Peloton (PTON) Q3 2023 earnings

Peloton‘s shares plummeted Thursday after the company reported a wider-than-expected loss in the fiscal third quarter and acknowledged an uncertain economic backdrop.

Shares were down about 13% in pre-market trading.

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Yet the company pointed to signs of progress with its turnaround plan. It said connected fitness subscriptions grew and free cash flow losses declined. It also said new initiatives have resonated with customers, including a push to sell lower-priced, pre-owned bikes and a rent-to-buy program for fitness equipment. 

Here’s how the connected fitness equipment company did in the three months that ended March 31 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

• Loss per share: 79 cents vs. 46 cents expected
• Revenue: $749 million vs. $708 million expected

Peloton’s net loss for the period was $275.9 million, or 79 cents per share, compared with a loss of $757.1 million, or $2.27 per share, a year earlier. It marked the ninth quarter in a row of the company reporting losses.

Revenue declined 22% from a year ago, dropping from $964.3 million.

The fitness company has sought to stabilize its business and find a path to profitability again, after seeing a sharp reversal of fortunes. Sales of its bikes and treadmills slowed dramatically after a pandemic-related surge, forcing Peloton to lean into other revenue sources like subscriptions.

The company ended its third quarter with about 3.1 million connected fitness subscriptions, up 5% from the year-ago period. Connected fitness subscribers are people who own a Peloton product, such as its Bike or Tread, and pay a monthly fee for access to live and on-demand workout classes.

Average net monthly connected fitness churn ticked up slightly from a year ago, too. It came in at 1.1% for the quarter, consistent with the prior quarter, but above the year-ago churn level of 0.8%.

Peloton’s overall membership, however, did not grow. It ended the quarter with 6.7 million total members, the same as the end of the prior quarter and down from 7 million in the year-ago period.

In a letter to shareholders, CEO Barry McCarthy said Peloton is looking toward the future. The company later this month will relaunch the brand and introduce a new version of the Peloton app with a tiered membership structure, he said.

McCarthy added the relaunch aims to shake up how people view Peloton, so they think of its wide variety of fitness offerings — not just its well-recognized bikes.

Yet he warned of challenges ahead. He said the company typically experiences a seasonal decline in subscriber growth in the fourth quarter, which stretches across summer months. He said he expects one this year, too.

“Notwithstanding the relaunch, Q4 will be among our most challenging from a growth perspective,” he said.

In the fiscal fourth quarter, Peloton expects connected fitness subscriptions to rise, but revenue to drop. It said it expects revenue to decline by about 6% year-over-year to a range of between $630 million and $650 million, compared with $678.7 million the year-ago period.

It expects to end the fourth quarter with 3.08 million to 3.09 million subscribers, up from 2.97 million in the year-ago period.

Separately, Peloton announced Thursday that it had reached an agreement with Dish Technologies over a patent dispute. The company said it will pay Dish $75 million to settle an International Trade Commission complaint.

The company had previously said it aimed to reach break-even cash flow on a quarterly basis in the second half of its fiscal year 2023. McCarthy said in the letter Thursday that the settlement will significantly pressure free cash flow in the current fiscal quarter.

He added that the temporary hit is worthwhile because it “eliminates a cloud of uncertainty and an enormous distraction to the day-to-day operation of our business.”

McCarthy’s focus on a turnaround follows a tumultuous stretch after the company’s post-pandemic surge.

The struggles forced the company to cut costs last year by laying off thousands of employees, shuttering many of its stores and outsourcing its last-mile delivery and manufacturing. Its co-founder and former CEO John Foley also stepped down last year and later resigned as executive chairman.

As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix executive, the company has emphasized increasing subscriptions.

The company has tried to nudge sales of equipment by tinkering with prices, offering a rental option and adding rowing machines to its lineup. It got into wholesale by allowing Amazon and Dick’s Sporting Goods to carry its equipment. Peloton also struck a deal with Hilton to put bikes in all of its U.S. hotels.

In the shareholder letter on Thursday, McCarthy said those efforts are working.

Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. It has an average monthly churn rate of 5%, which is higher than Peloton’s overall churn rate.

Yet McCarthy said the option, which allows customers to make rental payments and chip away at the equipment’s purchase price, reduces a barrier to sign ups. He cited an internal survey, which found that 62% of respondents would not have subscribed if it weren’t for the flexibility of the rental program.

Peloton’s sales of pre-owned bikes has also resonated, he said. The company launched that offering in December and is considering adding its treadmills and rowers to the program later this year.

Together, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.

Peloton’s stock has risen about 11% so far this year. Yet its shares are still less than half of its 52-week high of $18.86 — and just a tiny fraction of their over $100 highs during the early years of the pandemic.

Peloton’s market cap is $3.06 billion, after reaching as high as almost $50 billion in early 2021.