派樂騰 (PTON) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Peloton's third quarter earnings conference call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the call over to your speaker today, SVP of Investor Relations, Peter Stabler. Sir, please go ahead.

Good afternoon, and welcome to Peloton's third quarter earnings conference call for our fiscal year ending June 30, 2020. Joining us today on the call to answer your questions are John Foley, our Co-Founder and CEO; William Lynch, our President; and Jill Woodworth, our CFO. A copy of today's shareholder letter is available on the Investor Relations section of our website at www.onepeloton.com and has been furnished to the SEC on Form 8-K.

Before we begin, I would like to remind you that 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 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.

With that, I'll turn the call over to John, who will begin with a few opening remarks. John?

Good afternoon. Thank you for joining us to discuss our third quarter results. As a New York City-based company, we've seen firsthand the magnitude of the COVID-19 crisis, and we offer a heartfelt thank you to all of those working tirelessly on the frontlines to battle this epidemic. Our top priority has been and continues to be the safety, health and well-being of our employees, members and the communities in which we operate.

As detailed in our shareholder letter release this afternoon, we have made a number of significant operational changes in order to safely continue our service. Fitness routines yield significant benefits to overall physical and mental well-being, and we remain committed to serving our members throughout this difficult time. We obviously recognize that a tremendous number of businesses and their employees are facing extraordinary challenges at this time. Our hearts go out to all of those negatively impacted by this crisis across broad sections of the economy.

As you might imagine, however, the shelter-in-place and work-from-home realities have created a meaningful tailwind for Peloton and the broader ongoing consumer shift towards at-home fitness experiences. While this tailwind is undeniably positive for our business financially, we are more proud of our member growth, the increased engagement of our members on our platforms and the feedback we have received from our members about how Peloton has helped them maintain their physical and mental well-being in these difficult times.

Specifically, we ended the quarter with over 886,000 Connected Fitness subscribers, representing 94% year-over-year growth. Member count is now over 2.6 million, inclusive of our 176,000 Peloton Digital subscribers. Over the past year, we've seen steady gains in member engagement as we've expanded content verticals and launched new member experiences.

With so many members now under stay-at-home orders, this quarter saw an even larger gain than expected. Our Connected Fitness subscribers logged 44.2 million workouts with us in the quarter, up from 18.0 million workouts in the same period last year, representing 145% year-over-year growth. On a subscriber basis, that is 17.7 average monthly workouts per Connected Fitness subscriber compared to 13.9 workouts in the same period last year. With this growth, the value proposition of our platform has never been stronger.

This incredible engagement with our Connected Fitness products led to our lowest level of churn in 4 years. For the quarter, our average net monthly Connected Fitness churn was 0.46%. In addition, we now have over 176,000 digital subscribers, with growth attributed to improvements we have made to our fitness content and software features available on our digital app, our price changed to $12.99 in December and the extension to new platforms like Amazon Fire TV.

Early in the COVID crisis, we extended the digital subscription free trial period from 30 days to 90 days, resulting in over 1.1 million downloads of Peloton Digital in the past 6 weeks. We were extremely proud to offer so many people free access to our incredible fitness content during this time. I am also proud of our financial performance this quarter with revenue growing 66% year-over-year to $524.6 million. With strong revenue flow-through and leverage against our fixed costs, we achieved our first adjusted EBITDA positive quarter as a public company in Q3, with an adjusted EBITDA margin of 4.5%.

Over the past several weeks, we believe we are accelerating our market share gains of the $600 billion global fitness industry and increasing our lead as the largest and most scale Connected Fitness platform in the world. We believe the current environment of social distancing and working from home is permanently influencing consumer behavior, driving more people to discover Peloton as the most engaging, entertaining, immersive and motivating home platform for fitness and well-being.

Our scale as a platform is a huge asset but also presents some challenges. With tens of thousands of people on the leaderboard at a time and millions of members on the platform and growing rapidly, we continue to develop ways for our community to interact with each other in a more personal way. To that end, last week, we launched Tags, a new social software feature that strengthens our network by leveraging the power of groups, making it easy to feel connected to others even without existing connections on Peloton.

Tags are a simple, yet highly flexible way for members to express themselves, connect with others and work out together. Members can create Tags that represent their shared interest, their favorite sports team, college, charity, employer, geography and more or browse through the more than 50,000 Tags that have been created by our community in just 1 week since its launch. Importantly, our members can now filter the in-class leaderboard by Tag, taking a massive global leaderboard and making it instantly more intimate, personal and motivating.

Before turning it over to Jill, I want to mention a few additional milestones in Q3. On March 19, we began broadcasting from our new flagship media compound, Peloton Studios New York. Equipped with a state-of-the-art technology, our new 35,000 square foot facility has 4 studios under one roof, allowing us to film all fitness disciplines in one centralized location for the first time. When it opens to the public, Peloton Studios New York will be a destination for our member community to come together.

