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Operator: Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Peloton Interactive First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I will now turn the call over to James Marsh, SVP of Investor Relations. Please go ahead.

James Marsh: Thank you, operator. Good afternoon, and welcome to Peloton’s First Quarter Fiscal 2026 Conference Call. Joining today’s call are Peloton 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 press release, both of which can be found on our Investor Relations website, for a discussion of our 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 press release. I’ll now turn the call over to Peter.

Peter Stern: Thank you, James. Good afternoon, everyone, and thank you for joining today’s call. Before I summarize our performance in Q1, I’d like to address our voluntary recall announced earlier today. As previously disclosed, we have received a small number of reports of an Original Series Bike+ seat post breaking during use. As of today, we are aware of 3 such incidents. The well-being of our members is our highest priority. And therefore, in cooperation with the U.S. Consumer Product Safety Commission and Health Canada, we are voluntarily recalling approximately 833,000 units in the U.S. and approximately 44,800 units in Canada of the Original Series Bike+ model. These units were manufactured from December 2019 to July 2022 and sold beginning in 2020 to April 2025.

We are offering an updated self-installable seat post replacement, which is the CPSC approved remedy. Impacted members will receive an e-mail with order instructions and the notification will also appear on their Bike+ touchscreen. This recall does not impact any other equipment models, including our new Cross Training Series Bike and Bike+. The anticipated financial impact is reflected in our results and our guidance, including the increases to our adjusted EBITDA guidance and minimum free cash flow target. Liz will share more details about the financial impact later in this call. Turning our attention to the first quarter of the fiscal year. I am proud of Peloton. In the quarter leading up to our October 1 innovation reveal, our team once again successfully executed on our business priorities, progressed our financial results and delivered positive human impact at scale.

As a result, our performance came in above the guidance range on most key financial metrics in this seasonally slower quarter for fitness equipment sales, and we continue to see year-over-year growth in average workout time per Connected Fitness subscription. Looking from the outside in during the first quarter, it may have felt like business as usual, as we continue to demonstrate financial discipline and established a strong foundation for achieving our full year financial guidance. But behind the scenes, the quarter was anything but. Throughout the quarter, the Peloton team was hard at work, setting the stage for our new chapter by innovating on every aspect of our magic formula of premium equipment, software powered by AI, world-class instructors and a deeply engaged community.

In last quarter’s remarks, I laid out Peloton’s strategy. The first and most foundational part of that strategy is our commitment to improving member outcomes. To that end, on October 1, we simultaneously unveiled and began shipping the most significant product update in our history with an all-new equipment lineup, the Peloton Cross Training Series and the Peloton Pro series. Our understanding of human health has progressed since Peloton took the world by storm with the introduction of the original bike. And today, we know that adults need to pursue a combination of cardio, strength and more to achieve their wellness goals. To that end, all Peloton products now feature advanced swivel screens, allowing members to easily transition between cardio and strength to complete floor workouts, including strength, yoga, Pilates and stretching.

Our new Plus line includes an advanced computer vision movement tracking camera that counts your reps, corrects your form and offers weight suggestions in real time, along with voice control, enabling members to adjust weights, skip moves or pause their workout without touching a thing. We’ve made several additional upgrades, including improvements in audio across the board and featuring sound by Sonos in our Plus line for a studio-like experience. On October 1, we also launched Peloton IQ, which gives every Peloton member a personalized coach regardless of whether they own our new Cross Training Series, our Original Series or work out with a Peloton app subscription. Peloton IQ uses AI to turn years of insights and data points, including your goals, class activity and health stats from wearable devices into personal training guidance.

In so doing, Peloton IQ makes some of the benefits of personal training accessible to millions of people, providing individual insights and recommendations based on members’ intentions, preferences, level of fitness and performance. Since launching the Cross Training Series and Peloton IQ, we’ve observed a favorable mix shift toward our more premium products, including a mix shift toward Tread sales and toward our Plus line of products, the latter of which we believe is driven by excitement around the advanced computer vision features. Beyond our work on cardio and strength, the trust we’ve built with our community gives us an opportunity to address an even broader array of wellness domains. In September, we acquired Breathwrk, an award-winning app specializing in breathing exercises, which have been shown to positively impact sleep, focus, blood pressure, heart rate variability, stress and anxiety.

The Breathwrk subscription app makes mental fitness accessible to all, and now our members can enjoy Breathwrk as part of their All-Access or App+ subscriptions. We’ll have more to share over time as we evolve in this important category. We also announced a first-of-its-kind collaboration with the Hospital for Special Surgery, the world leader in orthopedics to offer Peloton members access to expert care for joint and muscle pain, injuries and orthopedic conditions. We’ve co-developed class collections with HSS medical experts, recently launching the first 5 on preventing some of the most common types of injuries. We’re also committed to meeting members where they are in their life stages. In response to member demand, we started with menopause, a life stage that impacts the majority of our members at some point in their lives.

