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Peloton Interactive, Inc. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.06.

Operator: Thank you for standing by. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to Peloton Interactive Third Quarter Fiscal Year 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to James Marsh. Please go ahead.

James Marsh: Thank you, operator. Good morning, and welcome to Peloton’s third quarter fiscal year 2025 conference call. Joining today’s call are Peloton’s Chief Executive Officer and President, Peter Stern, and Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management’s views as of today only and will include forward-looking statements related to our business 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. Please refer to our SEC filings and today’s shareholder letter, both of which can be found in our Investor Relations website for a discussion of material risks and other important factors that could impact our results.

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. Following prepared remarks from Peter and Liz, we will begin the question-and-answer session with two questions submitted by shareholders before the call. I’ll now turn the call over to Peloton’s Chief Executive Officer and President, Peter Stern.

Peter Stern: Thank you, James. Good morning, everyone, and thanks for joining today’s call. Having achieved the Peloton employee Century Club of 100 days, I’m even more optimistic about our future and grateful for the opportunity to lead this company than I was when I was appointed. The first few months have been dedicated to redefining our purpose and values, learning about this fascinating business, and getting to know its mission-driven people. Q3 was my first quarter as Peloton’s CEO and I’m pleased to share that we performed at the high end of or above guidance on our key metrics. We slightly grew Paid Connected Fitness subscriptions in this seasonally strong quarter, further improved our unit economics and once again delivered significantly positive adjusted EBITDA and free cash flow.

At the same time, we are making substantial progress in formulating our strategic plans for fiscal year 2026 and beyond. You can expect more details on that next quarter, but for now, I’d like to discuss our approach to empowering millions of Peloton members to live fit, strong, long and happy, and in so doing to deliver long-term shareholder value. Our approach begins with four objectives: improving member outcomes by delivering even better equipment, software and instruction for our members, which increases how much they value Peloton; meeting members everywhere, where they shop, work out and online, because that is how we grow our base of members; creating members for life by deepening connections with and among our members, which will extend the time they stay with us and their lifetime value; and finally, operating with business excellence, because optimizing pricing and promotions and reducing costs will enhance our competitiveness, enable us to invest in our future and deliver superior shareholder returns.

During the remainder of my prepared remarks, I will elaborate on each of these objectives to provide you a deeper understanding of our strategy in advance of a more comprehensive forward-looking reveal as we progress through my first calendar year at Peloton. There are three components to our objective of improving member outcomes. The first is delivering even better cardio experiences. Since cardio is the foundation of our business and of a balanced fitness regimen. Second, we will develop a more holistic science-backed wellness ecosystem that goes beyond cardio. Third, we will focus on becoming ever-more personal coaches to our more than 6 million members. Peloton is already the category leader in connected cardio, as evidenced by our strong NPS scores and by the millions of members who engage in our cardio disciplines.

In Q3, all our cardio hardware products achieved a Net Promoter Score above 70 and Tread exceeded 80 on a scale of minus 100 to 100. We observed 5% year-over-year growth in running workouts and 11% growth in walking workouts. Engagement with newer features such as Pace Targets on our treadmill continued to improve. In Q3, over 80% of Tread users taking a running workout used Pace Targets, up from just under 60% last quarter. We see further opportunities to keep winning cardio by delivering innovative software, hardware and even more engaging content. We’ll share more about our innovation roadmap later this calendar year. Turning to holistic wellness. In Q3, we saw a higher mix of workout time in strength disciplines quarter-over-quarter and year-over-year.

We also delivered new kettlebell content in late February and nearly 70,000 members completed kettlebell workouts by the end of the quarter. Beyond strength, meditation classes taken increased 7% year-over-year in the third quarter. Peloton has a vast library of classes. With so many to choose from, we want to help our members reach their goals by becoming a more personal coach. We are lucky at Peloton to have expert instructors, motivated members and subject to our strong privacy safeguards, a wealth of data on what works at both the individual and population levels. The starting point for personalized coaching is a plan tailored to a member’s goals. In January, we launched Personalized Plans to all members and nearly 500,000 members had started a plan by the end of Q3.

We’re pleased with the repeat engagement from members using plans and our testing shows that members who set up Personalized Plans work out more often and with more disciplines. Over time, we’ll iterate on Personalized Plans to make them more comprehensive, dynamic and data-driven, helping our members take advantage of everything Peloton offers and become the best versions of themselves. Our second strategic objective is to meet members everywhere. The very essence of Peloton, a studio-quality workout from the convenience of your home, necessitates that we work to increase our presence outside the home. We need to meet new and existing members at retail stores, gyms, hotels, online and in real life events, both in the U.S. and the other countries in which we operate.