I'd also like to highlight that our music and legal teams achieved an important milestone in the third quarter, resolving the litigation with Downtown Music Publishing. Since then, Peloton has welcomed thousands of new music publishers to our platform, adding great new songs that our members love to our already industry-leading library. We also settled our patent infringement litigation with Flywheel, further strengthening our ability to protect our intellectual property. We have a strong patent portfolio, which we continue to vigorously defend.

Lastly, I want to express my gratitude and appreciation to the entire Peloton team across field operations, member support, retail, content production, our instructors, our folks on the manufacturing lines and all of our employees at our headquarters in New York City, London, Taiwan and Plano, who have all played an important role in supporting our members' physical and mental well-being through this COVID crisis and beyond. I am definitely proud to work at Peloton, and I hope you are, too.

Now over to you, Jill.

Thanks, John. We generated total revenue of $524.6 million in Q3, representing 66% year-over-year growth, exceeding expectations across all geographies driven by strong demand for our Bike. On our last earnings call, we said we would face a challenging comp in Q3 given that our Tread launched in the same quarter last year. So we are especially pleased with the growth we achieved in the quarter. I also noted that guidance would more closely map to results moving forward as we gained more clarity on key areas of variability.

With that said, we were pacing at the high end of guidance or better for all of our financial metrics and KPIs. But starting in the first week of March, we saw a spike in demand for our Bike and Tread due to COVID-19. The significant increase in sales spans all of our markets and has continued into May.

On March '19, we paused activities that require entering the home, including Tread delivery, return pickup and in-home servicing. It will resume these activities when it is safe for our employees, members and communities.

Gross margin for the quarter grew to 46.8%. Our Connected Fitness product gross margin was 45.3%, exceeding our expectations. This was due to a mix shift to bike delivery, continued improvements in our product costs helped by our acquisition of Tonic, and the greater-than-expected fixed cost leverage in logistics due to sales outperformance and the shift to threshold delivery. These efficiencies were partially offset by hazard pay for our warehouse and delivery employees. Subscription gross margin was 57.8%, and subscription contribution margin was 63.6%, exceeding expectations primarily due to fixed cost leverage.

Total operating expense, excluding nonrecurring litigation and settlement expenses of $49.3 million, was flat year-over-year as a percentage of total revenue. In mid-March, we paused all advertising in the majority of our markets, allowing us to see the benefits from many years of marketing investments in brand awareness and high customer satisfaction driving word-of-mouth referrals. With better-than-expected sales and gross margins, operating expense leverage, inclusive of lower marketing spend for the quarter, our Q3 adjusted EBITDA was $23.5 million, representing an adjusted EBITDA margin of 4.5%.

We have a strong balance sheet with over $1.4 billion of cash and cash equivalents and additional liquidity in the form of an untapped $250 million credit facility, providing significant resources to take care of our employees and members during this time while allowing us to continue to make investments in our platform to drive growth going forward.

Moving on to guidance. For fiscal year 2020, we are raising our expected ending Connected Fitness subscriber range to 1.04 million to 1.05 million versus our previous guidance of 920,000 to 930,000, representing 104% year-over-year growth at the midpoint. For Q4, we expect average net monthly Connected Fitness churn to be below 0.75%, reflecting recent trends and an expectation that we will revert to more normalized levels by the end of the quarter.

In Q4, we expect revenue of $500 million to $520 million, representing 128% year-over-year growth at the midpoint. For fiscal year 2020, we are raising revenue guidance to $1.72 billion to $1.74 billion, representing 89% year-over-year growth at the midpoint versus previous fiscal 2020 revenue guidance of $1.53 billion to $1.55 billion.

We entered Q4 with a backlog of bike deliveries in all geographies, and sales continue to surpass expectations into May. The unexpected sharp increase in sales has created an imbalance of supply and demand, unfortunately causing elongated order-to-delivery windows for our customers. While we are working to accelerate the supply of bikes and incurring higher costs in order to expedite shipments, we do not expect to materially improve order-to-delivery windows in Q4.

Moving on to margin. For Q4, we expect gross margin of 42.5% to 43.5% and a Connected Fitness product gross margin of 40% to 41%. As previously mentioned, this decline reflects cost to expedite product shipments and the continuation of hazard pay for warehouse and delivery employees. The decline in Connected Fitness product gross margin is partially offset by a mix shift to bike deliveries.

Our Q4 guidance assumes we continue to pause tread deliveries through the end of the quarter. If we resume in-home assembly sooner, that will provide upside to our Connected Fitness subscriber count and revenue expectations, put modest pressure on Connected Fitness product gross margin and leave adjusted EBITDA unchanged.

For Q4, we expect a subscription contribution margin of 63% to 64%. Year-over-year improvement in subscription gross margin and subscription contribution margins are driven primarily by continued leveraging of fixed cost of content production.

