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Operator: Good day and welcome to the Peloton Interactive Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After a few brief opening remarks, we will begin immediately going into our Q&A session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Peter Stabler, Head of Investor Relations. Mr. Stadler, the floor is yours.

Peter Stabler: Thanks, Sherry. Good morning, and welcome to Peloton’s Second Quarter Fiscal Year 2024 Conference Call. Joining today’s call are CEO, Barry McCarthy, and CFO, Liz Coddington. 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. I’ll now turn the call over to the operator for our first question.

Operator: Thank you. One moment for our first question. And that will come from the line of Doug Anmuth with JPMorgan. Your line is open.

Douglas Anmuth: Great. Thanks so much. Hi, Barry and Liz. A couple of questions. You called out that the Treadmill market is 2x that of Bikes. Can you just help us understand how you’re going to lean into those products more going forward? And if Tread+ demand is strong, why isn’t that helping free cash flow more in the back half of this year, just given the considerable existing inventory that you have? And then secondly, can you just help us understand the current mix of sales or perhaps sub additions across Peloton direct and third-party and Bike rental and any thoughts on how this could trend going forward? Thanks.

Barry McCarthy: Let me take the first part of the question, maybe Liz can take the second part, Doug. Thanks for joining today. The demand for Tread has been stronger than we anticipated, both for Tread and for Tread+. I think that interest in Tread+ has makes the Tread look even more attractive in comparison because of the price point differences. So that would be category one. The other exciting thing about the Tread and the fact that we’re seeing real growth year-over-year in units is that for as long as I’ve been associated with the business, we’ve been largely dependent on the Bike business. And now it appears that we have at least an important second leg of the stool to help support growth. Now with respect to Tread+, we do have a substantial number of units in inventory.

The good news is we’ve paid for them. So each sale is quite helpful to cash flow and initial demand was quite strong. But we have limited sales experience, and we have limited even more limited sales experience at full price. And so a little bit uncertain about what the demand will be coming into Q4. We’re also a little bit uncertain about our ability to fulfill the demand. So our first obligation is to retrofit the existing units in the field with the Rear Guard. And to the extent that we are manufacturing more Rear Guards than we have capacity for installs and retrofits than they’re available for us to retrofit existing inventory and ship to new purchasers. So that’s the perspective on Tread+. There was a mixed part of the question, Liz, I was going to kick over to you.

Liz Coddington: Yes, sure. In terms of the mix, I think the question was about what are we thinking in terms of our mix going forward into the back half of the year. As far as kind of the hardware sales piece of the business, from a Bike rental perspective, we are leaning into that. So we do expect to continue to see our mix shift toward the Bike rental or the FaaS rental. In terms of third party, for the back half of the year, our third-party business is impacted by a lot of key moments in those third-party channels. And so we’ll lean into those and depending on how well those actually do that, that may result in some mix shift into third-party at certain moments, but we don’t expect it to be a significantly higher portion of our sales in the back half of the year versus the first half of the year.

Barry McCarthy: One additional comment about Tread. I am pretty excited about some of the content that we’re going to bring to the platform. It will be oriented towards more of the performance athletes particularly marathon training. We entered into a partnership with New York Road Runners, I’m super excited about that, and we filmed in 3D, the Marathon course, the New York Marathon course this year and that will be available on our platform for runners who are training for the marathon. And we also captured the metadata and so the elevation on the Treadmill will automatically change as you progress down the course. And we hope to expand that to other leading marathons in the world and continue to lean into that segment of the marketplace, which I think helps to reposition the brand in important ways.

Operator: Thank you. One moment for our next question. And that will come from the line of Ron Josey with Citi. Your line is open.

Ronald Josey: Great. Thanks for taking the questions. Hi, Barry. Hi, Liz. I wanted to ask on engagement, Barry. It was up 6% year-over-year. Just curious, can you tell us how engagements evolved on the platform over the last several years with Peloton offering more content across more devices. Of course, the app, or are we seeing members adopting more of a hybrid style, or is it one or the other is question one. And then Barry, you mentioned in the letter, you’ve disappointed the team can improve performance in the current quarter as you did in the second quarter. Just talk to us about some of the improvements you saw in 2Q that helped numbers come in better than expected. Thank you.

Barry McCarthy: I was having trouble hearing during the second quarter improvement in what?