We’re extremely proud of our partnership with Respin Health, founded by Halle Berry to revolutionize menopause care with an integrated holistic approach, and have just launched a study with over 1,000 women to measure the benefits of targeted movement strategies and other evidence-based lifestyle interventions. These findings will power our evolving evidence-based exercise programming and menopause support. The second part of our strategy is to meet members everywhere. We have made great progress on this front over the past few weeks. We now have 10 micro stores in the U.S., up from 1 prior to Q1. And we also announced a new retail partnership with Johnson Fitness & Wellness, the nation’s largest independent fitness retailer with 100 locations across the U.S. We now have a physical retail presence in 46 states, while in Australia, we launched a retail presence in 11 franchise locations throughout the country.

Our expanded retail footprint positions us well for the holiday season, providing opportunities for consumers to test and experience our new innovations. Our commercial business unit continues to show strong performance and is an area in which we are also innovating. The new Peloton Pro series offers a complete lineup of Peloton equipment for commercial environments such as hotel gyms and multi-residential buildings, and includes the Tread+ Pro, Peloton’s first ever commercial treadmill. And Precor launched its new commercial Tread, the Breakaway. This new slat belt treadmill includes a sled-style push mode, cadence coach and a new console design. Peloton also recently became the primary fitness partner powering Utah City, a 700-acre mixed-use development outside of Salt Lake City.

And now every residential building in Utah City will feature a Peloton space that includes several pieces of Peloton equipment and accessories for residents. The third part of our strategy is to make members for life. Celebrating achievement is crucial for sticking with any program. So last month, we launched Club Peloton, our first loyalty and recognition program. As members engage with our platform, they progress through levels from bronze to legend, unlocking exclusive content recognition and rewards. Already more than 500,000 members have engaged with Club Peloton. On October 1, we also introduced official Peloton teams led by Peloton instructors, including Move for Life, Menopause, HYROX and Cross Training. These teams provide a forum for members to connect, discuss goals and learn from each other and from experts, further elevating Peloton’s community.

Since October 1, engagement with teams is up nearly 50%. Ultimately, all these strategic initiatives, product innovation, wellness expansion and new distribution are underpinned by the fourth part of our strategy, our commitment to operational discipline and business excellence. Our full year guidance announced in August included targeted initiatives to improve monetization, such as the introduction of expert assembly fees. These were implemented within the quarter and exceeded our expectations. At the same time, our cost reduction plans remain on track. Perhaps most important, we remain confident in our ability to inflect toward revenue growth as the fiscal year progresses, building on the actions we took in Q1 and on October 1. We continue to monitor and respond to evolving tariff policies and broader changes in the macro environment and consumer spending.

While those external factors are real, our focus remains on execution and being the best fitness and wellness partner to our members. We believe we offer an unmatched ecosystem of products and experiences to help our members invest in their health and well-being. As we enter this important holiday season, Peloton is exceptionally well positioned with great new equipment, Peloton IQ, new wellness partnerships, expanded distribution, a resurgent commercial business unit, new loyalty features, successful monetization changes and improvements in our financial performance. I’ll now pass it over to Liz, who will share more details about our Q1 financial results and guidance for the remainder of the year.

Liz Coddington: Thanks, Peter. I want to begin with our first quarter financial results in which we exceeded the high end of our guidance on most key metrics. We ended the first quarter with 2.732 million Paid Connected Fitness Subscriptions, reflecting a decrease of 6% year-over-year. Q1 is typically a seasonally lower quarter for hardware sales and seasonally higher quarter for churn. We exceeded the high end of our guidance range by 2,000, driven by higher-than-expected gross additions. Connected Fitness gross additions outperformed our expectations due to higher unit sales of our Connected Fitness products in both first-party and third-party retail channels. Average net monthly Paid Connected Fitness Subscription churn was 1.6%, an improvement of 20 basis points both year-over-year and 10 basis points quarter-over-quarter, in line with our expectations.

We ended the quarter with 542,000 ending paid app subscriptions, inclusive of subscriptions from our acquisition of Breathwrk. Total revenue was $551 million in Q1, comprising $152 million of Connected Fitness products revenue and $398 million of subscription revenue, outperforming the high end of our guidance range by $6 million. Outperformance relative to guidance was primarily driven by Connected Fitness products revenue from higher-than-expected hardware sales of both Peloton and Precor products. Connected Fitness products revenue decreased $7 million or 5% year-over-year, driven by lower equipment sales and deliveries, partially offset by a mix toward higher-priced products. Subscription revenue decreased $28 million or 7% year-over-year, primarily driven by lower ending Paid Connected Fitness Subscriptions, lower content licensing revenue and lower ending paid app subscriptions, partly offset by used equipment activation fee revenue, which was introduced in late August of fiscal 2025.