We expect Q4 adjusted EBITDA of $55 million to $65 million, representing an adjusted EBITDA margin of 11.8% at the midpoint. This means that for fiscal year 2020, we expect to earn $30 million to $40 million of adjusted EBITDA and adjusted EBITDA margin of 2% at the midpoint.

Our expected Q4 profitability on an adjusted EBITDA basis is the result of notable and continued high demand for our bikes in all of our global markets; a robust gross profit margin profile, albeit with additional shipping and COVID-related costs; significant reduction to sales and marketing expense due to limited media spend, partially offset by the costs associated with the extension of our digital free trial period to 90 days; and lastly, significant leverage across our fixed expense base. While we are not at this time able to provide financial guidance for fiscal '21, we understand many of you are looking for help with modeling beyond the current fiscal year. We previously said we expected to achieve profitability in fiscal 2023, a goal we have achieved far sooner than originally forecast.

The extraordinary events taking place over the past 2 months have measurably expanded our market opportunity and accelerated the ongoing shift to Connected Fitness. Our fiscal year 2020 profitability outlook demonstrates the strength of our financial model when scale and leverage are achieved. However, our underlying strategy is unchanged. We plan to continue to prioritize Connected Fitness subscriber growth and invest aggressively behind new products, software, fitness programming and international growth.

As John noted earlier, we believe COVID-19 will have a long-term impact on the fitness industry, with many people likely not returning soon or at all to gyms or boutique fitness locations. With over 90 million gym memberships across our 4 current global markets, the U.S., U.K., Canada and Germany, and only 2.6 million members today, we continue to see a long runway for growth in the coming quarters and years. We expect to provide fiscal '21 guidance in the fall when we report Q4.

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 from JPMorgan.

First, I was just hoping you could provide some thoughts on how much of the sales lift you think was driven by pull forward of demand versus what might be a more durable change to the demand for Connected Fitness. And then second, you mentioned the elongated wait times on bikes. Can you just talk about where you see kind of the bottlenecks if that comes more in manufacturing or in logistics and delivery or perhaps both.

Great. Doug, it's Jill. I'll take the first question and then hand it over to William to address your second question around supply chain and logistics. So great question. As you can imagine, this is a very important topic for us as a management team to understand as we resource plan across the organization for the next several quarters. I think as I said in the prepared remarks, we were tracking to the high end of guidance until the first week of March when we saw the spike in demand for our products, which means Q3 outperformance on sales in Connected Fitness subscribers as well above the top end of our financial guidance was COVID related.

In short, though, we believe that we are seeing a significant expansion in our serviceable addressable market. We define our serviceable addressable market as consumers who have purchase intent for our current products at our current price points. A year ago, we measured our SAM at 14 million Connected Fitness products. With purchase intent largely following our growth in brand awareness prior to COVID, we believe we already had significant expansion of our SAM given the progress we've made across our geographies and growing our brand awareness.

We are in constant dialogue, too, with our members, and like many companies, are working very hard to understand the impact of COVID-19. So while it's a little early to draw some definitive conclusions, we have done some recent research on purchase intent of our post-COVID buyers. And we attribute a large percentage of our increase in sales as an expansion of our SAM as they're a large percentage of people who previously did not indicate purchase intent of a Peloton Bike prior to COVID, which we view as a significant expansion of our market opportunity.

Further, I would say we continue to see persistent and sustained sales of our bike across all regions today, even with the elongated order-to-delivery windows. And most exciting to us is that our newest buyers are engaging even more with our product than any new buyer cohort has done and engaging more than some of our older cohorts. And we believe new at-home routines are continuing -- are going to continue to stay intact even when COVID has passed.

So we're very excited about our growth profile moving forward. And we think that a lot of this is just validating our long-held view that the Peloton experience is like no other. And once people try it for themselves, they get converted. So we're very excited about the expansion of our market.

Doug, thanks. It's Liam Lynch. Thanks for the question. So in terms of the constraint on the supply chain, it's bike inventory. With the way we -- first of all, we aim to get our products to members as quickly as possible. Typically, we're on a 7- to 9-day order to delivery. And we perform extremely well in that regard. In this case, we plan inventory levels based on sales forecast out number of days, x number of days. Q4 is a seasonally low period for us historically. And so as we planned out the number of days we wanted to carry, with the sales acceleration, that hit and created the imbalance that Jill referenced in the initial statement.

And so the good news is we've got an incredible supply chain team, one of the best in the industry. And so we worked quickly to expand within our existing facilities. And if you just look at what we're producing today versus what we were producing in early March, we've been able to more than double the output. And then as we look to the future, to the point on sort of structural changes and our growth going forward and move to Connected Fitness, as we've mentioned, we are investing in a new factory. This is part of the Tonic acquisition, a big new factory in Tainan, in an area called Shinji, and that will come online in December and will help fulfill holiday demand. It will actually help production for holiday and beyond.