Liz Coddington: What helped us beat Q2, I think.

Barry McCarthy: What helped us beat Q2. Is that the question?

Ronald Josey: Yes. And I think you said you’d be disappointed if the team can’t improve performance in the quarter similar to 2Q. So curious what happened in the last quarter to maybe do better here going forward?

Barry McCarthy: Yes. I’ll do part of it and Liz will take part. Well, as you mentioned, engagement was up 6%. The Connected Fitness engagement was up 4% year-over-year, and the app was up 7% year-over-year. We have not really made significant progress yet in personalization. I should say it differently, we’ve made good progress, but we can run a lot faster and we can do significantly better. And I am tremendously excited about the work that we are doing now and the insights that Nick Caldwell brings to the table. And I think a year from now, we’re going to be in a significantly better place and it will have a really positive impact on engagement, and we know that engagement is a big driver of churn. So churn was down in the quarter and engagement was up.

And I think there are opportunities to continue to broaden engagement plus we’re doing some really interesting things in the content team on different platforms that are contributing to the overall improvement in the user experience. I’m thinking by a way of example, in entertainment with YouTube Video and the NBA League Pass. Just by a way of example, and we’ve seen a very substantial increase in engagement in that content amongst Tread users by a way of example. So we’ve come a long way, but we’re going to come a lot further faster in the foreseeable future. And certainly, AI will play an important role here.

Liz Coddington: Yes. A few things to add about our outperformance in Q2. So some of the areas that really worked well for us were our Bike rental and FaaS, the third-party and our refurbished inventory sales or Bike sales. Those all outperformed our internal expectations in the quarter, which is great. And our Bike rental also benefited from the fact that we’ve had — we had lower churn, so that helped with subscribers. And also, we launched self-service buyouts on our platform, which was a really great win because we saw 11% of our rental members buy out in the quarter, which also contributed to some of the outperformance. There are other — there are some other factors that are impacting our subscriber growth for the quarter.

As we mentioned, our hardware demand was a bit lower overall than we forecasted, but we had some offsetting tailwinds that benefited us. First, our supply chain team did a great job and outperformed in terms of delivery efficiency. That means we had a bit of a pull forward in our deliveries into Q2 that we had expected to have in Q3. We also had faster subscription activations in the quarter than we expected. Sometimes over the holidays, people lag a bit with activating their subscriptions. And we saw that was faster than we expected too, so that helped with subscribers. And then another benefit that we had is we had lower new subscription passes in the quarter and higher-than-expected reactivations from a pass state than we expected. So that helped overall retention and is one of the drivers of our better-than-expected Q2 churn results.

Another thing that is also really important to understand about our performance in the quarter is the secondary market. That continues to outperform our expectations and was a key contributor to subscriber growth in the quarter.

Operator: Thank you. One moment for our next question. And that will come from the line of Andrew Boone with JMP Securities. Your line is open.

Andrew Boone: Thanks so much for taking my questions. I wanted to ask about the increase in media spend that you guys called out in the letter. As we get further away from the re-launch of the digital app, how should we think about marketing, especially as you just mentioned, the pullback in overall demand for hardware. And then, Liz, is there anything you can call out in terms of Connected business gross margins going forward, that stepped up in the quarter. How do we think about that for the back half of the year and then going forward? Thanks so much.

Liz Coddington: So to the first question, it sounds like it was about increase in media spend that we saw in Q2. So we always generally are typically see an increase in our media spending in Q2 because it is our holiday quarter and we use that as a way to drive leads and demand for our hardware products and our app on all of our products. In the back half of the year, we do expect to spend less in media just seasonally. So we do expect lower quarterly media spending going forward. Now remember, another thing to understand about our business, I would really come back to this on these calls is to talk about LTV to CAC. And so we’re trying to optimize for that for the business. And so when we look at our media spending, we are trying to make sure that our media spending is efficient and drives an efficient LTV to CAC, definitely over one.

Ideally, we want to be in the 2x to 3x range. We were not there for Q2, but we were above one, and our goal is to move towards more increasing media efficiency. Now on the Connected Fitness gross margins, we do expect — we don’t guide specifically to Connected Fitness gross margin, but we do expect some improvement in the back half of the year, in part because our Tread+ deliveries which actually just started will benefit gross margin in the back half. That — that will be — we do see a little bit of pressure from areas like Bike rental as that continues to take share, that will put a little bit of pressure on our Connected Fitness gross margin, but we do expect sequential quarterly improvement. Now it is important to note, though, with gross margin coming back to the LTV to CAC feet piece.