Our Precor brand provides a great opportunity to expand the presence of Peloton in commercial gyms. We recently launched a pilot program with Precor to bring a collection of Peloton instructor-led Tread classes to select Precor treadmills. And we’ve engaged Precor to provide installation and maintenance support on Peloton equipment in gyms, given the exacting demands of gym operators and the duty cycles imposed on gym equipment. We’re also continuing to test new models to bring Peloton to gyms. In February, we opened a Peloton-branded facility at the University of Texas at Austin. In this one studio, we’ve already met nearly 1,000 new Peloton members. Turning to retail. Our micro-store test in Nashville has been encouraging, as store revenue has outpaced the average of our other North America retail showrooms despite having one-tenth the square footage.

We plan to bring on additional locations soon. In addition to our owned first-party retail channels, third-party retailers allow us to meet members where they already shop. Amazon’s seasonal sales events are a great example of moments that capture incremental hardware sales. In March, we observed year-over-year growth in the US from Amazon’s Big Spring Sale. Meeting members everywhere also includes growing our international markets, where we grew paid connected fitness subscriptions year-over-year in Q3. A prerequisite to further scaling internationally is cost effectively translating our programming, especially given our enormous output with 3,300 classes released in the quarter alone. In March, we launched AI-powered subtitles, starting with our existing languages in English, Spanish and German.

And we are now translating roughly 100 classes per day. Our third objective is to keep our members for life. This starts with delivering elevated experiences at each stage in the member lifecycle. Member satisfaction scores are our preferred way to measure the member experience. This quarter, we worked with our repair partners to pilot dedicated vans stocked with Peloton spare parts to increase first visit-repair resolution, and we are now extending this pilot to additional locations. Our service and repair MSAT was 4.5% in Q3, an improvement of 5% quarter-over-quarter and 7% year-over-year. We also introduced AI into our call centers, providing our agents with a powerful intelligent agent, while still delivering the human interactions our members expect.

In Q3, our member support MSAT score was 4.3, improving 1% quarter-over-quarter and 20% year-over-year. We see significant opportunities to continue improving our member satisfaction by optimizing the journey from the point of purchase to delivery, installation and onboarding, improving our hardware design to allow for easier installation, and repairs and reducing the number of times that members need to contact our member support teams. Beyond strengthening members’ connections with Peloton, we believe that when members feel connected to each other, they’re more likely to stay committed to their fitness regimen. We launched Team Feed in January, enabling members who have joined the team to encourage and support each other by sharing workout activity and reacting to activity from teammates.

We also launched Community Teams in the quarter, which are public, discoverable and recommended teams of up to 50,000 members. As of Q3, our members have created nearly 100,000 teams. We see higher engagement within the first month after members join a team. Last but not least, we need to operate with greater efficiency and effectiveness in revenue realization and cost reduction. To accelerate our progress, I recently made changes to our leadership team. The first change was recruiting Charles Kirol to be our COO. Charlie knows how to manufacture complex consumer-facing equipment. He also currently holds the rank of Rear Admiral in the U.S. Navy Reserves, where he is one of the senior most procurement logistics and supply corps officers. This is the type of expertise and leadership we need for our next chapter.

The second change was designating Dion Camp Sanders as our Chief Commercial Officer. I referenced earlier the importance of scaling Peloton’s presence in more places, including gyms, retail, hospitality and internationally. Dion oversees all these areas and so bears principal responsibility for our strategy of meeting members everywhere. Additionally, we have announced a search for a CIO, CMO and Chief Communications Officer. Even in advance of these changes, I want to highlight the team’s significant progress in reducing costs. We continue to track ahead of our $200 million cost restructuring plan, which is driving meaningful improvement in profitability and helping us to deleverage our balance sheet at a swift pace. We see further opportunities to reduce our costs.

We are formalizing a company-wide program to drive continuous cost improvement, while ensuring our bases for competitive differentiation remain best-in-class. Having walked you through our strategy at a high level, I’ll now turn it over to Liz to discuss Q3 results.

Liz Coddington: Thanks, Peter. We are pleased with our third quarter results as we delivered at the high end of or exceeded guidance on key metrics and continued to make meaningful progress on improving unit economics and profitability. We also advanced our marketing objectives by improving our LTV-to-CAC ratio with a disciplined approach to sales and marketing. We ended the quarter with 2.88 million Paid Connected Fitness subscriptions, reflecting a net increase of 5,000 in the quarter due to seasonally higher additions and lower churn. This represented a decline of 6% year-over-year and exceeded the high end of our guidance range by 10,000 subscriptions. Outperformance relative to guidance was driven by both favorable net churn and higher gross additions.

Average net monthly Paid Connected Fitness subscription churn was 1.2% in the third quarter, in line with Q3 of last year and an improvement of 20 basis points quarter-over-quarter. Net churn was positively impacted by strong performance in subscription cancellations and reactivations, which benefited from marketing outreach to churned members. Gross additions outperformance was driven by slightly higher first-party hardware unit sales, whilst third-party retail sales and secondary market additions were in line with expectations. We ended the third quarter with 573,000 Paid App subscriptions, inclusive of Strength+ subscriptions, reflecting a net decrease of $12,000 in the quarter. Total revenue was $624 million in the third quarter, comprising $205 million of Connected Fitness products revenue and $419 million of subscription revenue.