And so we feel like we're really well positioned. It's worth noting that in terms of supply, the guidance that we provided for Q4, we feel very confident and comfortable that we have supply against that guidance. And we're doing everything we can, short, mid, long term, to ensure we have supply capacity going forward. But it is absolutely bike inventory.

(Operator Instructions) Our next question comes from the line of Justin Post from Bank of America.

Great. Obviously, unusual time, it looks like you're handling demand as well as you can. I was just wondering on the product development side, I know this new studio is opened and it's hard to tell what impact. But maybe you could talk about when things get back to normal how that's going to help with the content for Peloton. And then secondly, you already got to start thinking about next year. How is the pipeline on new products right now? And has there been any impact on product development from recent trends?

Yes. I'll take -- Justin, this is John Foley. Thanks for calling. I will take the new product one. And then, William, you want to take the content? With respect to new products, we did tease in the last couple of quarters that we had some innovation and some new things that we were going to bring to market this year. You can imagine, like every other company in the world, that the COVID crisis has forced us to rethink rolling out anything new. Obviously, our retail stores are closed right now. William alluded to the realities of the supply chain and what we're working through with our current product portfolio. So we did have to rethink the timing of new product launches. It's unfortunate but real.

In a good way, in an exciting way, it feels like -- or we do, at this point, have a significant backlog of innovation and R&D that we are looking forward to bringing to market as you can imagine. So a lot of that stuff has been taking place over the last year or 2, continues to take place even in a shelter-in-place reality. And so we do have a backlog, and we will we will bring those products and those innovations to market when we can. We're obviously not going to announce the timing today, but we are very excited about it. And it's going to be impressive, I believe.

And then, Justin, to your point on the content side, that studio sets us up to do exactly what we expressed both in terms of -- to investors but most important to our members, which is expand the types of content we offer and increasingly add more and more utility to the Peloton membership, which is why in some large part, we're seeing the engagement that Jill mentioned -- engagement growth that Jill and John mentioned in the beginning.

Just in the last few months, we've launched new fitness verticals like Fit Family, which was actually in development before COVID started and getting incredible engagement, 200,000 classes and workouts. That's something that our content team put together so the whole family can work out together. And it's super topical during this time where everyone's sheltering in place. Things like Dance Cardio, which has had close to 650,000 classes, and we just launched that a month ago.

And so these new studios will continue to allow us to expand the fitness discipline. It's becoming more and more important. We've seen adoption of noncycling fitness classes has exploded. So things like strength training, which is massively strategic to us. We believe the cardio and strength are the 2 pillars of fitness. And so we feel great about cardio with our Bike line and our Tread line. And then strength is something that is a super-fast part of the -- a growing part of the portfolio and that people continue to invest in. So those studios coming online will allow us to just keep expanding that content.

Our next question comes from the line of Edward Yruma from KeyBanc Capital Markets.

And that Robin live from her home ride was fantastic. Two quick ones for me. I guess first, on marketing longer term, given the kind of power of word of mouth here, any rethink to kind of how long it will take you to achieve kind of the longer-term marketing objectives from a leverage perspective, kind of current period notwithstanding? And two, are you seeing any changes in the underwriting standards from your finance partner?

Yes. I will take the first -- I'll actually take both questions, but I'll answer the second question first. And the answer is no. We have not changed any standards -- our partners have not changed any underwriting standards to our knowledge. We feel very good. We've had very consistent financing penetration over the last couple of months. And as you can imagine, I think we talked about this before. We've had to date extremely low default rates and a fairly healthy credit profile of a lot of those that participate in our financing program. So we feel very good about that. And again, the consistency that we've seen on financing penetration, we think, helps support that.

The second question on sales and marketing spend, I'll kick it off and then maybe turn it to William as well to add anything that I've missed. But 100%, this has been a really interesting time for us, where we've reduced media spend because of the organic demand that we've had, and we're continuing to pause that media spend in most of our markets. And what's been interesting is to see the years of investments that we put into building our brand and building product awareness and the investments that we've made to create the best experience, member experience and customer journey that we can. So we're seeing really great word of mouth.

I can say that as our membership gets larger, what's interesting is with the engagement growing, the base getting larger, we do think we're going to see some rival effect of word of mouth becoming increasingly more important. And it does lead us to believe, especially given the payoff we're seeing today in terms of, again, the increased sales despite having 0 marketing media dollars deployed, we do think in fiscal '21 and beyond, we should expect to see much more marketing efficiency than we originally forecast. I'll just say with that said, we're still in the very early innings of growth as a platform, and we're going to continue to smartly grow sales and marketing spend so that we stay top of mind with consumers.