Total gross profit was $284 million in Q1, a decrease of $20 million or 7% year-over-year. Total gross margin was 51.5%, a decrease of 30 basis points year-over-year and 50 basis points below our guidance of 52%. Total gross margin was negatively impacted by a $13.5 million accrual for Bike+ seat post inventory costs this quarter, in addition to $3 million we accrued in the prior quarter, representing a total estimated impact of $16.5 million. Excluding this $13.5 million charge in Q1, total gross margin would have been 54% or 200 basis points above our Q1 guidance. Beginning in the first quarter of fiscal 2026, we began assigning executive compensation and other corporate overhead expenses associated with our corporate facilities as we focus on driving more accountability for costs at a functional level.

Prior to fiscal 2026, these costs were all recorded in G&A, but starting in Q1 are assigned across cost of goods sold, sales and marketing, G&A and R&D. Connected Fitness products gross margin was 6.9%, a decrease of 230 basis points year-over-year, primarily driven by the Bike+ seat post inventory accrual I just noted. Excluding the inventory accrual, Connected Fitness products gross margin would have been 15.8%, an improvement of 660 basis points year-over-year, driven by a mix shift toward higher-margin products, lower warranty costs, a decrease in inventory reserves and lower warehousing and distribution costs. Subscription gross margin was 68.6%, an increase of 80 basis points year-over-year. Total operating expenses, excluding restructuring, impairment and supplier settlement expenses were $230 million in Q1, a decrease of $30 million or 12% year-over-year, reflecting the continued progress we’ve made in rightsizing our cost structure as well as a reduction to advertising expenses in Q1 ahead of our hardware portfolio refresh announced on October 1.

We are on track to achieve our target to deliver at least $100 million of run rate cost savings by the end of fiscal 2026. Sales and marketing expenses were $67 million in Q1, a decrease of $15 million or 18% year-over-year, primarily driven by decreases in acquisition, brand and creative marketing spend as well as a decrease in retail showroom expenses. As of the end of Q1, we had 7 legacy retail showrooms remaining. Research and development expenses were $62 million in Q1, an increase of $4 million or 6% year-over-year, primarily driven by cost assignments from G&A, which were partially offset by lower product development costs from a reduction in contractor spend. General and administrative expenses were $101 million in Q1, a decrease of $19 million or 16% year-over-year, primarily driven by cost assignments to other functional areas and lower professional fees.

This quarter, we recognized $13 million of impairment and restructuring expenses, of which $8 million was noncash. The noncash charges were primarily related to asset write-downs associated with accelerated retail store closures, while the remaining $5 million of cash charges were primarily related to exit and disposal costs and professional fees. Adjusted EBITDA was $118 million in Q1, which was a $2 million or 2% improvement year-over-year and $18 million above the high end of our guidance range. To note, the $13.5 million accrual for Bike+ seat post inventory costs was not added back to adjusted EBITDA. We generated $67 million of free cash flow in Q1, an increase of $57 million year-over-year, significantly outperforming our prior expectation for slightly negative cash flow in the quarter.

Free cash flow benefited from tariff-related favorability associated with both lower-than-expected tariff rates and delayed timing for certain tariffs going into effect, lower operating costs associated with realizing indirect cost savings faster than anticipated, revenue favorability and other smaller impacts. Q1 free cash flow included roughly $30 million of timing favorability. We ended Q1 with $1.104 billion in unrestricted cash and cash equivalents, an increase of $64 million quarter-over-quarter. Net debt was $395 million, a decrease of $382 million or 49% year-over-year. Overall, our first quarter profitability performance has enabled us to continue deleveraging our balance sheet. Our gross leverage ratio, defined as our gross principal debt outstanding divided by trailing 12-month adjusted EBITDA was 3.8 in Q1, a substantial improvement from the 14 in Q1 of last year.

Similarly, our net leverage ratio, defined as gross principal debt outstanding net of cash and cash equivalents divided by trailing 12-month adjusted EBITDA was 1.1 in Q1, down from 7.5 in Q1 of last year. We believe we have more cash on the balance sheet today than we need to run the business and are evaluating opportunities to optimize our capital structure over time. In February 2026, roughly $200 million of 0% convertible notes will come due, and we intend to pay them down at that time. It’s also worth noting our $1 billion term loan has a 1% call premium through May of 2026. We are mindful of the timing of when this call premium expires as we evaluate our options. We expect a refinancing to deliver a lower cost of capital and more flexibility to our capital allocation strategy.

