESS.” —ANDY WU, FOUNDER AND CEO OF TONIC. INTERNATIONAL EXPANSION We recently celebrated the first anniversary of the launch of our U.K. and Canada markets in September 2019 and October 2019, respectively, and we are pleased with the growth in sales and brand awareness to date, which has exceeded our expectations. In the lead-up to this holiday season we are opening several new U.K. MANUFACTURING PARTNER ACQUISITION showrooms as we continue to extend our retail We are excited to share that in October we footprint beyond London, and we have opened completed the acquisition of one of our long- additional warehouses to expand our internal field time, Taiwan-based bike manufacturing partners, operations coverage to more areas within the U.K. Tonic Fitness Technology, Inc. (“Tonic”). We believe that having greater control over our supply On November 20, 2019 we will take another chain will enable us to strengthen and scale our important step in our international expansion production capabilities, increase innovation, and with the launch of Peloton in Germany. With our allow us to continue to deliver the highest quality entry into Germany, we will be in the three largest connected fitness products in the market. After fitness markets in the world (U.S., U.K., and years of close partnership and collaboration, we Germany). Germany will also mark our first time are excited to officially welcome the Tonic team offering non-English language content to users on and its employees to the Peloton family. The our platform. To prepare for our sales efforts, we acquisition was completed for a purchase price of will be opening several retail showrooms across approximately $47.4 million, net of cash acquired. the major metropolitan areas of Germany within Upon completion of the transaction on October 16, the first few months of launch, and we will begin a 2019, Tonic became a wholly-owned subsidiary of full-scale national TV and digital media campaign Peloton. While the acquisition of Tonic brings some in January 2020 to build brand and product of our manufacturing in-house, we will continue to awareness. As part of our localization strategy, work closely with our other valued manufacturing we will produce German-language classes out of partners. Tonic, founded by Andy Wu, has been our London studio with new German instructors, designing and manufacturing innovative stationary and we will also make German subtitles available bikes since 1985. Peloton began collaborating with on a significant percentage of our existing Tonic on our Bike in 2013. English-language library. PELOTON Q1: 2020 | 05


 
CONTINUOUS INNOVATION SOFTWARE Our team of software engineers is dedicated to We work hard every day to continuously improving our Member experience by creating new and innovative interactive continuously improve the software features. During Q1 we released a brand end-to-end experience for new personalized home screen for the Bike and Tread, which makes it easier than ever for our our Members. Here are a few Members to find the perfect workout. The new home screen is fully redesigned and features things we’ve been working on personalized class recommendations, which over the last quarter: are tailored to each Member’s past workout activity, favorite instructors, music preferences, social connections, and more. We are just beginning to scratch the surface on both platform personalization and fully utilizing our substantial data assets to drive class recommendations and product development with the goal of deepening our Member engagement over time. Over the past few quarters, we have been focused on enhancing the Peloton Digital experience, with the objective of providing Members access to the same high-quality class content and immersive, motivating software features anywhere, anytime, and on any device. Our goal is to help our Members connect with us, reducing all barriers to accessing our content and maximizing the convenience of our platform. We recently released Chromecast for Android, as well as a new connection wizard for Miracast to make it easier for members using our Connected Fitness Products to connect and cast their screens to other devices in their home such as smart TVs, Roku, and Amazon Fire Sticks — a great way to enjoy some of our floor content such as yoga and strength. New personalized bike homescreen PELOTON Q1: 2020 | 06


 
ORIGINAL PROGRAMMING As we rapidly add Members and their engagement increases, we have the benefit of utilizing data to understand what workouts and programming our Members want and to direct our programming investments into those areas. We continue to broaden our original content offering by introducing fresh class concepts that engage Members in new ways. In order to amplify our commitment to music, we plan to increase the number of “Artist Series” offerings. We recently produced a Jennifer Lopez dual-instructor ride with Robin Arzon and Jess King, as well as a Lizzo ride, and both placed in the top 10 live classes of all time on our platform. Recent classes based on music by Paul McCartney, Red Hot Chili Peppers, The Chainsmokers and Shakira similarly drove strong engagement from our Members. We have also turned our focus to increasing live participation through “appointment” content. We now feature “Sundays with Love” with Ally Love on Sunday mornings at 11:45am ET, the “Jess King Experience” on Thursday nights at 9:00pm ET and “Zen in Ten”, a 10 minute lunchtime live yoga experience every week day. PELOTON Q1: 2020 | 07