Total revenue was $9 million above the midpoint of our $605 million to $625 million guidance range. Connected Fitness products revenue decreased $74 million or 27% year-over-year, driven by lower sales and deliveries across all Connected Fitness product categories. Seasonally lower hardware sales in the third quarter compared to last quarter is reflected in the revenue mix of 33% Connected Fitness products revenue and 67% subscription revenue. Subscription revenue decreased $19 million or 4% year-over-year, driven by lower paid Connected Fitness subscriptions and lower paid App subscriptions, partly offset by used equipment activation fee revenue, which was introduced in the first quarter of fiscal 2025. We remain focused on acquiring new members more cost effectively, and our third quarter performance reflects the continued progress we’ve made in evolving our marketing strategy.

Our advertising and marketing spend decreased 46% year-over-year, while our Connected Fitness products revenue decreased by a comparatively lower rate of 27% year-over-year. Our Find Your Power marketing campaign that began in the holiday season continued in the third quarter, showcasing the breadth of Peloton’s offerings to men and highlighting our Tread and Strength products. Similar to Q2, in Q3, we saw both a 300-basis-points increase year-over-year in the mix of gross additions to men as well as higher new subscription attach rates from Tread sales year-over-year. These efforts drove an improvement in LTV-to-CAC of more than 30% year-over-year, achieving a ratio slightly above 2x for the quarter. Total gross profit was $318 million, an increase of $8 million or 3% year-over-year.

Total gross margin was 51%, an increase of 780 basis points year-over-year and 100 basis points above our guidance due to revenue mix shift toward the subscription segment and favorable Connected Fitness products gross margin. Connected Fitness products gross margin was 14.3%, up 1,000 basis points year-over-year, primarily driven by lower inventory write-downs, a mix shift toward higher-margin products, and lower warehousing and transportation costs, partly offset by changes in our warranty reserves. Subscription gross margin was 69%, up 90 basis points year-over-year. Total operating expenses, including restructuring and impairment expenses, were $351 million in the third quarter, a $105 million or 23% decrease year-over-year, reflecting the progress we’ve made thus far toward right-sizing our cost structure.

We continue to track ahead of our target to achieve $200 million of annualized run rate cost savings by the end of fiscal 2025. Sales and marketing expense was $106 million, a decrease of $64 million or 37% year-over-year, primarily from a decrease of $52 million in advertising and marketing spend and a $4 million decrease in personnel-related expenses, inclusive of stock-based compensation expense. General and administrative expense was $151 million, a decrease of $2 million or 1% year-over-year, driven by a $5 million decrease in settlement costs and professional service fees, a $2 million decrease in software and IT costs and a $2 million decrease in depreciation and amortization costs. These decreases were partly offset by a net increase of $7 million in personnel-related expenses, inclusive of stock-based compensation, driven primarily by $21 million of executive departure costs.

Excluding the impact of these executive departures, general and administrative expense decreased $23 million or 15% year-over-year. Research and development expenses were $60 million, a decrease of $17 million or 22% year-over-year, primarily driven by lower employee related and contractor expenses. In Q3, we recognized $33 million of impairment and restructuring expenses, of which $31 million was non-cash. The non-cash charges were primarily asset write-downs related to plans to right-size portions of our corporate office footprint. The cash charges consisted of $2 million of severance and other exit and disposal costs as we continue executing on our restructuring efforts. Adjusted EBITDA was $89 million in the third quarter, which was $4 million above the high end of our guidance range and $84 million improvement year-over-year.

We generated $95 million of free cash flow in the third quarter, a decrease of $11 million quarter-over-quarter and increase of $86 million year-over-year. As of Q3, we generated $211 million of free cash flow fiscal year to date. This was also our fifth consecutive quarter of positive adjusted EBITDA and positive free cash flow. We ended the quarter with $914 million in unrestricted cash and cash equivalents, an increase of $85 million quarter-over-quarter. We continue to make progress toward deleveraging our balance sheet as net debt reduced $312 million or 35% year-over-year to $585 million. As of Q3, trailing 12-month adjusted EBITDA of $334 million reflects an improvement of $435 million year-over-year. Overall, our third quarter performance reflects a continuation of meaningful profitability improvement, driven by higher gross margins and cost discipline.

