派樂騰 (PTON) 2020 Q4 法說會逐字稿

Good afternoon and welcome to Peloton's Fourth Quarter and Fiscal 2020 Year-end Earnings Conference Call.

Joining today's call are John Foley, our Co-Founder and CEO; President, William Lynch; and CFO, Jill Woodworth.

Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities law.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.

For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our Investor Relations website.

During this call, we will discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

Lastly, I want to remind everyone that we'll be hosting a virtual investor and analyst session next Tuesday at 1:00 p.m.

Eastern.

You can find the details on our IR website.

We hope you can join us.

And with that, I'll turn the call over to John.

Thanks, Peter.

Hi, everyone.

Thanks for joining us to discuss our fourth quarter and full fiscal year results.

What a remarkable year it's been.

We're saddened that a global pandemic continues to wreak enormous havoc, prematurely claiming so many lives and bringing profound hardship to millions of others.

But we remain hopeful that human ingenuity will be able to rein in this plague before too much more suffering occurs.

We profoundly thank our frontline health care workers and other essential workers continuing to keep us healthy and safe.

This year has also brought back into focus long-standing societal injustices ingrained in our communities.

From Peloton's beginnings, we've endeavored to create an inclusive and supportive workplace and community for everyone, but self-reflection in the wake of this year's tragic events led us to believe we can and must do more.

Peloton is committed to being an anti-racist organization, and to help achieve that goal, we have made a $100 million commitment over the next 4 years across internal and external initiatives to fight racial injustice and inequity and promote health and well-being for all.

I'm incredibly proud of the hard work of all Peloton team members.

It has been another staggering year of growth, and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services.

The strong tailwind we experienced in March as the COVID-19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.

Organic demand for our bike remains strong, and member engagement remains elevated despite improving weather and the gradual reopening of the brick-and-mortar fitness locations.

With the unexpected continuation of these elevated sales trends, our teams have continued to grow our manufacturing days and expedited shipments of products where possible, while scaling delivery and member support teams.

With that said, while we have reduced wait times for our bikes since May, there remains much work to be done.

Amidst all of this, we have worked hard to innovate our Connected Fitness Product portfolio, and we are proud to introduce a major expansion of our hardware portfolio, delivering on our promise of offering a better best product strategy for both Bike and Tread.

Bike+, our exciting new follow-up to the bike that launched Peloton and created the Connected Fitness category, brings a new 360-degree rotating display, enhanced sound and digital resistance controls to provide a more seamless and immersive workout experience.

We've listened to our member feedback and kept what's special about our original bike but added features we know our members will love.

The 360-degree rotating display allows members to easily pivot and tilt the screen, adding strength, yoga and stretching to the routine or take our new bike boot camp class series.

With the announcement of Bike+, we implemented a $350 price reduction to our original bike, which is now available for $49 per month on a 39-month 0% APR financing.

Over the last 5 years, we've been able to realize significant production and scale efficiencies.

We're excited to pass those cost savings to prospective members.

As of today, nearly all of our 103 showrooms are now open for appointments where members can see and try our new Bike+.

The Bike+ is now available in the U.S., Canada, U.K. and Germany.

On Tuesday, we also announced the coming availability of our new lower-priced Peloton Tread.

Our new tread brings all of the magic of the Peloton fitness ecosystem from our immersive running and boot camp classes to our interactive software and community to a more affordable, smaller footprint.

Despite the smaller size, the Peloton Tread has ample running surface area and provides running comfort on a sleek belt drive.

While we had hoped to launch our new tread more quickly and in greater supply, we had to make some tough decisions regarding supply chain resource allocation due to the surge in demand we've been experiencing for our bike.

We also felt it was important to introduce the full bike and tread portfolio of products all at once to give customers the best visibility to choose the product or products that fit their fitness goals.

As you know, we won't cut corners when it comes to product quality or delivery standards, as both are critical to delivering the best customer experience.

We are as confident as ever that our new tread, combined with our existing tread, now known as Peloton Tread+, is a better best tread hardware portfolio that represents an enormous growth opportunity for Peloton over the coming years, multiples of our bike opportunity as we view the tread line as a portal to a full-body workout.

As we noted in our press release, our new Peloton Tread will be available in the U.K. on December 26 and in the U.S. and Canada early next year and Germany later in 2021.

It has long been our goal to democratize access to fitness.

And lowering the price of our bike, along with the introduction of our lower-priced Peloton Tread, are important steps to achieving this goal.

The heart of our strategy is increasing the value proposition of our platform, including expanding our portfolio of connected fitness products, investing in new fitness verticals, adding innovative software features and continuing to improve our overall member experience.

As member engagement rates continue to climb, we're lowering our members' cost per workout.

In the same vein of providing more value in conjunction with the launch of the Bike+, we're excited to debut our new series of bike boot camp classes.

And in the coming months, we'll have other exciting new content verticals available on Peloton Digital.

To help prospective members assess how the value proposition of Peloton compares to their current fitness routines, we recently launched a value calculator on our website.

We encourage you to visit and check it out so you can see how much time and money your household can save with the Peloton platforms over time.