 
Based on engagement data, we know that our Members want more fitness programs like our recently launched “Crush Your Core” with Emma Lovewell. We are committed to creating more of these programs over time to enhance our Members’ work out regime. We’ve added additional live workouts to our daily class schedule on Mondays and Wednesdays at 9:30pm ET/6:30pm PT to provide more convenient times for our West Coast Members. We also continue to invest in the best instructors. In September we welcomed two new U.S.-based cycling instructors, Kendall Toole and Tunde Oyeneyin. We are also excited to welcome three new international instructors to the roster in Q2 to support our growing Membership base in the U.K. and our German launch. SHOWROOMS We grew our global showroom count to 81 bring the Peloton retail experience to several through the addition of seven new showrooms new markets globally and engage with travelers in Q1, with four of those new showrooms through the opening of our first airport showroom representing new markets for Peloton retail— in Chicago’s O’Hare airport. Indianapolis, IN, Richmond, VA, Salt Lake City, UT, and Leeds, U.K. We also boosted our presence We continued to drive traffic and engagement to six showrooms in Southern Florida with the through Test Class (Bike and Tread) as well as launch of Coral Gables, Naples, and Palm Beach. local community engagement by hosting Member Additionally, temporary units in Columbus, OH and milestone celebrations and Member events in our Lone Tree (Denver), CO were transitioned to new, showrooms. As Members approach a milestone, permanent locations. An important component of we now send push notifications inviting them to our retail expansion strategy is the introduction come celebrate with us. of new markets. In the second quarter, we will PELOTON Q1: 2020 | 08


 
LOGISTICS AND ORDER EXPERIENCE We are always looking for opportunities to improve also launched a new master technician service to every Member touchpoint. In Q1, we began the provide branded, cost-effective in-home service roll out of a new Delivery Self-Scheduler feature experiences in select markets. For support after that enables customers to self-select their desired delivery, we recently launched our first in-app delivery date and time window following checkout. support feature which gives Members the ability We continued to expand our network of last mile to open a support ticket directly from their Bike Field Operations centers, opening a number of or Tread touchscreen and receive immediate new warehouse facilities in the U.S. and U.K. We troubleshooting steps to mitigate common issues. PELOTON Q1: 2020 | 09


 
PELOTON INTERACTIVE, INC. FINANCIAL DISCUSSION REVENUE REVENUE We generated total revenue of $228.0 million in Q1, representing 103% $228.0 million year-over-year growth. Connected Fitness Product revenue was $157.6 103% Y/Y million, representing 102% year-over-year growth and 69% of total revenue. Our strong sales were the result of our effective brand and performance ENDING marketing efforts including a new marketing campaign highlighting our CONNECTED financing program for the first time. We also benefited from continued FITNESS word-of-mouth referrals from our loyal Members, which remains one of SUBSCRIBERS our largest marketing channels. In addition, our strong year-over-year growth was helped by Tread and International, given that both launches 562,774 occurred late in Q1 of Fiscal Year 2019. 103% Y/Y Subscription revenue was $67.2 million in Q1, representing 112% year- AVG. NET MONTHLY over-year growth and 29% of total revenue. The increase in subscription CONNECTED revenue was a result of strong growth in our Connected Fitness Subscriber FITNESS CHURN base, which reached 562,774 by the end of Q1, representing year-over-year growth of 103%. Our growth in Connected Fitness Subscribers was aided 0.90% by our continued low Average Net Monthly Connected Fitness Churn in Q1 of 0.90%. As of September 30, 2019, 90% of our Connected Fitness Subscribers were on month-to-month payment plans. Our growing subscription revenue is driven by our Members’ increasing engagement with our platform, and engagement is the leading indicator of retention. During Q1, our Member engagement continued to grow with 11.7 Average Monthly Workouts per Connected Fitness Subscriber versus 8.9 Workouts in the same period last year. Our Connected Fitness Subscribers worked out with Peloton 19.2 million times, up from 7.1 million workouts in the same period last year, representing 171% year- over-year growth. The increasing diversity of our content offering available through our Connected Fitness Products and Peloton Digital continues to drive engagement and greater share of our Members’ workouts. We ended the quarter with 105,856 Digital Subscribers, up 116% year- over-year. Peloton Digital continues to be an important aspect of our business as it serves as a powerful lead generation channel for Connected Fitness Product sales and bolsters our Connected Fitness Subscribers’ engagement with multiple fitness verticals. Other revenue, which primarily consists of the sale of Peloton-branded apparel, was $3.3 million in Q1, representing 30% revenue growth, net of discounts, and 80% unit sales growth year-over-year. Growth in apparel sales is offset by the discounts offered in our referral program, which help encourage word-of-mouth purchase recommendations from our growing Member base. Peloton apparel allows our Members to display their loyalty to our brand, and we have seen sales increase year-over-year as we grow our Member base and expand our showroom footprint. PELOTON Q1: 2020 | 10