By generating meaningful free cash flow, we are also derisking our balance sheet quickly. We are well-positioned for future growth as the leader in the connected fitness category with a high retention, high gross margin subscription business. Next, I’d like to take time to provide some context for the financial outlook for the remainder of the fiscal year. We are raising the midpoint of our full year FY ’25 guidance for key metrics, including ending paid connected fitness subscription, total revenue and adjusted EBITDA, while maintaining guidance for total gross margin. We are prioritizing these metrics along with delivering free cash flow. Our full year FY ’25 guidance range for ending Paid Connected Fitness subscriptions of $2.77 million to $2.79 million reflects a narrower range and an increase of $10,000 at the midpoint.

This increase incorporates the outperformance in Q3 and our expectations for seasonally higher net churn in Q4 as we enter the warmer months of spring and summer. Our full year FY ’25 guidance range for ending Paid App subscriptions of $540,000 to $550,000 reflects a narrower range and a decline of $30,000 at the midpoint. Our Paid App subscription guidance reflects lower gross additions, primarily due to limiting media spend and investment in attracting new corporate wellness clients. Our outlook for full year FY ’25 total revenue of $2.455 billion to $2.47 billion reflects a narrower range and an increase of $8 million at the midpoint. This increase incorporates an expectation for favorable subscription revenue, mainly driven by higher Paid Connected Fitness subscriptions.

Our FY ’25 outlook for total gross margin of 50% remains unchanged and incorporates our expectations for minimal impact from tariffs in Q4. We are raising our FY ’25 adjusted EBITDA guidance to $330 million to $350 million, an increase of $15 million at the midpoint. Our outlook reflects continued improvements in profitability, largely due to favorability in gross profit and continued operating expense savings. Before we cover free cash flow, a quick note on tariff policy, which as you know is a dynamic situation. Peloton and Precor branded equipment are currently subject to a 25% tariff on their aluminum content. Precor and Apparel products sourced from China are subject to additional tariffs. We expect our full year FY ’25 free cash flow to be in the vicinity of $250 million, which incorporates our expectations for a roughly $5 million free cash flow headwind in Q4 from the impact of tariffs.

This meaningful free cash flow generation will continue reducing net debt and deleveraging our balance sheet. Now, we’d like to open the line for Q&A.

Operator: I would like to turn back the call over to James Marsh for the first two questions. Please go ahead.

James Marsh: Great. Thank you. The first question is from Danielle in Boston. Danielle asks, how are you incorporating AI to chart the future of Peloton?

Peter Stern: Thanks for the question, Danielle. I think AI has the potential to give human superpowers. And so that’s how we’re using AI. Let me give you a few examples of that. So, we’ve been giving our member support agents, what we call, an intelligent agent to sit alongside them. And that takes their already impressive knowledge about our products and just makes it kaleidoscopic. And the AI agent also takes away some of the drudgery in their work, for example, by taking notes on the calls, so that they can focus on giving our members the human touch that they expect. Another example of that I talked about earlier is our use of AI for translation. And let me just dimensionalize this. A typical season of a TV show has somewhere, let’s say, between eight to 12 episodes.

Last quarter, Peloton produced 3,300 classes. So, a traditional approach to translation just isn’t going to cut it, but AI can allow our instructors to communicate with our members in languages beyond the ones that they naturally speak. And so, that’s another example of allowing human beings to achieve new heights. We’ve been, in the last couple of weeks, deploying Google Gemini to all of our — or most of our Peloton team members. And that allows them to use their big creative brains to do big creative thinking and let the AI agent do a lot of the work for them beyond that. And then, to me, the most exciting way that we’re using AI is by empowering our Personalized Plans. So, Personalized Plans basically take our amazing human instructors and allow them to basically create a program so that we feel more like a personal coach.

And I view that as basically a way of empowering our members with AI. We launched that in Q3 and we’re already up to nearly 0.5 million plans set up already. So, the future is bright for Peloton members with AI.

James Marsh: The next question was asked by a number of folks, including Colin from Ireland, Ben from Sweden and Jay Smith from Spain. The question is, when will Peloton expand into new markets?

Peter Stern: I love this question, because the world would be a better place with more Peloton in it. We’re currently in five countries besides the U.S., so that’s the U.K., Canada, Germany, Austria and Australia. And right now, our penetration rates in those countries are significantly lower than they are in the U.S. So, our current focus is on growing from there. And then, like in the U.S., we need to earn the right to grow before we expand further internationally. So, right now, our international team is focused on trying to dial in the right mix of first-party versus partner-led growth. And we’re also trying to drive up the efficiency of our customer acquisition. When we do that, we’re going to be able to achieve both meaningful scale and profitability.

Then, when you couple that with what I talked about a moment ago, which is AI translation of our content, which unlocks new languages, that’s what will collectively position us to expand into new countries. But in the meantime, we do see some opportunistic markets that are adjacent to some of the markets we’re already in, where they speak the same languages. And so, we’re going to look at doing some of that starting next year.

James Marsh: Great. Celine, can you open up for Q&A now?

Operator: Thank you. We will now open the line for question and answer. [Operator Instructions] And your first question comes from the line of Youssef Squali with Truist. Please go ahead.