Onto our subscriber metrics.

We're thrilled to say that we passed a major milestone this past quarter, growing our Connected Fitness subscription base 113% to over 1 million.

As of June 30, we had 3.1 million global members, inclusive of our 1.09 million Connected Fitness subscriptions and 317,000 digital subscribers.

We remain very excited about Peloton Digital, where we're seeing improved conversion and upgrade rates stemming from a lower price of $12.99, 90-day free trial earlier in the year and our improved value proposition with a broader library of noncycling classes and access points across Apple, Roku, Fire TV and Android TV.

As of today, we have grown to nearly 500,000 digital subscribers.

While we have seen incredible growth in digital subscriptions, we do expect growth to taper in the coming quarters.

Digital fitness is a highly competitive category with higher churn and lower barriers to entry than our Connected Fitness subscription end model.

While we believe we have the best digital fitness experience with the broadest and deepest assortment of high-quality programming, we continue to focus on digital as an acquisition channel and added value for our Connected Fitness subscriptions.

And we're excited to say that digital is emerging as our fastest-growing lead generation channel.

My favorite KPI is workouts represented by our Connected Fitness subscriptions.

In the fourth quarter, workouts reached 76.8 million, up 333% year-over-year, equating to nearly 25 average workouts per Connected Fitness subscription per month compared to 12.0 workouts per subscription per month in the fourth quarter of last year.

Our incredibly high engagement levels have resulted in continued low average net monthly Connected Fitness churn, which for the quarter and full year was 0.52% and 0.62%, respectively.

Pelothon is a great example of our ability to deliver breakthrough member experiences that drive engagement while demonstrating the scale and commitment of our community.

Over the course of 4 weeks this summer, over 325,000 members participated in Pelothon, logging over 9 million workouts and raising over $1 million for hunger relief.

Before I turn it over to Jill to take you through the quarter and outlook for fiscal year '21, I'd like to extend my deep appreciation to our entire Peloton team.

You've risen to every challenge this uncertain world has thrown at us and stayed true to our mission of bringing physical and mental well-being to our member community.

As I often say, I'm proud to know you, to work with you and to learn from you every day.

Thanks for what you do.

Now over to you, Jill.

Thanks, John.

Before diving into the numbers, I'd like to highlight a change in the way we report our segments.

With this quarter's release, we have folded in Other segment, which includes primarily apparel sales, into our Connected Fitness Product segment.

As many of you know, a large percentage of our apparel sales are related to Peloton's referral program, which helps drive sales of our connected fitness products.

Therefore, this change in reporting reflects how we think about the interplay between apparel and connected fitness product sales.

Also Other represented less than 2% of our consolidated sales, and we believe narrowing our reporting to 2 segments offers a cleaner picture of our operating results.

To see how this change impacts our prior reported results, please see the reconciliation table in the appendix of our shareholder letter.

Now on to our results for the fourth quarter.

In the fourth quarter, we generated total revenue of $607 million, representing 172% year-over-year growth, exceeding expectations across all geographies.

Our performance was driven by a significant number of undelivered bikes carried over from Q3, expedited bike shipments and strong sustained demand throughout the quarter.

While we had resumed Tread sales and deliveries in some markets towards the end of the fourth quarter, Tread+ had minimal impact on our revenue in the quarter.

Gross margin in the fourth quarter grew to 47.6%, an improvement of 275 basis points year-over-year.

Our Connected Fitness Product gross margin was 45.3%, exceeding our expectations despite including 60 basis points of impact from the inclusion of the Other segment.

Year-over-year improvement was driven by a mix shift to bike deliveries and continued product cost efficiencies achieved, partially offset by overall expense growth, including expedited shipping of our products and COVID-related costs in the quarter.

As of today, we have resumed normal delivery protocols for our Bike, Tread+ delivery and service calls in nearly all of our markets.

Subscription gross margin for the quarter was 56.8%, and subscription contribution margin was 64.1%, exceeding expectations, primarily due to the leveraging of our fixed cost of content production.

Total operating expense as a percent of revenue was 32.7% compared to 66.9% in Q4 of last year.

We continue to pause the majority of our advertising spend, which when combined with our sales performance drove significant year-over-year improvement of sales and marketing as a percentage of revenue.

With better-than-expected sales, better gross margin and operating expense leverage, our Q4 adjusted EBITDA was $143.6 million, representing an adjusted EBITDA margin of 23.7%.

We're pleased that Q4 represented our first quarter of positive net income, which was $89.1 million or $0.27 per diluted share.

We're proud of how quickly we've achieved our profitability, but our priorities are unchanged.

We will continue to invest aggressively in new product development, scaling our manufacturing capabilities, introducing new software features and adding more fitness and wellness programming in order to capitalize on what we believe is a massive global market opportunity.

We have a strong balance sheet with over $1.8 billion of liquidity and an untapped $250 million credit facility, providing significant resources to continue investing in our platform to drive growth.

Now on to our outlook.

Given where we are in the quarter plus our significant backlog of bike delivery, we have a solid view into our first quarter results.

So you should expect our Q1 results to map closely to the guidance that we're offering you today.

