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Key Words: Peloton CEO says ‘naysayers’ are looking at the company’s $1.2 billion quarterly loss all wrong


““The naysayers will look at our Q4 financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses … but what I see is significant progress driving our comeback and Peloton’s long-term resilience.””

That was Peloton’s CEO trying to spin the exercise bike brand’s recent earnings miss in a much better light.

Peloton Interactive Inc.

is continuing to deal with the fallout of its overly optimistic view of post-pandemic demand — and judging by the stock’s 19% plunge in midday Thursday action, the company’s latest earnings report bore out those challenges.

In fact, Peloton posted a $1.2 billion net loss for the June quarter as it dealt with inventory issues, severance costs and other restructuring moves. Revenue declined 28% from a year earlier, while the company’s count of connected fitness subscribers was essentially flat on a sequential basis.

Read: Peloton’s stock dives after quarterly earnings report as company loses more than $1 billion

But Peloton Chief Executive Barry McCarthy says the results could be viewed more positively.

“The naysayers will look at our Q4 financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses” that “threaten the viability of the business,” he wrote in a letter to shareholders.

“But what I see is significant progress driving our comeback and Peloton’s long-term resilience. Important milestones reached include new executive leadership, renegotiated supply contracts, and significantly reduced cash outflow,” he continued.

Peloton is still burning though cash, but McCarthy said the company is making strides. It averaged negative free-cash flow of about $650 million a quarter in the six months leading up to the June quarter. But then over the June quarter, Peloton’s negative free-cash flow was $412 million.

“Our goal is to reach breakeven cash flow on a quarterly basis in the second half of FY23,” he said. “We continue to make steady progress, but we still have work to do.”

He later recounted a story from his teenage days working a summer job on a 720-foot cargo ship. It took “miles and miles” for a ship that large to change direction, but ultimately the crew was able to save the lives of two people stuck in the Mediterranean Sea.

“Peloton is like that cargo ship,” he said. “We’ve sounded the alarm for general quarters. Everyone’s at their station. We continue to add new inputs to evolve our go-to-market strategy to restore growth. When will the ship respond is the question. Our goal is FY23.”

Read: Peloton plans to sell bikes through Amazon

Several doubters on the sell side didn’t seem swayed, with MKM Partners analyst Rohit Kulkarni writing that “[a]part from encouraging CEO commentary and modest anticipated improvement in margins, there are very few things to cheer about in today’s press release.”

Jefferies analyst Randal Konik, who covers fellow fitness companies Planet Fitness Inc.

and Xponential Financial Inc.

but not Peloton, titled a note to clients: “My Bike Now Dries Laundry… Does Yours?”

He keyed in on sequential declines in member counts and average monthly workouts, along with Peloton’s projection for flat growth in connected fitness subscribers in the current quarter.

“These stats show something simple — Consumers are headed back to the gyms, and in-home fitness is continuing to fade,” Konik wrote.

CEO McCarthy was more upbeat about Peloton’s engagement potential when speaking on the company’s earnings call.

“The way we improve engagement and lower churn and increase lifetime value and drive more organic growth from word of mouth is by making you more delighted with that content,” he said. And in order to make consumers more delighted, Peloton will continue to lean into personalization, something it is only in the “very early stages” of, he added.

McCarthy previously served as chief financial officer at Netflix Inc.

and Spotify Inc.
and he sees lessons from both those companies that apply to Peloton.

Personalization “is why Netflix beat Blockbuster,” he said, and why Spotify “has run the table with the world’s largest streaming music service.”

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