 
PELOTON INTERACTIVE, INC. FINANCIAL DISCUSSION GROSS PROFIT GROSS PROFIT Gross profit was $105.1 million in Q1 representing 104% year-over- $105.1 million year growth. Gross margin for the quarter was steady year-over-year 46.1% gross margin at 46.1%. CONNECTED Connected Fitness Products gross profit was $67.8 million in Q1 FITNESS GROSS and represents 90% year-over-year growth. Our Connected Fitness PROFIT Products gross margin of 43.0% was negatively impacted by a mix shift to Tread sales, which currently carry a lower gross margin than $67.8 million our Bikes, as well as investments in our logistics platform to support 43.0% gross margin our growth. SUBSCRIPTION Subscription gross profit was $37.7 million in Q1 representing 144% GROSS PROFIT year-over-year growth. Subscription gross margin was 56.1%, a 743 basis point improvement versus last year. Subscription Contribution $37.7 million was $42.4 million in Q1 increasing 129% year-over-year. Subscription 56.1% gross margin Contribution Margin was 63.0%, a 470 basis point improvement versus last year, primarily driven by a $1.9 million benefit from lower SUBSCRIPTION content costs for past use year-over-year. This benefit was partially CONTRIBUTION offset by higher studio rent expense year-over-year, as prior year Q1 did not include the lease expense for our new Peloton Studios in New $42.4 million York City and London. 63.0% contribution margin For a reconciliation of non-GAAP financial measures to their corresponding GAAP measures, please refer to the reconciliation table in the section titled “Key Operating Metrics and Non-GAAP Financial Measures--Non-GAAP Financial Measures.” PELOTON Q1: 2020 | 11


 
PELOTON INTERACTIVE, INC. FINANCIAL DISCUSSION OPERATING EXPENSES TOTAL OPERATING We typically see lower revenue in the first and fourth quarters of our EXPENSES fiscal year relative to the second and third quarters when we benefit from Holiday sales, New Year’s resolutions, and colder weather. $156.0 million Therefore, operating costs as a percentage of total revenue in the first 68% of revenue and fourth quarters are typically higher. Total operating expenses of $156.0 million grew 46% year-over-year primarily due to increased SALES AND marketing expense, expansion into new international markets and MARKETING fitness verticals, and increases in payroll-related costs due to growth in headcount. Total operating expenses were 68% of total revenue, $77.6 million compared to 95% of total revenue in the prior year period. Our prior 34% of revenue year quarter included a one-time stock-based compensation charge of $32.6 million related to our Series F tender offer. Excluding this impact, GENERAL AND operating expense would have been 66% of total revenue. ADMINISTRATIVE Sales and marketing expense was $77.6 million and grew 71% year- $60.9 million over-year representing 34% of total revenue. Our prior year quarter 27% of revenue included a one-time stock-based compensation charge related to our Series F tender offer of $3.9 million. Excluding this impact, sales and RESEARCH AND marketing expense as a percent of total revenue would have been DEVELOPMENT 37% in Q1 2019. We continue to see marketing efficiencies in the U.S. Bike business, in part driven by our continued strong word-of-mouth $17.4 million referrals from our Members, which helped to offset some of the 8% of revenue increase in marketing spend for international and Tread where we are still in the early stages of building brand and product awareness. General and administrative expense was $60.9 million and grew 22% year-over-year representing 27% of total revenue. Excluding the one-time stock-based compensation charge related to our Series F tender offer of $26.2 million in the prior year quarter, general and administrative expense would have been 21% of total revenue in Q1 2019. The year-over-year growth was driven by continued investment in our teams and systems required to support us as a public company as well as lease expense related to our new headquarters in New York City, which we took possession of in August 2019. Our move to our new headquarters is planned for Fall 2020. Research and development expense was $17.4 million and grew 51% year-over-year representing 8% of total revenue. Excluding the one-time stock-based compensation charge related to our Series F tender offer of $2.5 million in the prior year quarter, research and development expense would have been 8% of total revenue in Q1 2019. The growth in overall expense is primarily due to the expansion of our software and hardware engineering teams to continue to develop a robust pipeline of new software features and products. PELOTON Q1: 2020 | 12


 
PELOTON INTERACTIVE, INC. FINANCIAL DISCUSSION PROFITABILITY NET LOSS Net loss improved in Q1 to $(49.8) million compared to $(54.5) million $(49.8) million last year. Q1 Adjusted EBITDA loss was $(21.0) million representing (22)% profit margin an Adjusted EBITDA margin of (9.2)% and year-over-year margin improvement of 283 basis points primarily due to operating expense ADJUSTED leverage. Factoring in Q1 weighted average shares outstanding of 38,453,864, basic and diluted net loss per share was $(1.29). EBITDA LOSS $(21.0) million (9.2)% margin Q1 2019 BALANCE SHEET AND CASH FLOW Our initial public offering and the $100 million concurrent private CASH AND CASH placement from entities affiliated with TCV yielded gross proceeds EQUIVALENTS of $1.26 billion before underwriting discounts and offering expenses $1.4 billion and helped bolster our cash and cash equivalents to $1.4 billion at the end of Q1. Cash used in operations was $(76.2) million during the quarter. Capital expenditures were $(22.5) million, the majority of which is related to the continued build out of our new Peloton Studios in New York City and London, our New York City headquarters, and new showrooms. PELOTON Q1: 2020 | 13