Looking further out into fiscal '21, we have had to make important assumptions regarding our performance as well as the sales mix of our new products.

And while COVID-19 has clearly had a positive impact on our performance to date, the duration of the crisis and macroeconomic impact remain unknown.

So while we aim to offer a realistic range of anticipated performance for fiscal year '21, we're also acknowledging that projecting more than a quarter out does present uncertainty.

When we reported Q3 results in May, we had expected demand to moderate in Q4.

However, the unexpected increase in COVID-19 cases in many states starting in late June had sustained the imbalance of supply and demand in many geographies for us.

This has made it challenging to meaningfully reduce our order-to-delivery time frames in the U.S. While we have materially increased our production capacity in recent months and continue to grow our manufacturing capabilities, we do not expect to return to normalized order-to-delivery windows in the U.S. prior to the end of Q2 fiscal '21.

In Q1, we expect revenue of $720 million to $730 million, representing 218% year-over-year growth at the midpoint of the range.

At the end of Q4, we had $230 million of Connected Fitness deferred revenue associated with bikes ordered but not yet delivered.

The price reduction of our bike yesterday will impact revenue in Q1 as we are proactively refunding all customers who received their bike but are still within the 30-day home trial window.

We are also refunding customers waiting for delivery of their bike.

Those customers' pending delivery can also opt to upgrade their order to Bike+ for an additional cost.

Our guidance reflects these substantial refunds, which reduced revenue for the period.

We believe these automatic refunds are the right strategy for Peloton as a members first organization.

Also, current U.S. bike owners are eligible to trade it in for Bike+ and receive $700 in cash of free yoga and toning accessories package and free pickup.

We were able to make this compelling offer because of our incredible logistics platform and partners who are able to perform reverse logistics at scale.

Please note that the buyback program does not impact the P&L, only the balance sheet.

For fiscal '21, we are estimating total revenue in the range of $3.5 billion to $3.65 billion, representing 96% year-over-year growth at the midpoint.

We are incredibly excited to add our new Bike+ and lower-priced Peloton Tread into our product portfolio, which will drive additional growth for us going forward.

The introduction of the new Peloton Tread though will have minimal impact on our revenue in fiscal '21 and will impact growth more meaningfully in fiscal '22 and beyond as we ramp production and ensure a high-quality rollout, as John noted earlier.

In Q1, we forecast end-of-period Connected Fitness subscriptions of 1.32 million to 1.33 million, representing 135% year-over-year growth at the midpoint.

For Q1, we expect average net monthly Connected Fitness churn to be below 0.75%, reflecting recent trends.

For fiscal '21, we forecast 2.05 million to 2.1 million ending Connected Fitness subscriptions, representing year-over-year growth of 90% at the midpoint, and average net monthly Connected Fitness churn to stay under 1%.

For Q1 and the full year, we expect a gross profit margin of approximately 41%.

In Q1 and the full year, we expect Connected Fitness Product gross margin to decline year-over-year to roughly 37% and 36%, respectively.

This reflects the price change of our existing bike, a mix shift to Peloton Tread+ and further investments we plan to make as we continue to scale our manufacturing base and logistics platform.

Subscription contribution margin in Q1 and the full year will be roughly flat year-over-year at 63% and 64%, respectively.

With the massive opportunity in front of us to grow our global fitness platform, we continue to invest in fitness content.

While we expect some leveraging of content production costs, these efficiencies will largely be offset by increases in variable costs, such as music, associated with the continued high engagement of our members; a mix shift to digital subscriptions, given the price change and performance of 90-day free trial; additional investments in new content verticals; and increasing our library of international and foreign language classes.

However, our long-term target of achieving a greater than 70% subscription contribution margin remains intact.

At this juncture, we expect moderate advertising spend in Q2 and more robust spend as we progress through the fiscal year.

With light marketing spend in the first half of the fiscal year, we will be able to deliver significant year-over-year leveraging of sales and marketing expense as a percentage of revenue in the full year.

We will also continue to invest heavily in scaling our platform through people and technology but expect general and administrative expense to show significant leverage as a percentage of sales.

Research and development expense is expected to be flat as a percent of revenue year-over-year.

Despite the reduction to gross margin in Q1 due to the price reduction on our original bike and mix shift to Tread+, we expect strong sales flow-through, leveraging of fixed costs and reductions to media spend to produce Q1 adjusted EBITDA in the range of $80 million to $90 million.

This represents an adjusted EBITDA margin of 11.7% at the midpoint of the ranges.

For fiscal '21, we expect adjusted EBITDA of $200 million to $275 million, representing an adjusted EBITDA margin of 6.6% at the midpoint of the ranges.

I will now turn it over to the operator to take your questions.

(Operator Instructions) Our first question comes from the line of Doug Anmuth of JPMorgan.

One for Jill and then one for John.

Jill, just on the 41% gross margin that you talked about for fiscal '21, can you just -- and the 37% Connected Fitness, can you just help us flesh out a little bit more around the gross margin profiles across the 4 pieces of hardware going forward?

Maybe just a little bit more on the puts and takes?