Gross margin and promotional activity, obviously, that affects gross margin. And so we’re optimizing for LTV to CAC. And if we see the opportunity is better to reduce our LTV by reducing our gross margin and optimizing our media spend accordingly, we’ll make that trade-off and evaluate it as we go.

Barry McCarthy: I would say at a high level, I’m pretty optimistic about our ability to try to bring more efficiency out of the marketing spend, and we’re making some structural changes in the way that we run the business that will help contribute to increased operating leverage. And I’m being — I realized I’m being vague, but I’m being intentionally vague, but it’s among the reasons why I have some optimism about the go-forward performance.

Operator: Thank you. One moment for our next question. That will come from the line of Shweta Khajuria with Evercore ISI. Your line is open.

Shweta Khajuria: Thanks a lot for taking my questions. I have two, please. One, Liz, could you please talk about the free cash flow. So your guidance now calls for lower expectations than what you talked about last quarter, you expect to be positive free cash flow in the fourth quarter and not for the full year. So help us think about why the change and what drove that? And then the second question is on how to think about the impact from TikTok and lululemon. Is $10 million a quarter that you quantified last time, did it come in better than expected? How should we think about it going forward? And then the impact of TikTok on P&L, please. Thank you.

Liz Coddington: Sure. So let’s start with the free cash flow question. Why is our free cash flow outlook lower than we had previously expected. So, for Q2, while our paid subscriptions for Connected Fitness outperformed our expectations, our hardware sales, as I mentioned earlier, were a bit softer than we expected. So we’re projecting that softness from a trend perspective to continue into Q3 and Q4, and that creates a bit of a cash headwind for us. We’re also continuing to see that mix shift into Bike rental or FaaS and that puts pressure on our cash because, again, we don’t collect all of that hardware revenue upfront. And then if you put that together, it means we have a bit of a cash headwind from inventory compared to our prior forecast.

And that’s mainly coming from our Bikes. We also had a few payment timing benefits that pushed from Q2 into Q3 that helped Q2 cash flow, but will impact us a bit in Q3. Now the other question was about TikTok and lululemon. I can probably take the lulu piece, Barry, I don’t know if you want to talk about that.

Barry McCarthy: She was anchored on $10 million and I think wanted confirmation on that.

Liz Coddington: Oh, yes. So, yes, our lululemon partnership, at least we’re talking about the Studio — the Studio All-Access Members that have the, what was firmly known as the Mirror hardware product. That performed as expected, actually a slightly bit better than we expected. So that is on track. And then TikTok, that is really a marketing relationship with TikTok that we — it’s early days. We don’t have a lot of explicit assumptions around how that is going to provide upside to our financials going forward in Q3 and Q4.

Barry McCarthy: Yes. We’re in the third week of the TikTok deal, and we’ve seen a very substantial increase in the number of pieces of content in those three weeks. If we compare to week one, I think it was about a 50% increase, and we’ve seen a 3x increase in total views, but it’s much too early to know where that’s going to land. We’re excited, our first live class had over 130,000 views, which is a pretty good start, but I’m sure we can do much better than that. The important thing to note is we’re reaching a demo that’s much younger and TikTok is proving to be an enormously effective platform to help us do that. So we want to lean into that. I think that if we do it well, it has implications for growth in app. But it’s way too early to have any meaningful insights yet.

The other thing I’d say is, for those of you who saw the headline yesterday that TikTok squared off with Universal over music rights, but I want you to know that doesn’t implicate our marketing agreement, our content on TikTok is fully licensed with the labels.

Liz Coddington: There is one thing I wanted to comment on with regard to the $10 million from lululemon for the Studio All-Access Members. That was just reflective of November and December. So that was just two months in Q2, and it will be obviously a full quarter in Q3 and beyond.

