In October, Peloton’s new chief executive, Barry McCarthy, said the pandemic’s stage winner had six months to rediscover its balance. A nascent recovery has come ahead of schedule.
On Wednesday, the stationary bike maker said that in the fourth quarter it just broke even on its preferred measure of free cash flow. That is a turnround from a deficit of more than $700mn just three quarters ago.
McCarthy has tried hard to reorient Peloton away from a capital-intensive, unprofitable hardware peddler towards becoming a slick provider of “Fitness-as-a-Service”. Peloton may now provide a model for other growth high-fliers unequipped to compete in a capital-constrained world.
McCarthy and his team pepper their talk with jargon such as “customer acquisition cost” aligning with “lifetime value of the customer”. The result is that Peloton has reduced its workforce from 9,000 to 4,000 and outsourced bicycle production and fulfilment. To get ahead, it now sells used bikes and relies on third-party retailers.
Last quarter, total revenue was under $800mn, compared with the $1.1bn achieved in each of the two previous holiday periods. More importantly, for the third consecutive quarter the majority of revenue came from subscriptions to fitness content videos rather than bike sales. The gross margin on those software sales is 68 per cent, compared with the losses on bike sales as Peloton dumps its excess inventory.
Peloton’s number of subscriptions has stabilised at about 3mn in total, and it believes these will expand from here as the business rights itself. And the market has cheered it on as the stock price has more than doubled from its 2022 lows. Improved results and a rising risk appetite from investors both help.
Peloton is fortunate that it has a software component that benefits from economies of scale. Peloton will not soon revisit its peak market capitalisation of near $50bn. But McCarthy’s new programme has created a leaner, humbler and more sustainable Peloton.
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