Youssef Squali: Great. Thank you very much and good morning all. So, Peter, you’ve been on the job for five months now. I’d love to get your take on your progress on key initiatives to date relative to your initial expectations, where you’re running ahead, where you may be trailing a bit and how that informs your view on returning to revenue growth? And second, on changes to the management team and you’ve touched on this in your prepared remarks a bit, but can you elaborate a little more on the rationale of these moves now and the type of executive profiles you’re looking for to fill these vacancies? Thanks a lot.

Peter Stern: Sure, Youssef. Thanks for the questions. Let me try to take them in order. So, the first part is sort of talking a little bit about our key initiatives and how we’re doing against initial expectations. And so far so good. As I mentioned a moment ago, the first thing that we need to do is earn the right to grow. And when you look at the progress there, I think it’s quite remarkable. We’ve been able to reduce our operating costs by 23% year-over-year. Our unit economics are up over 1,000 basis points year-over-year. Our LTV-to-CAC ratio in the last quarter was kind of in our target zone. And so, we’re starting to be able to acquire new members much more cost effectively. We’re delivering real cash flow. We talked about this vicinity of a $0.25 billion this year.

And so, all of that I think on the earning the right to grow front is really encouraging. We also set some other objectives for the remainder of this fiscal year around, for example, winning in Tread, which, as you know, is two times the market size of Bike and we’ve been mixing into Tread and also increasing the percentage of new members that we get when we sell a Tread. We talked about reaching new audiences like men. And again, for the quarter, we were up 300 basis points year-over-year in our mix of men among our new subscribers. We’ve been talking about the importance of strength and becoming more of a holistic wellness provider. And I will tell you that is an area where I’ve really been very positively surprised to realize that Peloton is actually the largest strength subscription service in the world.

And that just gives me really great hope. Now, the second question you had, I think, was what are the biggest challenges or the opportunities that we’re having — going to have in getting back to growth. And there, we got to start innovating on our hardware. We’ve been doing a great job on software, but it’s all got to come together as a mix of hardware and software and incredible content that we’ve got, so that our members derive even more value from us and they’ve got reasons to buy more from Peloton. We need to meet members in more places. We talked about this, but we’ve been, to date, reducing our presence, for example, in retail and we need to find ways now cost effectively to get back into retail. And then, of course, I’ve talked about gyms and hotels, those are big opportunities, and also real-life events.

We set a goal for our content team of increasing the number of real-life events we’re in over the next year by 3x. And then last but not least, we need to increase the member lifetimes of our existing members, so we can manage churn. We’re in a really good place in the quarter. We did 1.2%, but we can always do better on that. And so, that’s going to involve everything from continuing to uplevel the quality of member support we provide and the experience we provide throughout the lifecycle to over time creating even more reasons for our members to stay loyal to us. And we need to do all of what I just described in a balanced way. So, we’re neither chasing demand nor chasing supply and ensuring that we’re growing profitably. So, I think that was the second question.

The third question was to talk a little bit more about the management changes. And I want to put all this in context. I was really lucky to join a company that already had an excellent lead team. And I’m grateful for the contributions that every one of those lead team members has made to date, including the work that Andy and Lauren have done over the last couple of years to get us to the stage that we’re at right now. Regarding the hiring of Charles Kirol as our COO, we’re specifically focused on improving our pace of innovation, the agility that we have in our supply chain, especially given the economic uncertainty that’s out there in the marketplace, the quality of our products, in particular the quality of our installs, and the cost of our connected fitness equipment, so we can appeal to even more potential new members.

And that commitment to improving every aspect of our equipment will help deliver a critical part of our magic formula. Our new CMO and I are going to be focused together on the plan to get Peloton back to top-line growth. And then, we can continue to do a better job in getting our new story out there and that’s what I’m looking for with the Chief Communications Officer. And then, we still have a lot of tech debt that we have to address as a company and that’s going to allow us to move faster and continue to reduce costs, and that’s why we’ve got a search for a CIO. I do think all of those searches are progressing quite well. And so, I hope to have some good news to report relatively soon.

Youssef Squali: Very helpful. Thanks, Peter.

Operator: Your next question comes from the line of Arpine Kocharyan with UBS. Please go ahead.

Arpine Kocharyan: Hi. Thank you so much for taking my question. Good morning. Peter, would it be possible to give us a sense of what overall impact on your business you’re seeing from kind of broader consumer slowdown and macro fears? I guess, what kind of macro scenarios are factored into your Q4 guidance, which is actually going up by about $3 million by my calculation in terms of EBITDA from what you were implying before. Have you actually seen any slowdown in any segment? What are you watching as far as kind of broader consumer health? And then, I have a quick follow-up.

Peter Stern: Thanks, Arpine. We’ve seen some ins, some outs lately, but let me pass it to Liz to talk about some more of the specifics on this.