Yes. And I'll just add to that. Obviously, the word-of-mouth point, Ed, is an astute point. And we've seen word of mouth grow. We do a post-purchase survey to ask our new buyers where they first heard about Peloton and what's influencing their decision, and we've seen word of mouth grow during this COVID period as a percent of what new buyers cited as influencing the purchase decision faster than we've ever seen it.

So clearly, this experience is unmatched. The way we treat members, the investments we put towards things like our delivery and member experience, post-purchase service, we'd hoped those would pay off. We believe they would, and we're seeing that in terms of a marketing viral effect.

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

Great. And amazing numbers. So I wanted to ask, John, maybe a bigger question, just given your commentary around social distancing and obviously, the natural demand we're seeing. Just can you give us some insights on how you're thinking about the retail strategy? I think all stores and showrooms are still closed, and you're still seeing significant demand. And also, if there's any update on what you're seeing from digital subscribers potentially converting over into Connected Fitness subs.

Great. Actually, William, do you want to take the question on retail? And then John can take the next question.

I was answering the question on mute. So I'm glad you...

Oh, got it. Sorry. I thought we might have lost you, John.

No, no. Let me weigh in real quick, and William can definitely provide more color on probably both answers. But Ron, with respect to the retail stores, as you know, we have close to 100 retail stores across 4 different countries. And the good thing about our retail stores, we love them. We love what they do. We love people being able to try the products. We look forward to launching products. They're kind of a hub for their local community.

But as you point out, we don't necessarily need them, and our sales have been strong without them for the last few weeks or a couple of months. But what we're excited about, when you think about reopening them, is that we don't have to be on the bleeding edge, unlike other retailers and studios for that matter who -- their entire business depends on getting back open. We are going to be able to be a little bit more cautious and say, call it, the trailing edge of opening back up because our retail folks are actually adding value from home, helping out with member experience and inside sales.

But we are committed to retail. We love retail. In this environment, you could actually see us with some retail struggling 12 months from now, having even better leases, better locations. And so retail has been and will continue to be an important part of our strategy and our multichannel marketing and the efficiency of how we go to market and we engage with our consumers.

And then the second thing around digital conversion, it's obviously too early to say on how the 1.1 million trialers are going to convert because they haven't come up to the 90-day gate where they would have to decide to become a digital subscriber. But you can imagine that with the engagement we're seeing from those people and the quality of the content that, as Justin brought up, is going to continue to get better as Peloton Studios New York comes online and next year as Peloton Studios London comes online, so more content, more verticals, more ways to engage with that content, we expect that a lot of those 1.1 million will either become a digital subscriber or eventually become a Connected Fitness purchaser, which is obviously the golden goose for our business. But we would welcome both of those. But at this point, we don't have any data on the conversion.

Our next question comes from the line of Jason Helfstein from Oppenheimer.

It's Anthony on for Jason. Given what you've seen in the past 6 weeks around the digital-only subscription, do you believe that can be an attractive LTV business if new users don't convert to Connected Fitness subs but remain digital-only after the promotional period expires?

Yes. I'll take that. And Jill and William, you guys can weigh in. We haven't seen the type of explosive unit economics in that business would lead us to believe that it's going to be a meaningful driver of the bottom line for Peloton in the next couple of years. That said, we've seen a great increase in TV and an increase in LTV to CAC ratio with our lower price going to $12.99, some of the new engagement touch points like Android TV.

And so we love the business. We are -- we've said this, and we continue to do it, is kind of run it at unit economic breakeven and just try to get as many people on the platform as possible because we do like introducing people to our content and letting them trial it before they buy. But right now, mostly, we're thinking about it as lead gen for our Connected Fitness platforms as we bring -- as we execute on our better/best strategy, and we potentially have lower price points in our different lines.

You could see more of those digital trialers and more of those digital subscribers engaging and buying our products. So it is a beautiful wheelhouse or a virtual flywheel at this point. But we still aren't saying that it's going to be a massive stand-alone business yet. Does that answer your question?

Our next question comes from the line of James Hardiman from Wedbush Securities.

What's your strategy to keep the Connected Fitness churn down once the gyms actually reopen? It sounds like it's safe to say that the upside versus your numbers for 3Q and potentially 4Q are largely people that didn't have access to their gyms. How do you keep those people in the fold? Obviously, it helps if they just bought a $22 piece of equipment. But is that sort of when we should think about sales and marketing resuming as gyms begin to reopen and there's increasing options for people looking to stay in shape?

Yes. Maybe I'll start. And obviously, John, chime in. But I think what's been the most encouraging aspect of some of the data that we've collected from our post-COVID-19 buyers is that they're incredibly engaged with our product. And no doubt, a large percentage of them had fitness routines that they can no longer do. But we've heard countless stories of a lot of our newest members who, again, did not have purchase intent for the Peloton Bike prior to COVID-19 who are complete converts, right? I think so many people are now able to experience the immersiveness in entertainment and software features and community.