Next, I’d like to share context for our financial outlook for Q2 and the remainder of the fiscal year. Our full year fiscal 2026 revenue outlook of $2.4 billion to $2.5 billion is unchanged from what we provided last quarter and reflects a 2% revenue decrease year-over-year at the midpoint. Our recently announced changes to subscription pricing were incorporated into our previous full year outlook. And so far, the impact of those changes has been in line with our expectations. We are pleased that our members continue to see the value in their Peloton membership and the recently added benefits like Peloton IQ, Club Peloton, Breathwrk and more. As we noted last quarter, our full year guidance anticipates an inflection toward growth during certain quarters within the fiscal year.

Our Q2 revenue outlook of $665 million to $685 million reflects this expectation with a slight increase of 0.2% year-over-year at the midpoint and an increase of 23% quarter-over-quarter as a result of seasonally higher equipment sales and recent pricing changes. We are raising our full year fiscal 2026 guidance for total gross margin to 52%, which is an increase of 100 basis points from our prior guidance and an improvement of 110 basis points year-over-year, primarily driven by favorable tariff rates relative to our prior full year guidance as policy continues to evolve, a favorable mix of sales toward higher-margin products and our continued focus on driving cost efficiency to our supply chain. These tailwinds are partially offset by the accrual for the Bike+ seat post inventory impact in Q1.

Q2 total gross margin is expected to be roughly 49%, down 250 basis points quarter-over-quarter due to an expected seasonally higher mix of Connected Fitness products revenue. We are raising our full year fiscal 2026 guidance for adjusted EBITDA to $425 million to $475 million, reflecting an increase of $25 million from our prior guidance and an improvement of 12% year-over-year at the midpoint, driven by favorable gross profit and operating expenses, reflecting our expectation for realizing cost savings faster than previously anticipated. To note, we are increasing our full year guidance by $25 million, notwithstanding the $13.5 million accrual for Bike+ seat post inventory costs in Q1. Our Q2 outlook for adjusted EBITDA of $55 million to $75 million reflects an increase of 11% year-over-year at the midpoint, but a decrease of 45% quarter-over-quarter due to seasonally higher marketing spend in Q2.

Our Q2 guidance for ending Paid Connected Fitness Subscriptions of 2.64 million to 2.67 million reflects a decrease of 8% year-over-year at the midpoint. Average net monthly Paid Connected Fitness Subscription churn is expected to increase year-over-year and quarter-over-quarter due to an increase in subscription cancellations and pauses following our pricing changes announced on October 1. However, our guidance reflects an expectation that our net churn rate will be flat year-over-year in full year fiscal 2026. We also expect gross additions to decrease year-over-year as a result of an expected year-over-year decrease in hardware sales. Generating meaningful free cash flow remains a top priority. We are raising our full year fiscal 2026 minimum free cash flow target by $50 million to at least $250 million, reflecting the benefit of lower tariffs, both from lower rates and later-than-expected implementation timing and our progress on realizing indirect cost savings sooner.

This target reflects our expectations for a roughly $45 million impact to free cash flow as a result of tariff exposure, which remains a dynamic situation that may change in the future. Overall, our guidance for Q2 and the remainder of the fiscal year reflects continued improvement in profitability and progress toward revenue growth. We still expect to achieve the important milestone of positive operating income on a full year basis in fiscal 2026. Now we’d like to open the line for Q&A.

James Marsh: Thanks, Liz. We’ll begin the Q&A process this evening by taking a couple of questions from investors that send in their topics in advance. The first question will come from Bill, leaderboard name Pizza is Life. Bill asked, what is the market opportunity for the new commercial business unit? How will you be approaching the new geographical markets? And will you successfully integrate Precor and Peloton for a unified B2B offering? Peter?

Peter Stern: Bill, I love your leaderboard name. Strategically, our commercial business unit is set up to win. First, the market opportunity is large, and we still have very low share. And when I talk to gym operators, they all tell me that there’s only one brand that consumers ask for by name, and that’s Peloton. Second, the combination of Precor and Peloton just makes sense. You think about Precor’s brawn coming together with Peloton’s brains, and you’ve got something no one else can match. And let me explain what I mean by that because we’ve got plenty of smart people over on the Precor team. Precor builds equipment that is truly commercial grade. It’s the kind of stuff that’s built to be run like 12 hours a day. And they also have the installation and service capabilities for commercial establishments.

Peloton has software, content, community that’s absolutely unmatched. You bring those things together, and we’ve got every reason to be able to win. Bill, you talked also about a third point I’d raise, which is international. Peloton is only in 6 countries right now, but Precor is in over 60 countries. So that opens up opportunities for Peloton to enter these new markets in ways that build on existing distribution and relationships that we’ve already got, starting with B2B. So strategically, we’re in a great place. It’s just an execution challenge from here, and you can already see us executing on this. For example, Precor now provides all the installation and service for Peloton commercial locations, including hotels. Last month, we announced Precor’s first slated tread, the Breakaway with a new smarter, more powerful screen and Peloton’s first-ever commercial tread initially for hospitality and for multi-dwelling units was launched as part of the new Peloton Pro line.