Liz Coddington: Sure. So, going into the end of April — or end of March and very early April, we did see a little bit of softness in our sales, but we’ve actually, since then, seen things bounce back and we do feel really good about our future. And overall, our business is resilient, continues to be resilient, and we are predominantly a subscription business with a high subscription retention and a loyal member base. Now, if you think about it on the sales, fitness equipment side, we do realize that macroeconomic uncertainty could impact demand for connected fitness hardware sales because these are larger ticket purchases. But that being said, we do have lower-priced entry options, for price-sensitive customers that we can lean into.

For example, we can offer 0% financing so that customers can pay for their equipment over time. We offer Peloton-certified refurbished Bike and Bike+ at lower price points. We also offer our Bike+ rental option. And then, we have the secondary market where churned customers sell their hardware to others via peer-to-peer model. Now, regarding our subscription business, which comprises the vast majority, as I mentioned earlier, of our revenue and gross profit, that part of our business remains highly resilient with quite strong retention. I also think it’s worth pointing out that if you look at the price of our All-Access Membership, which provides access to a huge library of classes and more than 50 expert instructors at a price of $44 a month in the U.S., that’s lower than many monthly gym memberships and also lower than the prices of individual classes at some boutique fitness studios.

And then, one more point that I think is helpful just as you think about the broader fitness industry as it relates to macro, we took a look at historical GDP data related to the broader fitness industry. And if you look at it overall, it shows that our fitness industry has been quite resilient during periods of economic uncertainty. During the period of GDP decline between 2008 and 2009, external data showed that U.S. spend on fitness continued to grow and that implies that the fitness industry has some resilience to external economic factors, or to put it more plainly, the data suggests that fitness isn’t among the areas or the first places that consumers are likely to scale back when times are tough, presumably due to the value that they place on personal fitness and wellness.

Hopefully that addresses your question.

Arpine Kocharyan: That is actually super helpful. Thank you. And then, a quick follow-up. Peter, you highlighted pricing and continuation of kind of cost discipline in your strategic pillars and how you see returning to growth. Could you maybe expand on that a little bit? It seemed like the initial strategy was sort of super-serving the consumer to protect churn and maybe then focus on pricing while you kind of continue to further reduce OpEx. If you could just elaborate on that a little bit more would be very helpful.

Peter Stern: Sure, Arpine. First of all, I don’t think super-serving the member and also making sure that we get value for our products are mutually incompatible. As we said, actually I think during last quarter’s remarks, we’re taking a really hard look at pricing and that builds on work that we did earlier this fiscal year where we improved our unit economics. We took up the price of the Rower in North America and both of our Bike products internationally. And so, we’re continuing to look at our equipment pricing and, of course, taking into consideration the impact of tariffs as we do so. Regarding the subscription price increase, I don’t have anything to say today, except to note that it’s been almost three years since we did a subscription price increase and we’ve never done one internationally.

We feel really good about the value we provide. So, it’s something that we continue to take a look at. If we do decide to make changes on that in the future, we’ll comment on that when the time is right.

Arpine Kocharyan: Thank you very much.

Operator: And your next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead.

Doug Anmuth: Thanks so much for taking the questions. I have two. First, on the brand, the brand has been through a lot of change over the past several years and there have also been a number of CMO changes as well. Just curious how you think about improving the marketing strategy overall and if you have thoughts there. I know that obviously the role you’re still trying to fill. And then secondly, [Technical Difficulty] some of the puts and takes around fiscal ’26 free cash flow just following the big move in ’25? Thanks.

Liz Coddington: I’m sorry, Doug. You cut out a little bit on the end of your question. Would you mind repeating the part that you were directing at me? Sorry about that.

Doug Anmuth: Yes, absolutely. Sorry. I know it’s early, but looking for some of the puts and takes around fiscal ’26 free cash flow just following the big move up in ’25?

Liz Coddington: Thank you.

Peter Stern: So, regarding brand, Doug, thanks, I’ll start and talk a little bit about what we’re doing on marketing. What we’ve been doing basically is taking a real holistic look at every aspect of marketing. So, elevating the customer lifecycle all the way from awareness through to some of the things that we haven’t really done as much as a company like saves. And all of that discipline, we think, will give us a boost in terms of the subscriber acquisition and retention we get. The team is really sophisticated in measurement and in making sure that we spend our marketing in pretty optimal ways. And so, what we’re doing there as we start to look at 2026 is plan holistically across everything from our brand to performance marketing to pricing, which we talked about a moment ago, to the partnerships that we invest in to the promotions that we take and ensure that we’re allocating our dollars in the most efficient way we can across all of those levers, so that we can acquire new members in ways that are cost effective and start to get us back to growth.