And we believe so strongly in the value proposition of our product that we think that we are permanently changing the behavior of any of these new members. And again, I think just based on our own research, we do think it will be a slow climb for people to get comfortable in environment such as gyms and boutiques. And so I think we feel very confident that we're going to be able to keep these members engaged.

And I think William pointed out here as very well, when we think about our sole aim at this company, it is to drive engagement of our members, and everything we do is to drive engagement. So the better we can make our software features like Tags, the better we can -- the more content we're creating, the more fitness verticals, and we're going to continue to do that over the next several months, I think we're going to be able to convert and continue to attract a lot of our newest members who we think might be hesitant to go back to the gym anytime soon.

Great. And then sort of a follow-up. As we think about reopening the economy, I forget who made the comment in the prepared remarks about not being able to go into people's homes particularly to bring treadmills, is actually holding back connected subscriber growth. Now obviously, it takes longer to deliver if you're going into people's homes, which would seem to suggest that the delivery function is not a bottleneck in any way. Can you just talk us through how to think about when we get back to sort of a normal delivery process, how that actually helps the throughput?

I'll [pass to] William, but I think the rate-limiting factor for Q4 is really supply chain. It is not delivery capacity. But William, maybe you could walk through some of the efficiencies that we've gained over the last couple of months and tread delivery as well.

Yes, sure. It's important to note that Tread was ahead before we had to pause deliveries. Tread was tracking ahead of our forecast. So we felt great about Tread and just our ability to gain traction in what's still a relatively new category for Peloton. And as I mentioned earlier, in terms of cardio, we feel like Tread is an important beachhead for us. So we were definitely tracking ahead.

We were able to take -- with the explosion in Bike demand, we were able to take some of our field ops, our incredible field ops folks, and shift them over from what would have been tread deliveries to bike deliveries. And so it's one of the many benefits of our vertical model, and we actually have seen this across the business. We do a lot of things ourselves here at Peloton. And so whether it's retail and shifting some of those retail folks over into inside sales as we closed the stores to be able to take phone calls and all the inbound demand and orders, retail -- our retail folks led by Jen Parker and her amazing team also helped on the member experience side, answer phones.

It's the macro point. Our vertical model really gets us flexibility in our great management team. To your specific question, that's what we were able to do, and that's the efficiencies we saw. We were able to take the field ops capacity we would have put to Tread, and we were able to factor that into this incredible spike and growth in Bike demand.

The only thing I would add, and I mentioned this earlier, that if we are able to resume tread before the end of the quarter, we will 100% have the delivery capacity for that. But obviously, the current guidance assumes we are not resuming tread deliveries before the end of Q4.

Our next question comes from the line of Heath Terry from Goldman Sachs.

I just wanted to dig a little bit deeper into the supply chain discussion. If I look at the backlog that you had reported on the balance sheet in Q -- for the March quarter, it would appear that you had about 95,000 bikes on order at that point. And I compare that to the roughly 165,000 that are implied in the guidance for the June quarter. I've got to imagine you guys are going to sell a lot more and probably already have just in the month of April, a lot more than 65,000 or 70,000, 70,000 bikes.

Is that -- is the guidance for Q2 an indication of sort of what that 165,000, 170,000 where the supply chain sits now or sort of where the capacity of the supply chain sits now? And could you give us a sense of sort of all of these efforts that you have to expand the capacity of the supply chain, sort of where supply chain capacity could be in September and December, and particularly in December given that you won't necessarily have the ability to prebuild the way you normally would ahead of a typical holiday season? Is there a number you can see yourselves getting to in terms of the ability to deliver -- the supply chain's capacity to deliver over the next 6 months or so?

I'll just take -- I just want to make a couple of points of clarification, and then I think William can do a deeper dive for you on what we're doing from a supply chain perspective. I think I've said in the past that it's hard to look at our inventory and get an accurate picture of how many bikes, right, we have available for sale. And as you can imagine, order-to-delivery time vary significantly across the different markets. It depends on kind of where we're seeing certain spikes in demand. And as you know, we have 2.5 dozen warehouses across the country and now warehouses in Germany and the U.K. and Canada. So looking -- and there's tread inventory there. So I wouldn't necessarily look at inventory. And as a great...

Yes. I wasn't looking at inventory. I was looking at the -- I was looking at deferred -- at your deferred revenue line.

Yes. And so -- and on deferred revenue, yes, we 100% entered Q4 with a pretty decent backlog. And then remember, any sales that are occurring in Q4 are also going to be a backlog for fiscal year '21. So with that, I don't know if, Will, you want to address some of the specifics around what we're doing in supply chain. But it definitely is -- we feel very -- what I will say is we feel very good about the sales and subscriber estimates that we're giving for Q4 that those we feel very confident we can deliver on from a supply chain perspective.