And do you still expect Connected Fitness Product gross profit to offset sales and marketing spending on a more normalized basis?

And then, John, you're clearly talking about strength and boot camps a lot more here, and we see that with the rotating screen on Bike+ and then also the Tread is a gateway to strength.

What are your current views around the specific hardware product that's strength-focused?

Great.

Thanks, Doug.

So first, on gross margin, as you can imagine, as we introduce new products, we're naturally faced with a higher cost structure until we can achieve quantities that allow us to take our cost down.

For us, it was really important to lower the price of our bike by $350.

But obviously, that has impact to our Connected Fitness gross profit margin but does represent a really important step for us in increasing the accessibility of our products.

I would say in terms of your question around is our deterioration in gross margin offsetting still our sales and marketing expense or what we have often referred to as net CAC, the answer most definitely is yes.

And you're correct, we focus very much so on gross profit dollars, not gross profit margin, allowing us to do things like lower the price of the bike.

The only other color I would give you is that if you look across our bike portfolio now that we've dropped the price of our original bike, I would say those 2 products have similar gross margins, and our new Tread and our existing Tread+ have very similar gross margin profiles as well.

Yes, Doug, good to connect.

Yes, we -- as you know, we love strength.

We need to win strength from my perspective.

We are going to, with our Bike line better best and our Trend line better best, we're clearly going to win cardio.

And so strength is an important vertical for us to put a flag down on.

Clearly, if you're going to move all of your fitness programming into the home, strength is another complement to your cardio that we need to win.

I will remind you, and I think you know this, Doug, with our new studios in New York and London, we have dedicated strength studios within those broader studios.

We're going to have more and more programming for strength training, not just the bike boot camp, but with the lower-priced Tread, the treadmill workouts and tread boot camp, which I've said in the past, I think, are the best workouts because they're both cardio and strength.

And so we think that our approach here is going to be a winning approach.

With respect to other products in the marketplace, we haven't seen anything that we are -- personally that I'm not excited about.

I'd like to work out with 3 weights and bands and body weight, and we're going to offer that in such volume that we think we're going to be able to win with our current approach.

Our next question comes from Heath Terry of Goldman Sachs.

Great.

John, back in May, you all talked about doubling production capacity.

Can you give us a sense of what you've been able to do to increase production capacity since then as demand has stayed at such an elevated level and how you envision managing meeting the incredible demand that you're seeing now versus the risk of overbuilding ahead of what hopefully eventually becomes sort of more normalized demand as we get back to whatever version of normal we're going to get back to?

And then, Jill, as we look at the margin guidance for the current quarter and for the full year, can you give us a little bit more detail in terms of what role advertising plays within that?

Obviously, a lot of the outperformance in this most recent quarter was driven by Peloton not really being on the air and marketing the way that you were.

At what point do you see the company coming back on to drive demand in your -- in that way in your financial forecast?

Heath, thanks for the questions.

I'm going to pass it over real quick to William Lynch, our President, who I know you know, in just a second.

But I do want to say to your idea of us overbuilding supply chain capacity, that's a term that's never been -- that's never come up in the Peloton senior leadership rooms or boardrooms.

The -- what do we do to meet the current demand is absolutely a top 3 priority, and then William can give you a little bit more color.

But we believe that this opportunity globally and the SAM and TAM and the new markets we're going to go into the coming years and the existing markets we're in, we feel like there's such a massive opportunity that we need to invest heavily in supply chain for years and years to maintain it.

And we don't think that it's going to -- when you say normalized coming out of COVID, we don't see that.

We see that we're going to be able to market into a massive opportunity that we're going to need supply chain capacity for years and years.

So -- but with the short-term dynamic, which is real, I'll pass it over to William real quick.

Heath, as you noted, we mentioned we were going to double our capacity, and we've done that.

And so thanks to the teams for being able to do that.

As we think about our going forward, we are both expanding and investing in our own facilities.

As you know, we acquired Tonic and have been investing both in expanding existing factories as well as building a new factory in Shin Ji that comes online in December as well as working with our third-party partners to ramp up both bike and tread production.

And so we feel very comfortable that against the guidance Jill communicated, we will be able to deliver products, and we also understand that the order-to-delivery through the first half, which is the end of the calendar year, is going to be longer than is our standard.

As we look forward, the Shin Ji buildout and that coming online in December is going to be a big, big deal for us.

It's got flexibility for both bike and tread, significant unit capacity.

And so we're excited about that, and that's going to give us continued growth overall in our production.

Great.

And Heath, I'll take the second part, which I believe was how we're thinking about sales and marketing expense in fiscal '21.

As you can imagine, it's a bit of a delicate balance for us.

Of course, we have some new products that are now available, Bike+ available now and obviously Tread coming later this year in the U.K. and to the U.S. and Canada early next year.

So for us, we do think it's important to let the world know about our new products but obviously need to pay attention to order-to-delivery.

So I think what you'll see from us, obviously, the guidance in Q1 reflects light marketing spend, similar to what you saw in Q4, moderate marketing spend in Q2, and then probably a more normalized run rate as we move through the year.