We’ve also been doing things like using media mix models and holdout tests, so that we can continue to build our knowledge base about what works in a space that’s really — it’s challenging, right, to get people to take that step to start an exercise regimen. And so, the way that we do marketing makes a really big difference there. In terms of brand versus performance marketing, that’s something that is sort of implicit in all of this. I think we need to keep doing both of those and the two of them complement each other. So, that’s a little bit about what we’re doing on the marketing strategy. I’ll pass it to Liz to talk about ’26.

Liz Coddington: Yes. So first, I want to comment a little bit about where we were at year-to-date for fiscal ’25. So, year-to-date, we’ve delivered $210 million in free cash flow. And we had set — in last quarter when we set our guidance, we talked about delivering a minimum of $200 million in free cash flow in the full year. So, we continue to outperform a bit on our expectations and have greater visibility on our free cash flow as we progress through the year. And we now expect that we will end the year with roughly in the vicinity of $250 million in free cash flow for fiscal ’25, which given where we were a year ago, is quite a tremendous improvement year-over-year and massively from two years ago. Now, I’m not going to provide you with any sort of guidance around fiscal ’26, but it is worth noting a few things.

In fiscal ’25, we are benefiting from a net working capital tailwind associated with optimizing our inventory levels. And we do expect to have a modest tailwind going into fiscal ’26, but not nearly as much as we observed at fiscal 2025. But we do expect for the year to generate meaningful positive free cash flow in fiscal ’25 as we are doing in FY ’25.

Doug Anmuth: Got it. Meaningful positive free cash flow in fiscal ’26, you’re saying, as in ’25?

Liz Coddington: Sorry, ’26. Yeah, ’26 as in ’25. Sorry for that.

Doug Anmuth: No problem. Thank you so much. Appreciate it.

Operator: And your next question comes from the line of [Brian Nagel] (ph) with Oppenheimer. Please go ahead.

Unidentified Analyst: Hi, good morning. Thanks for taking my questions. So, the first question I want to ask, Peter, I mean, it’s longer-term in nature and looking at your results today and over the last several quarters, you’ve done a great job of kind of stabilizing business, controlling costs. But how are you thinking about or how should we think about the return to positive top-line trends and sort of say the building blocks to get in there?

Peter Stern: Yeah. Thanks, [Ryan] (ph). That’s the work that we’ve been doing on developing the strategy and the plans for the next few years. So, let me just try to translate what we shared in our letter and in my remarks into the math of actually getting back to positive trends. So, the first part of the strategy that you heard me talk about was improving member outcomes. And what that does is deliver more value to our members and that’s going to translate into members being willing to pay more for Peloton and buying more things from us. And so, you can look at that as the key to increasing average revenue per member. The second part of the strategy is meeting members in more places. And by being in retail and gyms and commercial and growing internationally and being in more real-life events and having a greater presence online, all of that adds up to sort of more [at best] (ph), more opportunities for us to grow members.

So, you can view that as driving the number of members up. The third part of the strategy that you heard was creating members for life, and that’s about increasing longevity, which translates into lower churn and higher customer lifetime value. So, focusing on the top-line growth, essentially our whole equation is basically average revenue per member, times, number of members, times, years per member, that equals our long-term revenue. And so, that’s basically the bridge from the strategy that I shared with you to how we drive growth.

Unidentified Analyst: That’s very helpful. I appreciate it. And then, my follow-up question on the balance sheet. So, again, you’ve done — you’re now sustained — you’re generating sustained free cash flow. We’ve seen that the leverage ratio has come down. So, as we think about the balance sheet going forward, do you think it will be more of kind of a natural deleverage, or are you expecting to take more aggressive near-term steps?

Liz Coddington: So, I can take that one. So, first of all, the health of our balance sheet is something that we are particularly proud of relative to where we were. We were about a year ago, if you think about it, we were approaching maturity while we had to complete a $1.35 billion refinancing of our balance sheet, which has since been done. And then since then, we’ve grown our trailing 12-month adjusted EBITDA to $334 million, which is an improvement, a massive improvement of over $435 million year-over-year. And then, we have also generated over $230 million of free cash flow over the past 12 months. So, we’re really pleased with that progress because as you pointed out, it has allowed us to deleverage our balance sheet. Our net debt has decreased $312 million or 35% year-over-year as of Q3.

And then, we also ended the quarter with $914 million in unrestricted cash and cash equivalents. Now, a few things to note, we are mindful of the fact that we do have about $200 million in convertible notes that are due in February of next year. And so, we have ample cash on our balance sheet to be able to pay them. We’re not planning to pay them early at this point in time as they are 0% coupon. But as our balance sheet becomes healthier and healthier, we have more optionality around capital allocation — or we likely will over time, we believe we have more cash on our balance sheet right now than we need to run the business. Our top priority is to continue to deleverage, because we believe that’s the best way for us to create more optionality now in regard to capital allocation and that will also help us reduce our cost of capital over time.

