Peloton (PTON) Q2 earnings 2023

Peloton said Wednesday its net loss narrowed year over year, and, for the third quarter in a row, subscriptions revenue was higher than sales of the company’s connected fitness products.

CEO Barry McCarthy called the results a possible “turning point” for the business, which has spent much of the past year executing an aggressive turnaround strategy. 

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The fitness equipment company’s fiscal second quarter revenue beat Wall Street’s expectations, but the company posted wider losses per share than expected. Peloton’s stock jumped about 7% in premarket trading.

Here’s how Peloton did in the three months that ended Dec. 31 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

• Loss per share: 98 cents vs. 64 cents expected
• Revenue: $792.7 million vs. $710 million expected

The company’s reported net loss for the three-month period that ended Dec. 31 was $335.4 million, or 98 cents per share, compared with a loss of $439.4 million, or $1.39 per share, a year earlier. While it’s the eighth quarter in a row the exercise company has reported losses, it’s the narrowest loss Peloton has marked since its 2021 fiscal fourth quarter. 

Revenue dropped 30% compared to the year ago period but exceeded the company’s expected range of $700 to $725 million. Connected fitness product sales, which are typically strong during Peloton’s holiday quarter, dropped 52% year-over-year while subscription revenue jumped 22%. 

“This is the time of year when, if we’re going to sell a lot of hardware, we have so you would expect there to be lots of hardware related revenue, and you would expect that maybe that revenue would exceed subscription,” McCarthy told CNBC. “It didn’t. It’s why in the letter [to investors], I call it out, as it may be a turning point.”

In his letter to investors, McCarthy said he expects the trend to continue. 

The company ended the quarter with 6.7 million total members and 3.03 million connected fitness subscriptions, which is a 10% jump compared to the year ago period. The company counted 852,000 subscribers to its app, a 1% drop compared to the year ago period. It has a goal of getting 1 million people to sign up for trials of its app over the next year.

Peloton is losing money on Bikes, Treads and other machines, but its subscription business has once again kept its overall margins above water. Gross margins for its connected fitness products were negative 11.2%, but gross margins for subscription sales were 67.6%. The total gross margin was 29.7%, up from 24.8% in the year ago period. It declined from the previous quarter, however, driven in part by increased promotions in the holiday quarter.

Peloton expects revenue to be lower but margins higher in the next quarter. The company is forecasting sales between $690 million to $715 million and a total gross margin of about 39%. Wall Street analysts pegged their revenue estimate for the quarter at $692.1 million.

The company is also expecting connected fitness subscribers to be between 3.08 million and 3.09 million. 

Peloton, which boomed during the earlier days of the pandemic, has been in the midst of a broad turnaround strategy under McCarthy, who took the helm of the business a year ago. 

The company’s stock is up about 62% so far this year, closing at $12.93 on Tuesday, giving it a market value of about $4.4 billion. Shares are well off their 52-week high of $40.35, which they hit around the time McCarthy became CEO.

“The viability of the business was very much in doubt when I walked in,” said McCarthy, a former Spotify and Netflix executive. “It probably wouldn’t be an overstatement to say there were some people who didn’t expect us to survive this long.”

Since he took over, McCarthy has cut Peloton’s workforce by more than half, expanded its Bike rental program nationwide, started selling certified pre-owned Bikes, debuted a rowing machine and partnered with Amazon and Dick’s Sporting Goods to sell its Bikes and Treads. 

McCarthy’s top priority was to manage cash flow and get the company out of the red, a goal he said the company has nearly accomplished. Free cash flow was negative $94.4 million, compared with negative $246.3 million in the previous quarter and negative $546.7 million in the year-ago period. 

McCarthy said he’s ready to pivot from trying to keep the company alive to growing it, he told CNBC. 

“Now that we’ve addressed the viability issues, let’s get back to thinking about growth and the future of the business, like full stop,” said McCarthy. 

“So there are a bunch of initiatives that we’ve announced that position us to pursue growth,” he added. “And the question we need to answer for investors now that we’re not talking about viability is how fast, how profitable, where’s it coming from, and over time we’ll begin to address some of those questions.”