What that will obviously do to adjusted EBITDA margin is make it a little bit front half-loaded for us.

But again, we're excited to get back to being on air.

And then the last point I would make is as we think about the long term, we do see us getting more efficient.

We now have a growing product portfolio, which provides us with potentially some marketing synergies down the road.

We also have been studying the organic demand that we've been able to generate over the last 6 months as well.

So we do think, coming out of all of these, we will see additional efficiency in our sales and marketing spend as we move forward.

Our next question comes from Justin Post of Bank of America.

First of all, thanks for providing full year guidance.

Most companies are not doing that.

It's brave.

I was wondering if you could talk about the new products contribution to the year, how you're thinking about how much in maybe units and how they'll affect ASPs.

And then second, was wondering, you do have the ability to return your bike, I guess, for $700 of credit.

What are you going to do with those?

And are you thinking about a refurbish program?

Great.

I will take the first question and then maybe, William, if you want to talk about the buyback program, that could make some sense.

So first off, I would say, in terms of product mix, you know we don't like to give very specific mix information.

We've obviously done a ton of research over the course of the last several months to come up with some assumptions for our model.

But I think what I would say is that we believe our original bike will continue to be our largest SKU.

We -- again, we're very excited to lower the price of the bike to make our products more accessible.

And at $49 a month for 39-month financing, we think that will be a very compelling offer and really help us expand our serviceable addressable market.

We're also excited that we did reignite our Tread+ deliveries at the end, very tail end of Q4.

So we do think throughout the year, we'll see additional sales now coming from Tread+.

And obviously, towards the back end of the year as we launch our lower-priced Tread, we will see some mix shift very back-end loaded into the model.

And as it relates to Bike+, again, I would say, in pecking order, it probably would come behind our original bike in terms of volumes that we expect for the year.

In terms of lower-priced Tread, we really think that will be a major driver in fiscal '22.

Yes.

Thanks, Jill.

On your -- on the point on trade-in, we'll just reiterate a bit Jill's opening remarks.

So we are refunding every single consumer that awaited delivery of the bike.

So currently awaiting delivery, $350 with the price drop as well as those that were within the 30-day return window, and we feel like that's extremely members first.

In fact, we've been at this a long time.

And most companies just don't do those types of things.

But we feel like those substantial refunds that Jill noted are a great investment in optimizing member goodwill.

And so those will be substantially completed by the end of this week, and we appreciate our member experience team getting those refunds to consumers.

To your point on trade-in, we're excited.

We feel like that's a rich offer.

It's also in terms of ease, it's fairly frictionless to trade in and get the $700 plus the accessories bundle.

It also -- we will pick up your bike.

And then as you noted, we do have plans to offer a CPO program.

We are not announcing -- and that will be in the future, and we're not announcing that today.

Let me say, Justin, real quick as a complement to that.

One of the beautiful things about this global platform we're building, as you think about the logistics footprint that we are delivering the majority of our bikes and treads globally at this point, including U.K., Canada and Germany, that logistics footprint becomes a pretty powerful reverse logistics platform for this -- for the buyback program and the eventual certified preowned product that we will offer to the consumers in the coming years.

So we're excited to get that inventory, and we'll have future announcements about that opportunity.

Our next question comes from the line of John Blackledge of Cowen.

Great.

Two questions.

Just given the ramp in production, as we head into kind of what are typically the biggest seasonal quarters for Peloton 2Q and 3Q, could you discuss Peloton's ability to meet the holiday demand?

And then secondly, I don't -- I know the 10-K is not out yet, but any update on the material weaknesses and reporting around controls?

On the holiday demand, this is William, I'd mentioned it earlier.

We feel comfortable that we're in a position to meet the holiday demand on Bike and Tread.

That's within a forecast, of course, as we've seen with COVID, and we noted in our statements, Peloton has seen a surge in demand.

And so we've been busy expanding capacities in the ways I discussed earlier.

We feel like we have a great team.

Making the investments that Jill noted aggressively to expand the supply chain.

And so at this point, we feel like we've got a great plan in place, and we've got a demand forecast.

And so we expect to fulfill that demand, albeit with the longer order-to-delivery than we'd like or we're accustomed to.

That will start to abate based on our projections as we get into Q3 and Q4.

Great.

And on the second question, John, as you will see when our 10-K does come out tomorrow that our teams have worked very hard but successfully to remediate all of our material weaknesses.

We have made incredible progress across the company, bolstering systems, people, controls, and just wanted to say I am incredibly proud of the team and their accomplishments here.

So we're excited about it.

Thank you for asking.

Our next question comes from Scott Devitt of Stifel.

I had 2. The first one, just an additional question on manufacturing dynamics.

I was curious how much is now being done in-house versus third party and whether you're expecting that to balance out over time.

And then secondly, there's a lot of user data that you collect that can be economically beneficial to the community, especially if corporates and health providers and life insurance companies are willing to offer premium discounts in exchange for confirmed efforts at maintaining health.

And it seems like a pretty big untapped opportunity for the company.

I was wondering if you could talk about any efforts in this area.