Barry McCarthy: Coming back to the cash flow thing here is what I would say. Let’s remind ourselves what the two objectives for the business, one is stop the bleeding. The other is grow the business. I’d hope that we would generate more cash flow in the second half of the year than we currently think we’re going to. But the important thing is we still think we will cross the finish line and get cash flow positive in Q4. And if you look at our balance sheet, that the business is not going away, which for a long time was a systemic threat. So because of that, we’re able to focus on renewed growth. Now what have we accomplished in the last two years to assist with that. Well, there’s been very little product innovation. We reintroduced an existing product, Tread+, and we launched the Row, which mostly we sell to existing subscribers and a little bit to new members.

So not much on the product side, a lot of innovation with respect to the business model, different go-to-market strategies, 3P and FaaS, being to note were the examples. I think what you’re going to see in the next two years is a significant product innovation and which I’m very excited about because I think we have a real shot at changing in a meaningful way at the growth trajectory of the business.

Operator: And one moment for our next question. And that will come from the line of Aneesha Sherman with Bernstein. Your line is open.

Aneesha Sherman: Great. Thank you. Barry, you’ve talked about the seasonality of the business with more growth clustered in the winter months. Can you square that with your view of flat growth in Q3, which is a winter quarter, especially in the light of all the successful initiatives you’ve highlighted in your letter? And then on the other side of this, you’re lapping a weak Q4 this year, and you expect positive growth. Are you comfortable with having fully lapped the seasonality effect at that point. So from Q4 onward, you’re basically like-for-like on seasonality?

Barry McCarthy: Well, our view on — maybe we’ve communicated poorly, but our view on seasonality hasn’t changed, actually. It is Q2, the holiday season, which drives 40 plus percent of the annual volume. And there’s not much seasonality in the rest of the year, slows in the summer months a little bit. But that would be the only other qualifier I would mention.

Liz Coddington: And I also think it depends on what you’re looking at. If you’re looking at subscribers, we do expect to grow subscribers in Q3. So both on the Connected Fitness side as well as the app side.

Barry McCarthy: Now we did deal with the seat post recall beginning in May of last year, and that certainly caused a lot of softness for the B1 Bike. But we’ve been living with that softness for B1 Bike ever since. So it’s not like consumers suddenly rediscovered a love for that product in the aftermath. We see significantly different trajectory for unit growth for Bike+, by the way, but.

Liz Coddington: And also our Treadmill products, we’re seeing growth there.

Barry McCarthy: Sorry, I didn’t mean to imply that wasn’t the case. I just meant to say that if you’re expecting sort of resurgence in demand post the seat post recall for B1 Bike that really hasn’t — that hasn’t happened.

Aneesha Sherman: And if I can ask a quick follow-up. Do you believe at this point, you’re kind of huge inflection in growth your 2020, 2021 cohorts. Have those COVID users now sort of normalized in terms of churn and your churn level is now back to normal across cohorts, including the COVID cohort?

Liz Coddington: Yes. I would assume that’s the case. Yes.

Barry McCarthy: I think there was a short thesis that maybe they came in with COVID and they’re all going to fly out the door afterwards, and that just — that’s just flat wrong.

Liz Coddington: If you look at our churn profile, our churn rates and you look at them on a cohorted basis, like a 12-month churn rate by cohort, it’s not coming down substantially in any way. The only factors that are influenced just to add one more comment, the only factors that do influence our churn are the mix into the Bike rental, which we have talked about in prior quarters, where our Bike rental subscriptions do have a higher churn rate than our regular All-Access Members, although we are working to bring that down, and it did improve quarter-over-quarter in Q2, which is great. And then also, I think we’ve talked about in prior calls, the secondary market, which is the people who buy a Bike not through us, but through someone else like from a marketplace of some sort that those do have a slightly higher churn than people who buy directly from us.

And so as that increases, that will put some pressure on our churn as well. But our underlying churn for our All-Access Members that come through — is pretty stable.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Edward Yruma with Piper Sandler. Your line is open.

Edward Yruma: Hey, guys. Two quick ones from me. I guess, first, Barry, a bigger picture question. You’ve been at this for some time and certainly had some success in turning the business around. But I guess as you step back and think about Connected Fitness and growing it. It seems like you had most success we’re able to lower the cost of ownership. So I’m trying to understand it, it is further growth predicated on continuing to drive down cost of ownership to things like rental? Or is it still a marketing issue. And then as a follow-up, just so I’m clear on the POP sale, was that aligned with the impairments you’ve taken? And are there further impairments that are necessary when you close that? Thank you.

