Musical company

Peloton CEO says ‘naysayers’ view company’s $1.2 billion quarterly loss as a mistake

“The naysayers will look at our financial performance in the fourth quarter and see a falling revenue crucible, negative gross margin and higher operating losses…but what I see is meaningful progress that is driving our comeback and resilience term of Peloton.”

It was the CEO of Peloton trying to put the exercise bike brand’s recent shortfalls in a much better light.

Peloton Interactive Inc. PTON,
-18.36%
continues to deal with the fallout of its overly optimistic view of post-pandemic demand – and judging by the stock’s 19% plunge midday on Thursday, the company’s latest earnings report confirmed those challenges.

In fact, Peloton reported a net loss of $1.2 billion for the June quarter due to inventory issues, severance pay and other restructuring moves. Revenue was down 28% from a year ago, while the company’s Connected Fitness subscriber count was essentially flat on a sequential basis.

Read: Peloton shares plunge after quarterly earnings report as company loses over $1 billion

But Peloton chief executive Barry McCarthy said the results could be viewed more positively.

“Operants will look at our financial performance in the fourth quarter and see a falling revenue crucible, negative gross margin and higher operating losses” that “threaten the viability of the business,” he wrote in a letter to shareholders.

“But what I see is meaningful progress that drives our return and the long-term resilience of Peloton. Significant milestones achieved include new executive management, renegotiation of supply contracts and significantly reduced cash outflows,” he continued.

Peloton is still burning cash, but McCarthy said the company is making progress. It averaged negative free cash flow of about $650 million per quarter in the six months to the June quarter. But then, in the June quarter, Peloton’s negative free cash flow was $412 million.

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

He later told a story of his teenage years working a summer job on a 720ft freighter. It took “miles and miles” for such a large ship to change course, but in the end the crew was able to save the lives of two people stranded in the Mediterranean Sea.

“Peloton is like this freighter,” he said. “We sounded the alarm for headquarters. Everyone is at their station. We continue to add new inputs to evolve our go-to-market strategy to restore growth. When the ship will respond is the question. Our target is FY23.

Read: Peloton plans to sell bikes through Amazon

Several skeptics on the sell side seemed unswayed, with MKM Partners analyst Rohit Kulkarni writing that “[a]aside from the CEO’s encouraging comments and modest expected improvement in margins, there is very little to celebrate in today’s press release.

Randal Konik, an analyst at Jefferies, which covers other fitness companies Planet Fitness Inc. PLNT,
+0.22%
and Xponential Financial Inc. XPOF,
-1.31%
but not Peloton, captioned a note to customers: “My bike is now drying laundry… Is yours?”

He captured sequential declines in membership and average monthly workouts, as well as Peloton’s projection for steady growth in connected fitness subscribers in the current quarter.

“These statistics show something simple – consumers are returning to gyms and home fitness continues to fade,” Konik wrote.

CEO McCarthy was more optimistic about Peloton’s engagement potential when he spoke on the company’s earnings call.

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

McCarthy previously served as Chief Financial Officer at Netflix Inc. NFLX,
+1.14%
and Spotify Inc. SPOT,
+2.18%,
and he sees lessons from both of these companies that apply to Peloton.

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