So you add all of this up, I feel great about where we are with our commercial business unit, and I’m confident we’re going to be able to bring this together and deliver an industry-leading set of products and solutions on behalf of commercial clients.

James Marsh: Great. Thanks, Peter. Our second question comes from Christopher in San Francisco, leaderboard named Create SF. Are there any plans in the next 5 years to provide for dividends? Liz, maybe you can handle this one.

Liz Coddington: Sure. So while this question is specifically asking about offering dividends. It might actually be more helpful if I take a step back and update you all on our current capital structure and talk through our perspective on overall capital allocation strategy. As many of you may recall, in May of 2025, we were approaching a maturity wall, and we successfully completed a $1.35 billion refinancing of our balance sheet. Now following our refinancing, we have generated meaningful free cash flow with $380 million of free cash flow in the last 12 months. And we’re really proud of the work that we’ve done to really strengthen and quickly deleverage our balance sheet with net debt decreasing by $382 million or 49% year-on-year.

Our net leverage ratio really reflects the great work that the company has done to get healthy. And the deleveraging story really is a positive for our company, and it should open doors for us to be able to potentially lower interest expense in the future and also invest in strategic uses of our cash. We do think it’s still a bit early to discuss a specific framework for capital allocation, but we do expect that it will become a focus when we pursue a refinancing at the right time. Now there are a few things that I would like to highlight. We talked about this earlier, but we believe there is more cash on our balance sheet than we need to run the business today and that we are a much better credit today than when we last refinanced. Our current priority is continuing to deleverage as we believe this will maximize the optionality for us in the future and reduce our cost of capital.

Now when we think about appropriate range for our gross leverage ratio targets, we’re thinking about them in terms of established framework, such as the public ratings framework. Ideally, we would want to align with companies that maintain single — high single B to BB ratings, and we think a gross debt-to-EBITDA ratio in the range of 2x to 4x is reflective of a good sustainable structure. So with that continued deleveraging, we expect to have more capital allocation alternatives available to us, and those could include things like buying back stock, reinvesting in the business to drive organic growth, pursuing potential inorganic growth opportunities or going back to your original question, offering cash dividends.

James Marsh: Great. Karen, can you open it up to Q&A at this stage?

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Operator: [Operator Instructions] The first question comes from Andrew Boone from Citizens Bank.

Andrew Boone: I would love to just ask about the recall. Can you guys compare this to the initial recall and just help us understand why those 2 recalls weren’t combined?

Peter Stern: Sure, Andrew. I’ll cover that. This is Peter. As I’m sure you can imagine, decisions around recalls are really complicated and depend on a lot of factors. But what I can say is that the Original Series Bike and the Original Series Bike+ are different models and they’re physically different pieces of equipment. And at the time of the bike seat post recall, there were no incidents. There was 0 incidents relating to the Bike+.

Andrew Boone: Okay. And then just as a follow-up, I’d love to understand if there are any derivative impacts from the recall around the business, the brand. Can you guys, again, compare this to the previous recall? Just help us to understand if there are any ripples that we should be thinking about the broader business?

Liz Coddington: Sure. So I can take this one. So let me just first talk about the cost impact. We talked in our prepared remarks about the $13.5 million accrual that we booked last — in Q1 and in addition to the $3 million that we accrued in Q4, which is a $16.5 million impact. And we do believe that, that is that we made the appropriate assessments and judgments around sizing that accrual, but estimates are forward-looking and actual results may differ. For subscriptions, which I think is one of the things that you were asking about comparing to the prior recall, based on behaviors from our prior seat post recall that was in May of 2023 and which applied only to our original bike models, our Q2 guidance incorporates a small anticipated headwind to Paid Connected Fitness net churn, and that’s driven by elevated subscription pauses.

We expect the majority of these incremental pauses to be on pause in Q3. And so that nets out to a small drag on subscriptions for the year. Now in terms of revenue impact, unlike our prior seat post recall, this recall affects bikes manufactured during a specific period that we no longer sell. And we already have replacement seat post inventory available to begin to fulfill anticipated replacement orders. And the overall revenue impact is expected to be immaterial and is reflected in our full year guidance.

Operator: The next question comes from Arpine Kocharyan from UBS.

Arpine Kocharyan: So I’m going to combine 2 questions into one, if I may. And you alluded to this in your prepared remarks, but you’re raising EBITDA and your revenue guidance is unchanged, which tells me that there’s no major change in your thinking as it relates to underlying churn assumptions from before you raised pricing. First, is that a correct read? And secondly, if you could talk through your thinking of how you see churn normalizing? I think you saw churn normalizing within 8, 12 months post price increase back in 2022. Could you maybe talk about how your base of subscribers is different today versus ’22 kind of emerging from COVID lockdown. On the other hand, you’ve been targeting maybe segments of the market that have underlying churn a bit higher through your rental program and the secondary market. Just if you could talk through what you see different today would be super helpful.