Barry McCarthy: Let me acknowledge that you’re quite right that the go-to-market innovations that have resulted in lower cost of entry like FaaS like refurb have been enormously successful. I mean FaaS is now a $100 million run rate business from zero and we grew not quite 300% year-over-year in the quarter. And we see very fast growth in the secondary market north of 40%. So value matters. Now lots of ways to deliver value. And one of the ways to do it, which we had great success with at Spotify and Netflix was by investing in the product and the user experience. And I think there’s a tremendous opportunity for us going forward to lean into the performance aspect of the market with premium priced products in order to drive new growth for us, meaningful growth.

And I think an existence proof that there’s an appetite amongst consumers for that kind of positioning is the Tread+ by a way of example. So if you give people something they want, they’d be delighted to pay for it, but it has to be a uniquely compelling user experience. And which is why we’re leaning heavily into investing in product innovation. And now we have to have the right talent in the building to pursue that. We had some pretty interesting talent walk into the building last quarter. And I’m pretty optimistic based on what’s being discussed in the building today.

Liz Coddington: And then just really quickly on that question about POP and impairments. In Q2, we did book an impairment charge of roughly about $2 million to bring our — the value of POP in line with what we sold it for and that gets closed in early Q3.

Operator: Thank you. One moment for our next question. That will come from the line of Youssef Squali with Truist Securities. Your line is open.

Youssef Squali: Great. Thank you. So a couple of questions. Maybe starting with Bike rental, that’s one of the positive developments that you had in the business. Can you maybe just remind us about maybe the size of it today, but more importantly, kind of the unit economics. I think in the letter, you mentioned attractive unit economics. How have they kind of performed over time. Where are we now relative to maybe the rest of the business? And then on Q4 guide, Q4 is typically one of the weaker quarters that you’re guiding for an inflection point to growth there. Can you maybe just help us with the puts and takes as to what needs to happen for you guys to hit that milestone? Thank you.

Barry McCarthy: I’m going to let ask Liz to take most of that, but I just want to make one observation about FaaS linking back to a previous question. We had about seasonality. So the one thing we learned last year about FaaS and saw again this year FaaS, it’s not very seasonal. The demand seems to be pretty consistent across the calendar year. Now we did see accelerated growth in FaaS this quarter, but that’s because of some work we’ve done on landing pages and the way we’re merchandising it to members to make it more easily discoverable and put it on level footing with a sale rather than bearing it down in the footnotes where it had previously lived and allowing it to service on Google Search by a way of example, rather than bearing it. Liz, do you want to talk about the Q4?

Liz Coddington: Yes. So let me first — let me talk — I do want to provide a little bit of information about FaaS around the unit economics. So our unit economics for FaaS are improving. Our churn was better than it was in Q1. It’s — as I mentioned, it’s still higher than it is for those who buy our Bikes out right. And we’re continuing to work on closing the gap between that rental churn and purchase churn. But it did improve quarter-over-quarter. It was slightly under 5%, and we’ve talked about it being around 5%.

Barry McCarthy: 100 basis points quarter-over-quarter.

Liz Coddington: Yes, 100 basis points of improvement quarter-over-quarter versus Q1. With that — part of that — as a result of that, we have — our average payback is now averaging around 16 months for FaaS, which is also an improvement over Q1. But one thing to note about that is that we are still using pretty rich mix of refurbished units. And as we lower our churn going forward and continue to make improvements there and also continue to provide the right incentive structure for folks to buy out their rentals, we expect to be able to shift to a richer mix of new Bikes at some point in the future as we continue to sell down sell through that refurbished inventory while achieving an attractive payback results. So that’s all good news.

Now there was a question about the Q4 inflection, and I think that, that is really looking at revenue growth. Q4 is — from a subscriber perspective, our guidance is that we’ll end the year for Connected Fitness subs just slightly — if you look at our implied guidance has us ending just slightly above where we started the year. So it is a seasonally tough quarter for growth. And part of the revenue growth that you see in Q4 is driven by the fact that we will be continuing to deliver Tread+ and so again, our Tread+ mix to date so far, maybe that — hopefully that will shift over time, skews a lot towards existing subscribers rather than new ones. And again, that makes sense because we just re-launched it. And so that will help bolster revenue in Q4 on a year-over-year basis.

Operator: Thank you. One moment for our next question. And that will come from the line of Simeon Siegel with BMO Capital Markets. Your line is open.