 
PELOTON INTERACTIVE, INC. Q2 AND FULL FISCAL YEAR 2020 BUSINESS OUTLOOK Q2 FISCAL YEAR 2020 HIGHLIGHTS FULL FISCAL YEAR 2020 HIGHLIGHTS • 680,000 to 685,000 ending Connected Fitness • 885,000 to 895,000 ending Connected Fitness Subscribers, growth of 88% at midpoint Subscribers, growth of 74% at midpoint • $410 million to $420 million total revenue, 58% • $1.45 billion to $1.50 billion total revenue, 61% growth at midpoint growth at midpoint • $(70) million to $(65) million Adjusted EBITDA, • $(170) million to $(150) million Adjusted EBITDA, (16.3)% Adjusted EBITDA margin at midpoint (10.8)% Adjusted EBITDA margin at midpoint We remain focused on driving strong Connected Fitness and investments in supply chain and logistics to Subscriber growth and engaging and retaining our scale our business, partially offset by product cost growing, scaled Member base. Our Connected Fitness efficiencies. We expect both our Subscription Margin Subscriber guidance is based on the early success and Subscription Contribution Margin to benefit from of Home Trial, our expectations for a robust Holiday an expected reduction in content costs for past use, and New Year’s resolution season, and continued low and to a lesser extent, leverage from our fixed costs of Average Net Monthly Connected Fitness Churn. Churn content production as we grow our Connected Fitness is expected to slightly rise, but stay below 1.05% in Q2 Subscriber base. and average 1.05% for the full Fiscal Year 2020. This is due to the expected increase in return rates from Home We will continue to deploy capital in a disciplined Trial and the continued expiration of prepaid Connected manner given the significant global market opportunity Fitness Subscriptions offered prior to July 2018. By the in front of us. In Fiscal Year 2020, we will continue to end of Fiscal Year 2020, we expect that at least 94% invest in building our brand, supporting our growth, of our Connected Fitness Subscribers will be paying scaling operations internationally, improving our end- month-to-month. to-end Member experience, and recruiting and retaining the best teams across all business functions at Peloton. For Q2, we expect $410 million to $420 million of total We expect Q2 Adjusted EBITDA of $(70) million to $(65) revenue, representing 58% growth at the midpoint of the million, representing an Adjusted EBITDA margin of range. For Fiscal Year 2020 we expect $1.45 billion to (16.3)% at the midpoint of the range. For Fiscal Year $1.50 billion of total revenue, representing 61% growth 2020 we expect Adjusted EBITDA of $(170) million to at the midpoint of the range. As mentioned previously, $(150) million, representing an Adjusted EBITDA margin the strong year-over-year growth in Q1 Fiscal Year of (10.8)% at the midpoint of the range. 2020 was aided by Tread and International, given that our entry into the Tread category, U.K., and Canada A reconciliation of non-GAAP guidance measures to occurred last Fall. This will drive tougher year-over-year corresponding GAAP measures is not available on a comparisons for the balance of Fiscal Year 2020. forward-looking basis without unreasonable effort due to the uncertainty regarding, and the potential variability For Q2 and Fiscal Year 2020 we expect a gross of, many of the costs and expenses that may be margin of 39% to 40% and 41% to 42%, respectively. incurred in the future. We have provided a reconciliation Connected Fitness Product margin will continue of GAAP to non-GAAP financial measures for Q1 in the to be negatively impacted by the mix shift to Tread reconciliation table at the end of this letter. PELOTON Q1: 2020 | 14