Sure, yes. I'll -- just to add, Heath, we've done a lot to derisk the supply chain and support this growth, including -- yes, and just where we put our manufacturing, we have 2 terrific manufacturers in Tonic who is now -- as you know, last fall, we acquired Tonic and it's now part of Peloton; and then Rexon, who is a third-party manufacturer also in Taiwan. So we're dual-sourced on bike in most of the major components. That's derisked our supply chain a lot on the manufacturing side.

As well on the delivery side, we're able to -- we've got great 3PL delivery providers. So in addition to our own field ops team, we've got XPO, and we've got J.B. Hunt, and so we're able to flex volume there. And as we think mid- to long term, we are a growth company, and we -- you mentioned holiday we are coming online with a new factory. We've made significant CapEx in that factory. We saw it coming. We saw this growth coming, not just -- not in this COVID period but in terms of our mid- to long-term growth.

And so we've got that new factory coming online. I'm not going to talk about unit capacity, but that is a substantial addition to our ability to manufacture Connected Fitness equipment. But it's both bike and tread out of that new factory. So we feel like we're going to be able to support the growth in the business. And that's true across areas like member experience where we've been scaling up. And Brad Olson and that team has been able to service members in a terrific way out of our Plano HQ, too. So we're comfortable.

When you say comfortable, William, I mean, is there -- is that a suggestion that you don't feel like the -- like you're going to be able to get to a point by the holiday season where you feel like supply chain capacity is not a limitation of growth?

We do, yes. Well, we're not giving guidance. And obviously, demand has been a lot harder hit in this -- if you look at our forecast variability, we're pretty tight. We had been. I don't think anyone could have expected this period we're in, as you fully realized. As we think about -- the x factor is sort of what does the baseline look like coming out of this.

And so we're not going to give guidance. But I think Jill articulated our view, which is we believe that this whole thing has accelerated the move to Connected Fitness. We are -- obviously, feel great about the business mid- to long term. And so we feel like we've got plans in place to support our growth.

Our next question comes from the line of Jonathan Komp from Baird.

First, just wanted to ask about, more tactically, the thoughts around marketing. Jill, I don't know if you're willing to share how low you may be planning in the current quarter. And then how are you thinking about when you shortened in that quarter the delivery lead time, you're turning marketing back on, kind of any additional thoughts on the levels we should expect and even some of the tactics you're planning?

Yes. So in Q4, the assumption right now is the majority of our media spend is turned off in most of our markets. Obviously, they're still very nascent markets for us like Germany, where we're still in the very early stages of brand building. But predominantly for the U.S. and U.K., we are turning off the majority of our media spend, which I think we've said in the past has been roughly, call it, half of our cost structure in sales and marketing.

And so in terms -- the one other thing I would point out is we do have a slight offset to that in Q4, which is the cost that it require -- was required for the 90-day free trial. So those 1.1 million members streaming and music costs, that is a slight offset to sales and marketing. So [a reduction] in sales and marketing and OpEx, there is an offset [still to lost] media spend.

But yes, I think, William, if you want to mention when we might think about turning that media on over the next several months. But for Q4, just so -- yes, it's assumed in our model through the end of Q4, for sure, with the elongated order to delivery.

Yes. As Jill noted, we feel like these investments in creating awareness around Peloton and new products is an asset for us. I mean we think we're reaping the benefits of all this awareness building, our leadership in Connected Fitness now in a time where we're off. You could envision -- John talked about the innovation pipeline of new products. You can envision substantial marketing going behind that in future quarters. Again, we're not going to announce anything, but we feel good about that.

As Jill noted, we're still on in Germany, where we feel like we're -- as you know, we just launched Germany. We're still on in TV and digital marketing activities and other marketing channels to create awareness. So that's how we think about it. We will come back on with marketing. We will find efficiency, as Jill noted, as we get into 2021 and beyond. We don't think we'll be off forever, and we're going to invest in new products and new geos to continue to lead with Connected Fitness.

Okay. Great. And maybe just one follow-up then on the -- Jill, the study that you mentioned of new Connected Fitness customers who weren't previously considering purchase as well as the 1.1 million who downloaded the app for free. Any more details on the characteristics of those customers, either demographics or what their fitness routines were previously. Just any more insight on those 2 bases of new customers potentially.

Yes. No, that's a really great question. I'm glad you brought it up. In terms of the post-COVID buyers specifically, one of the most notable changes in demographics is that their -- the cohort of age under 35 has significantly grown. And even before that, I know we've previously said in the past that our fastest-growing demographics are those that make under $75,000 and those that are under 35. We've seen a huge acceleration of that lower age group, and we've seen very consistent household income data over the last, call it, couple of quarters. So we're really encouraged by that. Our average age of our customer is going down pretty significantly.

And I would also say, again, back to the engagement stats, which we think is always the best leading indicator, is that our most recent buyers are working out with us more than any other new cohort that we've seen. Obviously, there's the shelter in place that is probably driving some of that engagement. But we're very encouraged by that.

