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Peloton (PTON) results for Q2 2023

Brody Longo trains on his Peloton exercise bike on April 16, 2021 in Brick, New Jersey.

Michael Loccisano | Getty Images

Platoon said Wednesday that its net loss narrowed year over year, and for the third quarter in a row, subscription revenue was higher than sales of the company̵[ads1]7;s connected fitness products.

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

The fitness equipment company’s second-quarter earnings beat Wall Street expectations, but the company had a bigger-than-expected loss per share. Peloton’s stock jumped about 7% in premarket trading.

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

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

The company’s reported net loss for the three-month period ended Dec. 31 was $335.4 million, or 98 cents per share, compared with a loss of $439.4 million, or $1.39 per share, a year earlier. Although it’s the eighth consecutive quarter the fitness company has reported a loss, it’s the narrowest loss Peloton has posted since the fourth quarter of fiscal 2021.

Revenue fell 30% compared to the same period last year, but exceeded the company’s expected range of $700 million to $725 million. Sales of connected fitness products, which are typically strong during Peloton’s holiday quarter, fell 52% year-over-year, while subscription revenue rose 22%.

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

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

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

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

Peloton expects revenues to be lower, but margins higher next quarter. The company estimates sales between $690 million to $715 million and a total gross margin of around 39%. Wall Street analysts set the revenue estimate for the quarter at $692.1 million.

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

The next phase of the turnaround

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

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

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

Since taking over, McCarthy has cut Peloton’s workforce by more than half, expanded its bike rental program nationwide, started selling certified pre-owned bikes, debuted a rowing machine and partnered with Amazon and Dick’s Sports equipment to sell their bikes and treads.

McCarthy’s top priority was managing cash flow and getting the company out of the red, a goal he said the company has almost achieved. Free cash flow was negative $94.4 million, compared to negative $246.3 million in the previous quarter and negative $546.7 million in the same period last year.

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

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

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

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