 
PELOTON INTERACTIVE, INC. Q2 AND FULL FISCAL YEAR 2020 BUSINESS OUTLOOK WEBCAST We will host a Q&A session at 8:30am ET on Tuesday, new products and services; our ability to accurately November 5, 2019 to discuss our financial results. To forecast consumer demand and adequately manage participate in the live call, please dial 1 (877) 667-0469 our inventory; our ability to maintain the value and (US / Canada) or 1 (346) 406-0807 (international) and reputation of the Peloton brand; a decrease in sales of provide conference ID 2467016. A live webcast of the our Bike; the continued growth of the connected fitness call will be available at market; the loss of any one of our third-party suppliers, https://investor.onepeloton.com/investor-relations/ manufacturers, or logistics partners; our ability to and will be archived on our site following the call. achieve the objectives of strategic and operational initiatives; litigation and related costs; the impact Thanks to our Members, employees, partners, and of privacy and data security laws; and other general investors — together we go far! market, political, economic, and business conditions. —Team Peloton Additional risks and uncertainties that could affect our financial results are included under the caption “Risk Factors” in the final prospectus pursuant to Rule 424(b) SAFE HARBOR STATEMENT (4) filed with the SEC on September 26, 2019 and our This shareholder letter includes forward-looking other SEC filings, which are available on the Investor statements, which are statements other than Relations page of our website at statements of historical facts and statements in https://investor.onepeloton.com/investor-relations and the future tense. These statements include, but on the SEC website at www.sec.gov. are not limited to, statements regarding our future performance and our market opportunity, including All forward-looking statements contained herein are expected financial results for the second quarter based on information available to us as of the date of 2020 and full year 2020, our business strategy hereof and you should not rely upon forward-looking and plans, and our objectives and future operations, statements as predictions of future events. The including our expansion into new markets,. Forward- events and circumstances reflected in the forward- looking statements are based upon various estimates looking statements may not be achieved or occur. and assumptions, as well as information known to Although we believe that the expectations reflected us as of the date hereof, and are subject to risks and in the forward-looking statements are reasonable, uncertainties. Accordingly, actual results could differ we cannot guarantee future results, performance, or materially due to a variety of factors, including: our achievements. We undertake no obligation to update ability to attract and retain Subscribers; our limited any of these forward-looking statements for any operating history; our ability to anticipate and satisfy reason after the date of this shareholder letter or to consumer preferences; the effects of the highly conform these statements to actual results or revised competitive market in which we operate; market expectations, except as required by law. Undue reliance acceptance of our Connected Fitness Products; our should not be placed on forward-looking statements. ability to successfully develop and timely introduce PELOTON Q1: 2020 | 15


 
PELOTON INTERACTIVE, INC. KEY OPERATING METRICS AND NON GAAP FINANCIAL MEASURES In addition to the measures presented in our interim condensed consolidated financial statements, we use the follow- ing key operating metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. Three Months Ended September 30 2019 2018 Connected Fitness Subscribers 562,774 276,957 Average Net Monthly Connected Fitness Churn 0.90% 0.50% Total Workouts (in millions) 19.2 7.1 Average Monthly Workouts per Connected Fitness Subscriber 11.7 8.9 Subscription Gross Profit (in millions) $ 37.7 $ 15.4 Subscription Contribution (in millions)(1) $ 42.4 $ 18.5 Subscription Gross Margin 56.1% 48.7% Subscription Contribution Margin(1) 63.0% 58.3% Net Loss (in millions) $ (49.8) $ (54.5) Adjusted EBITDA (in millions)(2) $ (21.0) $ (13.5) Adjusted EBITDA Margin(2) (9.2)% (12.0)% (1) Please see the section titled “Non-GAAP Financial Measures” for a reconciliation of Subscription Gross Profit to Subscription Contribution and an explanation for why we consider Subscription Contribution to be a helpful metric for investors. (2) Please see the section titled “Non-GAAP Financial Measures” for a reconciliation of net loss to Adjusted EBITDA and an explanation for why we consider Adjusted EBITDA to be a helpful metric for investors. CONNECTED FITNESS SUBSCRIBERS AVERAGE NET MONTHLY CONNECTED Our ability to expand the number of Connected Fitness FITNESS CHURN Subscribers is an indicator of our market penetration We use Average Net Monthly Connected Fitness Churn and growth. A Connected Fitness Subscriber can repre- to measure the retention of our Connected Fitness sent a person, household, or commercial property, such Subscribers. We define Average Net Monthly Connect- as a hotel or residential building. ed Fitness Churn as Connected Fitness Subscriber cancellations, net of reactivations, in the quarter, divided A Connected Fitness Subscription is either a paid by the average number of beginning Connected Fitness Connected Fitness Subscriber (a Connected Fitness Subscribers in each month, divided by three months. Subscription with a successful credit card billing or This metric does not include data related to our Digital with prepaid subscription credits or waivers) or paused Subscribers who pay a monthly fee for access to our Connected Fitness Subscriber (a Connected Fitness content library on their own devices. Subscription where the Subscriber has requested to “Pause” for up to 3 months). We do not include canceled or unpaid Connected Fitness Subscriptions in the Con- nected Fitness Subscriber count. PELOTON Q1: 2020 | 16