Simeon Siegel: Thanks. Hi. Good morning, everyone. So congrats on the strength of third-party retailers. Can you remind us what the unit level revenue and margins look like for a Bike sold or any equipment sold via third-party retailer versus when you sell it directly. And then you called out and I think you’ve spoken a few times encouragingly about the continued growth in the secondary market sales. Can you just let us know roughly what percent of the current CF subscriptions are on their second or life or so? Thank you.

Liz Coddington: So the first question sounded like it was related to unit economics for a third-party. So our — from a gross margin perspective, the unit economics for selling through a third-party channel like a Dick’s Sporting Goods or an Amazon are lower because, obviously, there is that margin that we have to give to the wholesaler to that third-party retailer. Where we sort of make up the difference on that is in our market — our sales and marketing spend. So we expect our customer acquisition costs through those channels to be substantially lower, and that’s what we optimize for as well as driving as much of that those units have incremental units through those channels as we possibly can. And so that’s the key difference.

So you see the gross margin pressure from third-party and it should be offset, and that’s how we model and that’s how we run those channels with more efficient sales and marketing spending. Now the other question was what percentage of our Connected Fitness subs are coming from the secondary market, I think. It’s increasing quarter-over-quarter. In Q2, it was actually slightly down as a percentage of our total gross additions versus Q1, just under 30% coming from that channel.

Barry McCarthy: Let me come back to 3P for a minute and let’s talk about FaaS in the same — the rental program in the same context. It only makes sense to give up margin if the customers you’re acquiring are — if a large percentage is incremental. And it’s relatively easy to do the math to figure out what the crossover point is where you’re economically advantaged by making the lower margin trade-off. Now in Q4, we had explosive growth with the 3P partners. And it cost us an incrementality. And so it was really — it was a really important lesson. And once we were into the quarter, there was no way to undo the sales of inventory that to our third 3P partners that were competing with us during the holiday season. So what we learned is there are periods that are sort of uniquely special.

We’re just those partners individually Prime Day by a way of example are on promotion, and we can move a lot of units. And there are other times of the year when you could come to us, you could go to them. Consumer might be indifferent, but we’re not. And we need to be more thoughtful about our sell-through to those partners during those periods of time. I think we talked about the incrementality on FaaS, it’s north of 60% in the more like 63, 62 pretty consistently since we started. So even though economics as compared with at least the cash flow aspects of it or less attractive than the sell-through. We’re absolutely able to attract a significant audience that we wouldn’t otherwise be attracting.

Operator: Thank you. One moment for our next question. And that will come from the line of John Blackledge with TD Cowen. Your line is open.

John Blackledge: Great. Thanks. Just on Tread+, Liz, kind of just addressed it. My question is, is demand more so from existing members? Or is it a mix of existing and new members. I think she said more so from existing members now. But I guess as we get through the second half and into next year, would you see — would you expect to see more demand from new members given the market is two times bigger than the Bike market. And then my second question on paid apps. The high end, it looks like the high end of paid app subs is down a little bit. Just how should we think about trajectory of paid app subs kind of into the back half and kind of into fiscal ’25 and beyond? Thank you.

Barry McCarthy: I think we’ll probably comment here, John. Thanks for the question. I think you’re absolutely right that we — it’s reasonable to expect that we would see a shift in the mix from existing members to new members because, of course, today, really the only members who know what the Tread+ represents are the existing members.

Liz Coddington: Also our Tread+ is actually just reviewed as the best overall Tread in 2024 by CNN, which is — which should also help grow the awareness of the product.

Barry McCarthy: And with respect to the app, I think in the past, we’ve referred to it as the best product we have that nobody knows about. The unaided brand awareness, which was down 1% is the unaided brand awareness is 6%.

Liz Coddington: There was a question about the range. So I can take that part. So —

Barry McCarthy: Sorry, hang on a second. Yes. I just wanted to talk about sort of the momentum and where we are in the learning curve and because I think it important us about our go-forward view. So it’s at a very high level, I think, your question is, okay, so we restructured our app pricing model. Is the business better off for having done it? And the answer is, today, not yet. But we think the crossover point happens in June, and we’re pretty optimistic about the trend line we’re on now. We foot-faulted early when we focus primarily on free. We struggled with that for several months and then we pivoted to focusing on the paid piece. And ever since we focused on the paid piece, we have seen significant progress. And we continue to make important steps in improving the overall user experience.