Peter Stern: Yes. Arpine, this is Peter. I’ll get us started on this, and then Liz feel free to jump in as always. As Liz said, the impact of the price increase in terms of churn has been in line with our expectations, and we’re pleased with how it’s going. Just to give you a sense of kind of the timing of the thing, we saw elevated cancellations in the first week or so after the announcement. And that was, as you can imagine, mostly concentrated in the first couple of days, and it was concentrated also in members who were more inactive versus our most active members, as you’d also imagine. And some of those people were likely to cancel at some point anyway. Since then, our churn has mostly moderated back to normal. As we indicated on our remarks here, our churn was actually down in Q1.

That was the second quarter in a row that, that had taken place. And so we feel pretty good about the overall churn dynamics associated with the business. We have an increasingly tenured base of loyal members at this stage. And so if we step back and look at what to expect over the course of the year, the higher cancellations and pauses as a result of the price increase will — that will manifest as higher churn in Q2. Then we should see an improvement in Q3, especially because we’ll be reactivating some of the people who paused rather than canceled in Q2. And if we look at the year overall, we’re projecting to see overall flat churn on a percentage basis over the entire year despite the tick up in Q2, and that’s based on our confidence in the relationship that we have with our members.

Yes, we have a very — a different composition of our members. We have more people who are on programs like rental, for example, are coming from the secondary market, which tend to have higher churn, but that’s offset by the fact that we have more — much more tenured members and that tenure effect leads to lower churn. So all of those things add up to us feeling the level of confidence we’ve expressed about churn. Liz, do you want to jump there?

Liz Coddington: Yes, I could just — I was just going to add a little bit about EBITDA. So our EBITDA for the year, we did — it reflects the outperformance that we had in Q1 because we are taking it up relative to our prior guidance by about $25 million on the full year basis. And so we outperformed in Q1. And then we do expect to see continued tariff favorability associated with the timing delays and lower rates than we had anticipated when we set our prior guidance. And then we also expect that we will realize some of the cost savings related to our $100 million run rate cost savings plan sooner than we anticipated. So all of those factors are driving some of that improvement in adjusted EBITDA.

Operator: The next question comes from Marni Lysaght from Macquarie Capital.

Marni Lysaght: I know you’ve called out some of the factors driving the free cash flow result. You’re talking to the full year as well. But can you — just when we kind of go through the balance sheet and you’re talking about timing benefits, like receivables has come in quite lower relative to sales. And I appreciate inventories are a touch high. You’ve obviously been potentially preparing new products. So just thinking about some of the working capital nuances feeding into free cash flow trends going into this quarter and how you might think about this current quarter and for the — and how that ties into the full year?

Liz Coddington: Yes. So in terms of Q1, we certainly exceeded our expectations, which we had thought would be slightly negative, and we had some outperformance, and we talked about tariffs and some of those things as well and our cost savings plan. But we did have about $30 million, which I talked about earlier of benefits from vendor payment timing. And so some of that is related to payment terms, improvements in our payment terms and things like that. So that is probably a bit of what you’re seeing. And on a full year basis, I do — we expect to see that continued favorability and then — but the timing will reverse in there. So we’re taking our free cash flow target up by $50 million, but that is a minimum free cash flow target. Also, I want to make sure that to remind you all of that, we expect to be able to outperform that over the course of the year.

Marni Lysaght: Understood. And just kind of, I guess, with new products coming to market, the right way of thinking about inventory?

Liz Coddington: Yes. So we are balanced in terms of how we thought about inventory for our new products. Even though it’s news to everyone here that we launched them in October, obviously, we have been planning for this for quite a while. And so we had a balance of working down our inventory on our old products, and we’re being pretty measured about how much we built up in advance of the holiday season. So we feel pretty good about where we are at, at this point.

Marni Lysaght: Okay. That’s understood. And just a quick one on — with Repowered, the kind of like the marketplace platform. How do we think about, I guess, the early progress that had a national rollout over the summer? And would the recalls, would that impact some of the vendors on that?

Liz Coddington: Yes. So on Repowered, we — again, that’s — it still a relatively new marketplace for us. And — but we did create it as a way to help facilitate secondary market transactions because we are pretty — the secondary market is an important entry point for us for price-sensitive customers. Now in terms of the recall, we do have — we will have — either we do already or we very well have a process in place to make sure that anyone buying on our Repowered marketplace will have access to a Bike+ seat post, it will be part of kind of the flow that they go through when they purchase a Bike+ through that marketplace.

Operator: The next question comes from Shweta Khajuria from Wolfe Research.