 
PELOTON INTERACTIVE, INC. KEY OPERATING METRICS AND NON GAAP FINANCIAL MEASURES TOTAL WORKOUTS AND AVERAGE NON-GAAP FINANCIAL MEASURES MONTHLY WORKOUTS PER CONNECTED In addition to our results determined in accordance FITNESS SUBSCRIBER with accounting principles generally accepted in the We review Total Workouts and Average Monthly Work- United States, or GAAP, we believe the following non- outs per Connected Fitness Subscriber to measure GAAP financial measures are useful in evaluating our engagement, which is the leading indicator of retention operating performance. for our Connected Fitness Subscribers. We define These non-GAAP financial measures have limitations Total Workouts as all workouts completed during a as analytical tools in that they do not reflect all of the given period. We define a Workout as a Connected amounts associated with our results of operations Fitness Subscriber either completing at least 50% of as determined in accordance with GAAP. Because of an instructor-led or scenic ride or run or ten or more these limitations, Adjusted EBITDA, Adjusted EBITDA minutes of “Just Ride” or “Just Run” mode. We define Margin, Subscription Contribution, and Subscription Average Monthly Workouts per Connected Fitness Sub- Contribution Margin should be considered along with scriber as the Total Workouts completed in the quarter other operating and financial performance measures divided by the average number of Connected Fitness presented in accordance with GAAP. Subscribers in each month, divided by three months. The presentation of these non-GAAP financial mea- sures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. A rec- onciliation of the non-GAAP financial measures to such GAAP measures can be found below. PELOTON Q1: 2020 | 17


 
PELOTON INTERACTIVE, INC. ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN Adjusted EBITDA and Adjusted EBITDA Margin are We calculate Adjusted EBITDA as net loss adjusted to key performance measures that our management exclude other income, net, provision for income taxes, uses to assess our operating performance and the depreciation and amortization expense, stock-based operating leverage in our business. Because Adjusted compensation expense, transaction costs, and certain EBITDA and Adjusted EBITDA Margin facilitate internal litigation expenses, consisting of legal settlements and comparisons of our historical operating performance related fees for specific proceedings that arise outside on a more consistent basis, we use these measures for of the ordinary course of our business. Adjusted EBIT- business planning purposes. We also believe this infor- DA Margin is calculated by dividing Adjusted EBITDA by mation will be useful for investors to facilitate compar- total revenue. isons of our operating performance and better identify trends in our business. We expect Adjusted EBITDA The following table presents a reconciliation of Adjust- Margin to increase over the long-term as we continue ed EBITDA to net loss, the most directly comparable to scale our business and achieve greater leverage in financial measure prepared in accordance with GAAP, our operating expenses. for each of the periods indicated: Three Months Ended September 30 (dollars in millions) 2019 2018 Net loss (1) $ (49.8) $ (54.5) Adjusted to exclude the following: Other income (expense), net 1.2 1.0 Provision for income taxes 0.1 – Depreciation and amortization expense 7.1 4.2 Stock-based compensation expense 18.7 36.7 Transaction costs 0.3 — Litigation expenses 3.9 1.2 Adjusted EBITDA $ (21.0) $ (13.5) Adjusted EBITDA margin (9.2)% (12.0)% (1) Included in net loss are content costs for past use as follows: Three Months Ended September 30 (dollars in millions) 2019 2018 Content costs for past use (2) $ 0.9 $ 2.9 (2) From time-to-time, we execute music royalty agreements with various music rights holders. As part of these go-forward license agreements, we may also enter into agreements whereby we are released from all potential licensor claims regarding our alleged past use of copyrighted material in our content in exchange for a mutually-agreed payment. We refer to these payments as content costs for past use. Included in Adjusted EBITDA are content costs for past use. These costs had a negative basis point impact on Adjusted EBITDA Margin of 41 and 256 for three months ended September 30, 2019 and 2018, respectively. PELOTON Q1: 2020 | 18


 
PELOTON INTERACTIVE, INC. SUBSCRIPTION CONTRIBUTION AND SUBSCRIPTION CONTRIBUTION MARGIN We use Subscription Contribution and Subscription Contri- in conjunction with financial measures prepared in accordance bution Margin to measure our ability to scale and leverage with GAAP for planning purposes, including the preparation of the costs of our Connected Fitness Subscriptions. The our annual operating budget, as a measure of our core operat- continued growth of our Connected Fitness Subscriber ing results and the effectiveness of our business strategy, and base will allow us to improve our Subscription Contri- in evaluating our financial performance. bution Margin. While there are variable costs, including music royalties, associated with our Connected Fitness We define Subscription Contribution as subscription revenue Subscriptions, a significant portion of our content creation less cost of subscription revenue, adjusted to exclude from cost costs are fixed given that we operate with a limited num- of subscription revenue, depreciation and amortization expense ber of production studios and instructors. The fixed nature and stock-based compensation expense. Subscription Contri- of those expenses should scale over time as we grow our bution Margin is calculated by dividing Subscription Contribu- Connected Fitness Subscriber base. tion by subscription revenue. We believe that these non-GAAP financial measures are The following table presents a reconciliation of Subscription useful to investors for period-to-period comparisons of Contribution to subscription gross profit, the most directly com- our business and in understanding and evaluating our op- parable financial measure prepared in accordance with GAAP, erating results because our management uses Subscrip- for each of the periods indicated: tion Contribution and Subscription Contribution Margin Three Months Ended September 30 (dollars in millions) 2019 2018 Subscription Revenue $ 67.2 $ 31.7 Less: Cost of Subscription (1) 29.5 16.3 Subscription Gross Profit $ 37.7 $ 15.4 Subscription Gross Margin 56.1% 48.7% Add back: Depreciation and amortization expense 3.7 1.8 Stock-based compensation expense 1.0 1.2 Subscription Contribution $ 42.4 $ 18.5 Subscription Contribution Margin 63.0% 58.3% (1) Included in cost of subscription are content costs for past use as follows: Three Months Ended September 30 (dollars in millions) 2019 2018 Content costs for past use (2) $ 0.9 $ 2.9 (2) From time-to-time, we execute music royalty agreements with various music rights holders. As part of these go-forward license agreements, we may also enter into agreements whereby we are released from all potential licensor claims regarding our alleged past use of copyrighted material in our content in exchange for a mutually-agreed payment. We refer to these payments as content costs for past use. Included in Subscription Contribution are content costs for past use. These costs had a negative basis point impact on Subscription Contribution Margin of 138 and 904 for three months ended September 30, 2019 and 2018, respectively. PELOTON Q1: 2020 | 19