We don't split out the inventory out of own factories or 3PLs.

I think we've said the majority are now, with the Tonic acquisition, coming from our own factories.

Our manufacturing partners are valued, and we wouldn't be able to fulfill the demand without them.

Just a point on that as well.

It's not just production when we think about our logistics for holiday, the warehouses, we've expanded the number of bands for deliveries, both in the U.S. and our international markets as well as our field ops teams.

As John noted, our logistics team, we feel like is a real competitive advantage.

So we've planned them and are hiring and have been training for a while.

So we feel really good about that.

And then, I guess I'll turn it over to Jill on the second question.

Yes.

I'll hop in here.

You're absolutely right about the opportunity we see with corporates and insurers.

We think that this is a massive opportunity and potentially a very big growth vector for us in the coming years.

We don't have anything to announce right now, but I like where your head is.

Specific to data, sharing data is a very tricky thing in this world and something we take very seriously.

So with respect to our customers' data, we do not have any plans to share it in any scary way that would be offsides and be on the wrong side of the line with our members.

So I put an asterisk on the opportunity but -- with respect to sharing data because that's not something we're going to run headlong into, even though it comes up a lot.

I feel like, for 8 or 9 years, I've been -- being asked about what our plan is with the data, and we've never had a plan other than to protect it.

But we do see a big opportunity with corporate insurers.

And I'm sure in the coming quarters, we'll have something to talk to you about.

Our next question comes from Bernie McTernan of Rosenblatt Securities.

I was just wondering if there is any update on the 14 million serviceable addressable market.

Last quarter, you guys said it was bigger now with the lower-priced products.

I'm assuming there's an impact, how we should gauge the impact between cutting the price on the bike versus a lower-priced tread?

And then also, churns come in below our expectations for the past few quarters.

Can you isolate the benefit of reactivations versus normal disconnects?

Sure.

So first of all, thanks for your first question.

Of course, we've long believed that our price points have represented one of the biggest barriers to purchase of our products, and obviously, we've done things in the past to move the needle and grow our market like financing programs and obviously, last year in the fall, when we launched 30-day home trial.

As you can imagine, this has been a big week for us because making our products more affordable without sacrificing quality or member experience has been our goal from day 1. So I think the short answer is, yes, we do believe, of course, lowering the price of our product will have an impact on our serviceable addressable market.

And obviously, the introduction of the lower-priced Tread, we've said this before, we think it's 2 to 3x the opportunity of bike.

But if you join next Tuesday at our Investor and Analyst Session, we have been working hard on updating this analysis that we presented around the time of the IPO.

So we will share that next Tuesday.

In terms of churn, I would first and foremost say the largest source of churn in any given month is soft churn.

But of course, what we've seen over the last several months, it may be people that have been idle for some time, and then they've been sheltering in place.

What we've seen is an uptick over the past couple of quarters of reactivations of those members.

So -- but I will say, first and foremost, the biggest contributor to churn is soft churn, which is credit cards getting declined, most of the time unintentionally.

Our next question comes from the line of Ron Josey of JMP Securities.

I wanted to ask a little bit more on the demographics here.

And Jill and John, I think we've talked about this in the past with 35 -- under 35 years still the fastest-growing.

I'm wondering if it's still the fastest-growing.

I think that was like 28% of new sales last quarter.

And if you can just talk about the demo that you're seeing in terms of years and then household income.

And then, John, when we talk about digital, with digital subs growing as fast as they are, the free trial going back down to 30 days, can you talk about conversion rates from free to paid but then ultimately into purchasing a product?

And why not keep it at 30 -- at 90 days?

Why come down to 30?

Understood there's a cost there.

But if it's a large acquisition tool, maybe that can help.

Great.

I'll take the first one.

And then, John, if you want to chime in on digital.

We continue to make a lot of progress appealing to younger and less affluent households, which has been a goal from ours -- of ours over the last couple of years.

I'm happy to report those under 35 are still the fastest-growing segment when you look at the data from full year fiscal 2020.

And again, in terms of reaching a broader socioeconomic range, we estimate that households earning less than $100,000 in annual income are around 46%-or-so of sales.

So we will also -- I feel like you guys are reading my mind, we will also address more specifics around demographics during our investor and analyst session next week, but we're very excited about the progress we've made.

And obviously, I think with the price reduction, I think we're going to see the needle move even more.

And like you said, we -- I think as you heard in my preamble that we have close to 500,000 paying digital subs right now, which is fantastic, and kudos to the team.

With respect to metrics, conversion and cohorts and all that stuff, the annoying thing about our digital business is there's so much fantastic innovation including, just in the last few months, adding Apple TV, Amazon Fire TV, late last year, Android TV, Roku TV a couple of months ago.

And so many changes to the conversion funnel and the software and adding content that it gets better with every cohort.

So it's hard to look at the trends in that business because it's just moving so quickly in a pro-consumer way.

So in the coming quarters, I think we can have more clarity for you.

But at this point, we're -- it's a nascent business.

We run it at breakeven.

It's not going to be a big driver of our bottom line.