Shweta Khajuria: Let me try 2, please. First is, Liz, if you could speak to just the overall demand environment. And as you think about the rest of the quarter and into calendar quarter Q1 post the holidays, how are you — what are you seeing right now that gives you conviction on demand trends generally, especially in the U.S.? And then my follow-up question is on your commercial opportunity. You kind of talked to this earlier as part of your answer to the first question. Could you please help us frame how big that opportunity could be for you in the, call it, near to midterm? And how are you measuring progress as you tap into that opportunity?

Liz Coddington: Sure. So let me talk a little bit about demand trends that we’re seeing. So for the Connected Fitness market overall, our internal estimates when we use third-party sales data do indicate that, that category in the U.S. is still declining year-over-year post the surge that we saw from mid-2020 to mid-fiscal 2022, but the rate of decline has decelerated to low single digits. So we’re pretty encouraged by the trajectory it is moving towards. But we do expect to see some continued softness in Connected Fitness equipment demand in the short-to-medium term, and that is incorporated into our full year guidance. It’s also worth reminding everyone that we are a large player in the Connected Fitness market segment. So our actions to focus on profitability do have an impact within the segment overall, especially for hardware sales.

But in the long term, we do remain bullish on our growth potential as well as growth for that — for the Connected Fitness category and the fitness and wellness economy overall. I do want to touch on the overall economy — fitness and wellness economy because we do see that consumers are placing just a higher value on fitness and wellness. And if you think about that, it’s much broader than just Connected Fitness in the framing of cardio fitness for the most part. And while it’s not a nearly defined TAM today, there is third-party research overall that sizes, if you think about the entire wellness economy in totality, just within the U.S., at over $2 trillion. And now that’s a huge number. We don’t plan to participate in all of those categories that fall within the wellness economy.

But we are focusing on moving toward areas beyond connected cardio and toward categories that demonstrate scale and growth and proven results for our members. And you’ve heard Peter talk about some of these. As we redefine our strategy, our market opportunity becomes much larger than connected cardio fitness. So you can think about cardio Connected Fitness as a big piece of us today, but our intent is to go well beyond that. And some of those categories, we’ve mentioned them before, but I’ll just mention them one more time are in addition to cardio, we’ve got strength. We’ve got mental well-being, nutrition and hydration and sleep and recovery. And we’ll continue to talk about these more as we execute on our strategy.

Peter Stern: And just to cover the commercial side of that equation. The overall gym market in the United States is considerably bigger than the in-home Connected Fitness market. And although our internal analysis suggests that it experienced a bit of a slowdown over the last month or 2, if we look over the last couple of years, it’s been continuing to grow. And we’ve experienced growth from the Precor side of our business. In some ways, I think we should be able to outpace the growth rate of the others due to the strategic benefits that I talked about earlier as well as the fact that we are refocusing on the commercial business unit and on Precor itself and recommitting to our commercial partners in that space. In terms of the metrics for success there, as you, I think, at this point, know about us overall as a management team, we are focused on growth, but the growth needs to be profitable.

And so we are working with the commercial business unit to ensure that the plans that we develop results both in top line growth as well as increased margins associated with that business as well. And again, we feel really good about that category and in particular, our positioning in the category.

Operator: The next question comes from Douglas Anmuth from JPMorgan.

Bryan Smilek: It’s Bryan Smilek on for Doug. Just 2 quick questions. Just thinking about the durability of double-digit sustainable Connected Fitness gross margins, can you just help parse out the drivers between product mix shift, the cost savings, obviously, that you’re enacting? And I guess, conversely, but also similarly tied, you mentioned increased marketing spend in 2Q. Can you just shed more color on just overall brand positioning, where you’re leaning into in terms of target demographics or service or channels as well for marketing?

Liz Coddington: Yes. So in terms of gross margins, just — I think your question was really kind of more about like long term and thinking about where we’re going with gross margins. So if you look back at Q1, our — to get to the — this is Connected Fitness gross margin specifically, was 6.9%. That was negatively impacted by the inventory accrual for Bike+ seat post. And if you exclude that, our gross margin would have been 15.8%, and that’s up 660 basis points year-over-year. Now if you look ahead to Q2, we’re anticipating Connected Fitness products margin to improve compared to Q1, and that’s driven by fixed cost leveraging with seasonally higher hardware sales and favorable mix of higher-margin products. And it’s also worth noting that it’s our highest quarter for seasonal promotions over the holidays.

So even with that, we are expecting margin improvement. We do anticipate our full year fiscal ’26 product Connected Fitness product gross margins to increase year-over-year. And then in terms of a long-term target, you mentioned double digits. Our goal is eventually to be in around the 20s range, and we intend to make progress towards that in the fiscal year. I do want to point out, though, as we’ve talked about on many prior calls, that we will continue to make trade-offs between gross margin and marketing spend based on the LTV to CAC efficiency that we see. Now Peter, did you want to talk a little bit — I can talk about marketing.