And so that would include things like paying down our debt, investing more in strategic initiatives to grow the business, which Peter talked about all these initiatives that we have. There’s also the potential over time to consider any inorganic growth opportunities that we might want to pursue. And then, eventually, at some point, although we are restricted right now with our loan covenants to offer capital return alternatives through dividends and share buybacks.

Unidentified Analyst: Very helpful. I appreciate it. Thank you.

Operator: And your next question comes from the line of Simeon Siegel with BMO Capital Markets. Please go ahead.

Simeon Siegel: Thanks. I was kind of hoping James would introduce me as Simeon from New York, but I’ll take it. Good morning, everyone. Nice progress on improving the health of the business. Peter, so, if I’m looking at this, your members, I think, are — total members are declining faster than the cash — than the CF Paid subs, so that those two metrics you gave. Do you think you’re seeing less intentional members peeling off and the engagement and strength of the remaining users, I guess, are inherently stronger? And if so, what would the implications be on churn, maybe potential ability to take price, anything else? Just curious if you’re ending up with a smaller but stronger user base. And if so, what initiatives that might empower you to implement?

And then, Liz, the used equipment activation fee, can you quantify that at all? Just if I’m looking at this correctly, I think that Paid CF subs are up slightly quarter-over-quarter, but the sub revenue is down slightly. So just trying to think through what other moving pieces might be in that sub revenue line, maybe it’s the App declines, just anything else we should keep in mind? Thanks, guys.

Peter Stern: Thanks, Simeon. I’ll start us off. I don’t think we’re seeing it the same way you’re seeing in terms of total members declining at a different rate from the subscriptions, but nonetheless, what we’re seeing basically year-over-year is consistency around our churn percentage. And I think it was pretty strong in the last quarter at 1.2%. And we do continue to benefit from the tenure effect. We just have some long-standing very loyal members in the business. So, in general, we’re just focused right now on making sure that we can serve those members the best we possibly can and build the value that they perceive in the company. And we are seeing, if anything, really positive signs because our NPS scores have risen in some cases by double-digits over the last year.

So that does give us confidence in the value that we’re delivering. Again, I’m not going to talk anymore about what we do with that except to keep focusing on improving it. With that, I’ll pass to Liz.

Liz Coddington: So, I just want to correct one thing. So, the members are down 8% versus subscriptions down 6%, but you have to remember that members is also impacted by App. So, our App, we only have one member per subscriber within the App. And that’s — and App members are down, down more, right? There — it’s not just our Connected Fitness members. When you’re looking at that, you have to look — you’re including our App members as well. So, I did want to just correct that one point. Now, the question about activation fees, so the used equipment activation fee, just for everybody’s reference, is a fee that we charge when a subscriber joins us through the secondary market and purchase their hardware from someone else, not through Peloton and not through one of our third-party retail partners.

We actually have been pleased with the secondary market activation fee. It has added revenue for the business. And it’s a positive for us because we get that revenue upfront and we are actually seeing as a result of that slightly improved cohort of churn among secondary subscribers, presumably because they’re investing a little bit more when they pay that fee, but it is a benefit to us both in terms of revenue and free cash flow. I also want to remind you that in our subscription revenue, we also include things like our content licensing revenue as well. So, it’s not just purely subscribers that you’re looking in there. So, our Lululemon would be in there, any Google Fitbit revenue would be in there, anything of that nature where we are licensing some of our content to other companies.

Simeon Siegel: Sounds good. Thanks a lot, guys. Best of luck for the rest of the year.

Operator: And that concludes our question-and-answer session. I will now turn the conference back over to Peter Stern for closing remarks.

Peter Stern: Thank you, operator. Before we close, I want to take a moment to share one of the most important things I’ve tried to do since joining Peloton, and that’s to understand what works so we can do more of that. Today, we discussed a number of things that are working, strength content and features, and solutions around holistic wellness like meditation. Our micro-store is driving more revenue than our average showroom at a fraction of the size, cost and lease commitment. Our workout area at the University of Texas is helping us reach more members. Teams are growing fast with nearly 100,000 already, and our reactivation efforts have been successful. We’re also shifting perceptions of our content and our product offerings, extending beyond the Bike with Tread, Running, Walking and Strength.

As we unveil our strategic plans for fiscal year ’26 and beyond, you should expect to hear more from us about doing more of what’s working. And we know many of you are not just shareholders, but also among our most avid members. So, here are your assignments. Check out our kettlebell strength workouts and our exclusive lineup of classes featuring DJs from Armin van Buuren’s Armada Music. And looking forward, try our new series, including progressive push for cycling and mobility and strength for longevity. As the weather improves, try live outdoor every Saturday at 10:30 AM Eastern. Olivia will host this week’s run with a live leaderboard. And last, stay tuned for pace targets for walking and hiking coming to Tread this quarter. Thank you all for joining today’s call.

I look forward to sharing more about our plans in the coming months. In the meantime, see you on the leaderboard.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.