And like we said in our preamble, the most exciting thing for us right now, it's become our fastest-growing conversion to Connected Fitness subscribers, which is what we were hoping for.

Our next question comes from Deepak Mathivanan of Barclays.

So you had 47% gross margin on the Connected Fitness segment.

And based on rough math, approximately the price reductions on the bike accounts for approximately 10 to 12 points of margin impact.

Jill, you noted that the new Bike+ also has a similar margin, I believe in response to Doug's question.

Is that just due to higher bill of materials?

Or is there also higher cost and production operations with the new Bike+?

I guess what I'm trying to understand is, can we expect this 37%, 38% or high 30s gross margin to kind of go higher over time as you achieve efficiencies on the production side?

Yes.

I mean if you look at our track record on our original bike, I mean, if you look back to our gross margin, 5, 6 years ago, when you look at the progress we've made, if it cost us $1 5, 6 years ago, it now costs us $0.30 to $0.40 to make.

And so what is so exciting about Peloton's business is that we're a business of very few SKUs.

And in the world of fitness that is relatively unique.

And for us, as we grow and scale each of our products, and again, we're going to have a very pruned portfolio of products, we're going to be able to achieve these efficiencies over time.

So obviously, the stake I put in the ground was really around the original Bike today and Bike+ carrying similar gross margins.

But again, as we continue to build 1 million, 2 million, 3 million, we're going to realize even more product efficiencies.

But again, you -- we love this idea that we're able to give a lot of those efficiencies back to the customer to continue plow that in, to continue to grow the top line.

Got it.

That's very helpful.

And then maybe one question for John.

So with the GymKit integration, obviously, the user experience is great.

Where else do you see opportunities to partner with large ecosystems like Apple over the long term?

Well, that's a good question.

I wish there were more obvious integrations.

We were trying to partner with all the big platforms.

But again, with respect to data, it becomes pretty tricky of who's getting whose data and how does the member feel about it.

So we were very happy about the Apple integration -- Apple Watch integration.

And to be totally honest, that was -- that came from our members.

Like a lot of our R&D and a lot of our new products and new features are ideas that our members are pounding the table saying we need this, we want this, so that was a big one.

And we're excited to offer it.

But at this point, we're not going to announce any other ones other than there is tons of innovation taking place.

We're trying to keep our R&D dollars at some meaningful percentage of our top line, so we're investing in software engineers and hardware engineers, as you can imagine, so that there's continued innovation in the coming years.

Our next question comes from Lee Horowitz of Evercore ISI.

Two, if I may.

John, has the massive adoption of the Connected Fitness category during this COVID changed how you're thinking about the time line towards geographic expansion say beyond your current footprint?

And then, Jill, maybe touching on some of the comments around digital-only.

Does full year guidance assume that this improved conversion of the digital-only subscribers to full Connected Fitness subscribers maintained throughout the year, slows down?

Or how should we be thinking about that sustainability throughout the year?

Yes.

With respect to international, to be honest, it hasn't changed either our ambitions or our plan.

Luckily, Kevin Cornils and the leadership over there have been doing a fantastic job of preparing for new markets that we hope to get into in the coming years.

New languages.

We're also excited about Jen Cotter and Kevin Chorlins on the content side are thinking about language-specific opportunities.

So we've been fortunate that those leaders and those teams have been ambitious and relatively unhindered by the realities of COVID that have impacted some of our other parts of our business.

So we hope in the coming quarters and years to have some more updates there specific.

But like we've said in the past, we have global ambitions, and we're excited to get into more countries and more languages as soon as we can.

And just to build on John's point on international, with Germany and the U.K., we're in the #2 and #3 fitness markets in the world.

And as you know, we're also in Canada.

And we feel like we've got great momentum there.

So in the short term, we're really focused on continuing to invest in both those markets.

In Germany, for example, which is our newest market, we continue to invest in marketing and opening new stores during COVID when we were largely off of marketing in the U.S. And that was to quickly establish leadership in the connected fitness market.

So we feel like we still have a lot of upside against our current international strategy, acknowledging our ambitions that John just mentioned.

Great.

And on digital, as you know, digital is still a very nascent product for us, and we know stand-alone fitness content is a highly competitive, high-churn business, although we do understand that our churn is much lower than other fitness apps, and we do believe we have the best content available.

Given this, we're -- we don't really guide on digital subs.

We did note earlier in the call that we have nearly 500,000 paying digital subs today.

That's largely the result of our pricing change we made last year.

And obviously, the success of the 90-day free trial that we offered in March and April this year.

But don't expect that level of growth to come through in the balance of the year.

I'd also highlight where it really has impacted our outlook for fiscal '21 is our digital sub at $12.99 is less profitable than our Connected Fitness subscription business.

And so because we're seeing numbers that are much larger today than they were a year ago, it is a little bit of a drag.

It's one of the offsets to some of the fixed cost leveraging that we're getting in the subscription business.

But again, as John noted earlier, we're so excited about it as an acquisition channel.

And we're excited that the content and the platform keeps getting better and better.

And so we still see it as an incredible value that we're giving to our Connected Fitness subscribers and, again, this great acquisition channel.