 
PELOTON INTERACTIVE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share and per share amounts) ASSETS 09/30/2019 06/30/2019 Current assets: Unaudited Cash and cash equivalents $ 1,375.9 $ 162.1 Marketable securities 100.4 216.0 Accounts receivable, net of allowances 20.9 18.5 Inventories, net 205.6 136.6 Prepaid expenses and other current assets 46.5 48.4 Total current assets 1,749.3 581.7 Property and equipment, net 119.7 249.7 Intangible assets, net 18.3 19.5 Goodwill 4.3 4.3 Restricted cash 0.8 0.8 Right-of-use asset 485.5 — Other assets 9.9 8.5 Total assets $ 2,387.7 $ 864.5 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable 90.7 92.2 Accrued expenses 116.2 104.5 Customer deposits and deferred revenue 99.2 90.8 Other current liabilities 21.4 3.3 Total current liabilities 327.6 290.8 Deferred rent — 23.7 Build-to-suit liability — 147.1 Long term lease liability 483.8 — Other non-current liabilities 0.4 0.4 Total liabilities 811.8 462.0 Commitments and contingencies Redeemable convertible preferred stock $0.000025 par value; zero and 215,443,468 shares authorized; zero and 210,640,629 shares 941.1 issued and outstanding as of September 30, 2019 and June 30, 2019, respectively. — Stockholders’ equity (deficit) Common stock $0.000025 par value; 2,500,000,000 and zero Class A shares authorized; 43,448,475 and zero shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively; 2,500,000,000 and 400,000,000 Class B shares authorized, 236,819,100 and 25,301,604 shares issued — — and outstanding as of September 30, 2019 and June 30, 2019, respectively. Additional paid-in capital 2,249.1 90.7 Accumulated other comprehensive (loss) income (1.1) 0.2 Accumulated deficit (672.0) (629.5) Total stockholders’ equity (deficit) 1,576.0 (538.6) Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) $ 2,387.7 $ 864.5 PELOTON Q1: 2020 | 20


 
PELOTON INTERACTIVE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS UNAUDITED (in millions, except share and per share amounts) Three Months Ended September 30 2019 2018 Revenue Connected Fitness Products $ 157.6 $ 77.9 Subscription 67.2 31.7 Other 3.3 2.5 Total Revenue 228.0 112.1 Cost of revenue Connected Fitness Products 89.8 42.2 Subscription 29.5 16.3 Other 3.6 2.1 Total cost of revenue 122.9 60.6 Gross profit 105.1 51.5 Operating expenses: Sales and marketing 77.6 45.5 General and administrative 60.9 50.0 Research and development 17.4 11.6 Total operating expenses 156.0 107.1 Loss from operations (50.9) (55.6) Other income, net Interest income, net 1.3 1.0 Other expense, net (0.1) — Total other income, net 1.2 1.0 Loss before provision for income taxes (49.7) (54.5) Provision for income taxes 0.1 — Net loss $ (49.8) $ (54.5) Net loss attributable to Class A and Class B common stockholders $ (49.8) $ (54.5) Net loss per share attributable to Class A and Class B common stockholders, basic and diluted $ (1.29) $ (2.18) Weighted-average Class A and Class B common shares outstanding, basic and diluted 38,453,864 24,999,075 Other comprehensive income (loss): Change in unrealized gain (loss) on marketable securities $ — $ (0.1) Change in foreign currency translation adjustment (1.3) — Total other comprehensive income (loss) (1.3) (0.1) Comprehensive loss $ (51.1) $ (54.6) PELOTON Q1: 2020 | 21