And our final question for today comes from the line of Youssef Squali from SunTrust.

Great. Two quick ones. One, the first one is just a quick clarification on new products. Does the -- what's happening with COVID ultimately delay or accelerate the potential rule out of a lower price trend as you guys have talked about earlier? Just considering some of the issues you've had with the heavy kind of one that you're selling right now.

And John, so congrats, obviously, on hitting profitability. That's a huge milestone. But with a very comfortable cash on the balance sheet and profitability, can you just speak to your capital allocation? Has COVID changed any of your thinking around maybe M&A or maybe international expansion, doing it a little faster than initially anticipated? Any color there would be great.

Yes, it's a good question. We are absolutely 100% committed to having, say, the best treadmill at a lower price. We've talked about that a lot. We were committed last quarter and in the previous quarter. We're more committed today. We -- personally, I love that experience, that boot camp, cross-training, circuit workout, on-the-tread, off-the-tread strength training program that the boot camp and the Peloton Tread offers and that Peloton Tread current owners love. And bringing that at a more affordable price point is a massive priority for our entire team.

Again, this COVID world has forced us to relook at how we -- how and when we launch products this year or next or whenever. But we remain 100% committed to it, and we're very excited about that category and owning the tread category globally. That is a high priority for Peloton. I know it's a high priority for you guys or for your investors. We are not a stationary bike company. I know it looks like that right now because we've had to pull back and just deliver bikes for the past few weeks. But please don't take that as anything around our focus or the importance of the tread category for Peloton. It remains a super high priority, and we're very excited about the lower-priced product in that category.

The second question was around our balance sheet and profitability and how we think about growth and investing. At this point, Youssef, I can't say we're going to change much about our strategy. We've been pretty aggressive with growth. This is -- we're going into the sixth year of triple-digit growth on the subscriber growth, and we're very proud of that. And we are proud of our balance sheet. We think it could become strategic.

With respect to M&A, unfortunately, we don't see anything awesome that would really change the trajectory of what we're doing. So we're -- want to -- first, second and third priority are organic growth. We are -- we have a great M&A team, and we're looking at smaller things that might accelerate 1 or 2 things we're doing. But for the most part, M&A doesn't look like it's going to be a big part of our next few quarters or maybe even a couple of years.

But we do like our balance sheet. It lets us sleep well. The profitability, you're right, from my perspective, allows investors to start to see the power of our model. So more than anything, we've been talking about the power of that. We've been talking about how Peloton is one of the few companies where growth versus profitability is not a trade-off. Obviously, you just saw that. I think you'll continue to see that.

And so we aren't changing anything. COVID is changing the operations of everyone working from home, including our teams and shutting down our stores and having to do creative stuff on the content side. So there's operational changes we've had to make. But strategically, we're still on track. We will enter new markets, to your point, new international markets, to your point, in the coming years. We will bring new products to market. But all of it has been the same strategy we've been executing against for the past couple of years.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Foley for any further remarks.

Yes. So in closing, I did want to loop back on the macro here coming off of Q3 and Q4. Like everyone, with respect to COVID-19, we are hoping for a speedy recovery back to normal. We are pulling for society. We're rooting for society. We're pulling for science. We're pulling for New York City, by the way, where a lot of us live. On a personal note, I never realized how social I am. I literally can't wait to go to a buzzy, fun-packed New York City restaurant with good friends in the not-too-distant future, God willing. So we want to get back to normal like everybody.

But with that said, I want to talk about Peloton's future outlook and whether or not you want to own our stock. We believe that Peloton is the future of fitness, independent of when we get back to normal. I must point out that, like I just said, we are looking at our sixth consecutive year of growing our subscriber count by more than 100%. 6 years of triple-digit growth would hopefully lead you to believe that PTON is not a COVID story. Instead, we believe Peloton is the fitness -- is the future of fitness because we offer better experiences at better locations, on better hardware, with better instructors at a dramatically better value on a per workout basis. And you're going to hear more about that.

For those of you who don't see the value as part of what we offer, we're releasing a value calculator in the next couple of weeks, an updated value calculator on our website. I encourage you to play with it yourself to see, when you're working out close to 18 times a month, what type of value you're getting vis-à-vis other options in the marketplace, boutique fitness or high-end gyms or even value gyms on a per workout basis.

But we are a better value today. And with increasing engagement -- I think I'm going to remind everyone, on Q2, you saw increasing engagement. In Q3, we just talked about the increasing engagement. And with more affordable products over time, we believe that Peloton will always be the best value in fitness. Better experiences at a better value that is COVID-proof, that is recession-proof and that is 100% where the entire Peloton team is focused. So speaking of our team, one last thank you to the entire Peloton team for another fantastic quarter of delighting our members and outperforming expectations.

Good night, everybody. Thank you for tuning in.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.