And I guess that acquisition channel, I guess, the conversion meant to hold throughout the year, this uptick in conversion you're seeing to full Connected Fitness?

I mean -- yes.

Sorry, go ahead, William.

Yes.

No worries.

We're getting better at converting, and that has us excited.

If you look at -- we measure classes in cohorts.

So if you look at the classes of digital subs from 3 years ago in month 1, through month 6, through month 12, month 24, we -- as you might imagine, we measure the upgrade to connected fitness on a daily, weekly, monthly basis.

And what we've shown is that every month and every year and frankly in a more accelerated way in the last 18 months, we've been getting more and more effective on those upgrades.

And so that has us excited.

John noted some of the tactics we're using to enhance that, some of the in-app, getting to understand the digital sub better, what hardware platforms they're interested in.

Being able to surgically get them into content that might lean them into connected fitness.

So while we're not guiding to it, we are focused on it.

We've got a whole team on it.

It's a big deal for us.

And it's why we think that the app and digital is such an effective weapon in our marketing arsenal.

And why?

Frankly, it's a leading lead source for connected fitness, new connected fitness customers stay.

Our next question comes from James Hardiman of Wedbush Securities.

So the Connected Fitness sub growth has obviously been fantastic.

But if I look back, you guys crossed that 1 million sub mark less than halfway through the quarter.

If I'm doing the math right, then that pace slowed a bit during the final couple of months.

I guess, a, is that math right?

And b, why would that have been the case given all the investments made in manufacturing capacity?

It's precisely that.

I mean obviously we have about an 8-week lead time when we put in a purchase order or when we decide we need a product to the time we can get that product landed here.

So for us, we started to see, as you can imagine, towards the end of the fourth quarter much more constraints on supply.

So it's precisely that.

It was -- we just were constrained by supply.

Okay.

And then maybe if I can dig in on the margins side just a little bit here.

Obviously, margins have been arguably the biggest area of upside versus expectations.

I'm just trying to figure out how much of that is still a function of the pandemic as we look to future guidance and how much is just you're able to leverage your fixed cost to a much higher degree.

So maybe speak to, I guess, a, do you think you'd be profitable today on the EBITDA line if we were at more of a normalized marketing spend?

And b, as I think about the guidance for fiscal '21, do you expect to be profitable in each of the 4 quarters?

Obviously, the first quarter sounds like it's going to be the best of the quarters.

But how should I think about the final 3 quarters of the year?

Sure.

So I think -- first off, I think there's a lot in there because you were talking, I think, initially about gross margins and probably more so the upside surprises have been in Connected Fitness and then maybe go back into EBITDA, if that makes sense.

Is that correct in terms of -- yes.

I mean I think on Connected Fitness, the first thing to understand is obviously that's everything from product cost to logistics.

And so there is a lot that moves the needle within it.

I will say, in Q4, our expectation was that we would have to expedite more shipments of bikes, and we ultimately didn't need to do that.

And so that was a big driver of us exceeding our expectations there.

And of course, as you noted, we do -- we did see -- again, as we continue to scale our products, we are seeing more product cost efficiencies than we expected as well.

So it just happens to be an area where there's just a lot going on.

It sometimes can be a little bit challenging to predict, given that things are moving often in different directions where they can all move in the same direction and provide a bigger swing to the upside.

So certainly take your point that, that was well ahead of expectations.

But I would say we were really expecting more shipping costs than we needed to have in the model.

As it relates to EBITDA, I said earlier, I think if you look at how EBITDA first half, second half, clearly, with us ramping our marketing in Q2, it's really more weighted to the first half.

But at least for the time being, our belief is that we will be profitable in every quarter.

We're going to be unlike other years where we're very heavily weighted in Q2 and Q3.

Because of COVID, because of the new products, because of the lower price on the original bike, you're seeing more serial quarter-over-quarter growth, which for us is very different from previous years, where Q2 and Q3 are typically big quarters for us.

And so I think you're going to see a little more smoothing this year in revenue than in previous years.

Thank you.

At this time, I'd like to turn the call over to John Foley for closing remarks.

Sir?

Thank you, everyone.

Thank you, Jill.

In closing, I want to propose a pretty simple concept that fitness is moving into the home because home is a better location.

With roughly 35 million treadmills in U.S. homes today, American consumers have said that they want fitness at home.

It just hasn't worked until now.

People are now moving on to Peloton because of our incredible instructors, because of our strong and supportive community, because of our best-in-class hardware, our networked and gamified software, our world-class music, our unparalleled delivery experiences and so much more.

Again, these are not COVID dynamics.

These are fundamental, sustainable dynamics that meet people where they are with content and programs that exceed their fitness and wellness goals and make it fun and engaging to work out at home for the first time, full stop.

Finally, a huge thank you to our team.

You are all incredible.

What a wild 6 months of crazy hard work it has been for all of us.

Thank you for everyone -- thank you for everything you do to help our members with their physical and mental health.

It has been more important this year than ever.

And with that, thank you all for tuning in.

Talk to you next week for our first Annual Investor Day and/or our next quarterly earnings call in November.

Good night, everyone.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.