Peter Stern: On marketing spend, so for us, Q1 was a particularly low quarter. As Liz sort of intimated, we were sort of finishing up in many cases, the inventory that we had of our products. In fact, we went out of stock on the original bike in September in anticipation of the big launch. So there was no point, for example, in blowing it out on marketing when we knew we were doing great and running out of equipment. But as we look at Q2, we have a lot of messages to convey. And I’m so excited about those messages, right? Our launch of an entirely new product lineup with the Cross Training Series is a great reason for us to talk to our members and nonmembers alike. The introduction of Peloton IQ is it’s a new concept, right, what we’re trying to do in this space.

And there’s a lot of education that needs to take place. And of course, we’ve got all of this additional distribution. So we want to make sure that we actually are driving people into those stores because you got to provide the air cover in order for people to see that. That being said, we are, as always, very careful about our spend and pay close attention to our LTV to CAC and ensuring that we are acquiring members profitably. So what you will see is an increase in our marketing spend in Q2. There will be a higher percentage of our spend on brand and education than you’ve seen historically as compared with performance marketing in the early parts of the quarter. And then as we get into the latter parts of the quarter, the holiday season itself provides quite a lot of momentum for us.

And we shift over to much more efficient performance marketing, and then you should see that over the — much of the balance of the year, where we’ll basically reap the benefits of some of the investment we made in Q2. But all of that, as you can tell, is included in the guidance that we provided for Q2, which still has considerable profitability. So again, our discipline is something that we take pride in, and that is certainly the case in the marketing area.

James Marsh: Thanks, Peter. Karen, maybe we have time for one more question.

Operator: And the last question comes from Susan Anderson from Canaccord.

Susan Anderson: I guess maybe just to follow up on all of the additional wellness offerings you guys added to the subscription. Just curious if you’ve seen an uptick in usage of those services yet. It still may be a little early. And then maybe also if you can give an update on how the new certified refurbished equipment program is going.

Peter Stern: So let me start with the usage point. It’s actually been really — that’s been really positive. So we mentioned earlier that we’ve had 500,000 of our members use Club Peloton already. We’re also seeing more people taking workouts from our home screen, and let me explain why that matters. For a lot of our members, they kind of stay with the same old, same old. They go to the classes page, and go to their comfort zone. But when people are taking workouts from the home screen, it means that the recommendations that we’re delivering with Peloton IQ are starting to hit home. We’ve also seen a meaningful increase in strength workouts. And that’s based on both our understanding of the science and what’s important to our members in terms of their overall health as well as the personalized programs that we’ve developed for people who started to set goals around building strength and increasing longevity.

The most important point is that if we look at the month of October, every kind of usage on a per member basis is up. And what I mean by that is like whether you’re talking about workouts in that month, total workouts or the total workout days or total workout time, all those things are up, whereas historically, we typically see workouts go down from September to October. So we think our investments, in particular, AI, but also the investments we’re making in the community on the software side are making a difference. In terms of the — I think, Susan, your question was about the Repowered program. When you talked about a certified refurb program. And what I’ll note right now is that the Repowered program actually doesn’t do certified. It is, by the way, an awesome, awesome idea and one of the things that is certainly in our consideration set to actually provide certification because I think trust in this space is one of the areas that we can help to address.

But so far, what we’ve been doing is solving a sort of more basic set of problems. One is creating a trusted marketplace to match sellers and buyers locally, but also to be able to give them the option to have a professional come and do the pickup and the delivery so that you don’t have to go into somebody else’s house if you don’t want to or have somebody come into your house if you don’t want someone there. So that’s been the focus so far for Repowered. It’s still early days, but we’re seeing from what we’re being told, good performance from the partner that we’re working with on that program, and it’s scaling as we expected. But stay posted for more cool stuff, and thanks for throwing out the idea. Why don’t I close this out at this point with thanks, first of all, for everyone who joined today’s call and also some encouragement for you to tune into some fun class moments that we have coming up.

After Thanksgiving, we will have a veritable buffet of new live and on-demand classes available, including a live Turkey Burn Ride with Robin Arzón; a live Turkey Burn Run with Kirsten Ferguson; and The Feast, a live full-body strength class with 6 of our strength instructors. And coming soon, Emma Lovewell will release her third installment of her popular Crush Your Core program. And we recently launched a podcast, Move for Life hosted by instructor Matt Wilpers and Dr. Kavita Patel that’s focused on longevity and it’s available on YouTube. And for the investment professionals and analysts out there, our co-developed collection with the Hospital for Special Surgery on Desk Worker Strength & Mobility was made for you. With that, we look forward to seeing you on the leaderboard and wish you a happy and healthy holiday season.

James Marsh: Thank you.

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

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