And by the way, this is where the work we’re doing in personalization. We’ll be having its biggest impact and where some of the partnerships we’ve struck like TikTok, by a way of example will help drive significant growth, I think. Okay. Sorry, Liz, over to you.

Liz Coddington: And I was just going to point out that if you look at our guidance, what it implies is that Q2 was sort of the low of our paid app subscriber base. That makes sense because we just completed the time frame that our legacy paid app members were able to receive the App Plus level of content for the App One price. And we were actually quite in a positive way surprised that on the retention level of those subscribers given the expiration of their legacy period. So we feel like we’ve sort of bottomed in Q2. And now the question is how quickly can we grow the sub base from there over the next couple of quarters. And as Barry pointed out, there’s a lot of great things that we are working on and that those features will continue to roll out over the coming quarters.

And so there is some uncertainty on how quickly we’ll be able to grow it. And then there’s also things like as we talk about our Peloton for business offerings and our corporate wellness space, that’s a great opportunity for us. We are — those deals, they’re negotiations, and they do take time. And so there’s a lot of uncertainty on when those deals and negotiations will close. And those could be a great accelerant and app subscription growth for us. But there isn’t a whole lot contemplated in our guidance in the next couple of quarters for that to happen. So there’s a lot of upside potential. It just reflects the uncertainty of how quickly we will be able to accelerate that over the next couple of quarters. But we’re — as Barry said, we’re super optimistic about it.

There’s lots of great signs, particularly on the lower churn front and the engagement front that suggests that the app could be a great opportunity for us to accelerate growth.

Operator: Thank you. And our last question for the day will come from the line of Lee Horowitz with Deutsche Bank. Your line is open.

Lee Horowitz: Great. Thanks for taking the question. Barry, you talked in the letter about outgrowing the overall Connected Fitness market. Subs growing sort of marginally year-on-year, which would suggest that the overall market sort of remained depressed at this point. I guess how do you think about sort of what’s holding the market back and growing more meaningfully at this point? How do you think about the conditions that maybe allow some of those headwinds to abate and sort of what do you think about the sort of long-term sort of growth rate of this overall market at a steady state? Thanks.

Barry McCarthy: I don’t really know what the long-term growth rate of the market is. It’s got to be at least population growth. I would think with a couple of accelerants. The more you age, the more important it is that you invest in your health and the more likely you are to have disposable income available to make that investment for one. Two, no question that product innovation drives growth. And there’s a lot of really interesting technology coming into the marketplace to help drive that. In our case, we really only scratched the service and gamification. That’s going to be a vector for growth for us. Liz mentioned, corporate wellness, that is having a moment in corporate America for sure, where companies are investing at the margin increasingly in fitness, nutrition, mental wellness by a way of example.

And I think we’re well positioned to participate in that. And then lastly, it’s pretty clear from the introduction of Row and the introduction of Tread+ innovation drives growth. And we’ve been busy saving ourselves for the last two years. And now we’re positioned to invest in innovation. Again, it’s innovation that put us on the map in the first place. There’s a lot of talent in the building. It’s a matter of getting it organized and focused in a really productive way. I think Nick is going to be an impactful player there. I think Lauren is going to be quite impactful with respect to our approach to marketing as well, plus there are a bunch of product innovation drives growth, geographic expansion drives growth. The unaided brand awareness for the product in the US is 55%.

Okay, anybody now by a way of comparison what the unaided brand awareness is for Starbucks or Coke. They’re north of 90. So there’s still a lot of untapped potential even in the US and by a way of comparison, the unaided brand awareness in the UK is 37%. And in Germany, it’s in the 20s. And so — and I don’t know what it is for LatAm, but it’s got to be significantly lower. And we’ve got a lot of strength in the Latinx community from a content perspective. So product innovation, geographic growth and product relevance in commercial and corporate wellness should all be vectors for — to drive an acceleration in sales in the next couple of years.

Operator: And Mr. Stabler that was our final question. I’ll turn the call back over to you for any closing remarks.

Peter Stabler: Thank you, everyone, for joining us today. We look forward to speaking with you next quarter. Have a good day.

Operator: Thank you all for participating. This concludes today’s program. You may now disconnect.