 
PELOTON INTERACTIVE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (in millions) Three Months Ended September 30 2019 2018 Cash Flows from Operating Activities: Net loss $ (49.8) $ (54.5) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 7.1 4.2 Stock-based compensation expense 18.7 36.7 Amortization of debt issuance costs 0.1 0.1 Amortization of premium from marketable securities 0.3 — Non-cash operating lease expense 9.3 — Changes in operating assets and liabilities: Accounts receivable (2.4) (0.1) Inventories (69.1) (25.8) Prepaid expenses and other current assets 1.9 (8.8) Other assets (1.4) (2.4) Accounts payable and accrued expenses 17.5 21.9 Customer deposits and deferred revenue 8.5 (3.0) Operating lease liabilities, net (16.7) — Other liabilities (0.1) 1.5 Net cash used in operating activities (76.2) (30.2) Cash Flows from Investing Activities: Maturities of marketable securities 115.3 — Purchases of property and equipment (22.5) (11.2) Net cash provided by (used in) investing activities 92.8 (11.2) Cash Flows from Financing Activities: Proceeds from issuance of common stock upon initial public offering, net of offering costs 1,195.7 — Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs — 539.1 Proceeds from exercise of stock options 2.7 0.2 Net cash provided by financing activities 1,198.4 539.3 Effect of exchange rate changes (1.3) (0.1) Net change in cash 1,213.7 497.8 Cash, cash equivalents and restricted cash — Beginning of period 163.0 151.6 Cash, cash equivalents and restricted cash — End of period $ 1,376.7 $ 649.5 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ — $ 0.1 Supplemental Disclosures of Non-Cash Investing and Financing Information: Conversion of convertible preferred stock to common stock $ 941.1 $ — Property and equipment accrued but unpaid $ 8.9 $ 3.6 Stock-based compensation capitalized for software development costs $ 0.4 $ 0.1 PELOTON Q1: 2020 | 22


 

The following information was filed by Peloton Interactive, Inc. (PTON) on Tuesday, November 5, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

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Inside Peloton Interactive, Inc.'s 10-Q Quarterly Report:

Financial Statements, Disclosures and Schedules

Inside this 10-Q Quarterly Report

Cover Page
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets (Parenthetical)
Condensed Consolidated Statements Of Cash Flows
Condensed Consolidated Statements Of Operations And Comprehensive Loss
Consolidated Statements Of Changes In Redeemable Convertible Preferred Stock And Stockholders??? Equity (Deficit)
Consolidated Statements Of Changes In Redeemable Convertible Preferred Stock And Stockholders??? Equity (Deficit) (Parenthetical)
Commitments And Contingencies
Commitments And Contingencies (Details)
Debt And Financing Arrangements
Debt And Financing Arrangements (Details)
Description Of Business And Basis Of Presentation
Description Of Business And Basis Of Presentation (Details)
Equity-Based Compensation
Equity-Based Compensation (Tables)
Equity-Based Compensation - Narrative (Details)
Equity-Based Compensation - Schedule Of Fair Value Assumptions (Details)
Equity-Based Compensation - Summary Of Stock Option Activity (Details)
Fair Value Measurements
Fair Value Measurements (Details)
Fair Value Measurements (Tables)
Income Taxes
Income Taxes (Details)
Inventory
Inventory (Details)
Inventory (Tables)
Investments In Marketable Securities
Investments In Marketable Securities (Tables)
Investments In Marketable Securities - Schedule Of Investments In Marketable Securities (Details)
Leases
Leases (Tables)
Leases - Schedule Of Maturities Of Lease Liabilities For Operating Leases (Details)
Leases - Schedule Of Supplemental Balance Sheet Information (Details)
Leases - Schedule Of Supplemental Cash Flow And Other Information Related To Leases (Details)
Loss Per Share
Loss Per Share (Tables)
Loss Per Share - Schedule Of Computation Of Loss Per Share (Details)
Loss Per Share - Schedule Of Potentially Diluted Securities Not Included In Calculation Of Diluted Shares Outstanding (Details)
Revenue
Revenue (Tables)
Revenue - Disaggregation Of Revenue (Details)
Revenue - Narrative (Details)
Segment Information
Segment Information (Tables)
Segment Information - Reconciliation Of Segment Gross Profit To Consolidated (Details)
Segment Information - Schedule Of Key Performance Measures By Segment (Details)
Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit) (Details)
Subsequent Events
Subsequent Events (Details)
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies (Details)
Summary Of Significant Accounting Policies (Policies)
Ticker: PTON
CIK: 1639825
Form Type: 10-Q Quarterly Report
Accession Number: 0001639825-19-000018
Submitted to the SEC: Wed Nov 06 2019 11:11:40 AM EST
Accepted by the SEC: Wed Nov 06 2019
Period: Monday, September 30, 2019
Industry: Electronic And Other Electrical Equipment No Computer Equip

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