PELOTON INTERACTIVE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 , filed with theSEC onSeptember 7, 2022 ("Form 10-K"). As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks, uncertainties, assumptions, and other important factors that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Form 10-K. Overview Peloton is the largest interactive fitness platform in the world with a loyal community of 6.7 million Members as ofSeptember 30, 2022 . We pioneered connected, technology-enabled fitness, and the streaming of immersive, instructor-led boutique classes to our Members anytime, anywhere. We make fitness entertaining, approachable, effective, and convenient, while fostering social connections that encourage our Members to be the best versions of themselves. We define a Member as any individual who has a Peloton account through a paid All-Access Membership, or a paid Peloton App subscription. Our Connected Fitness Product portfolio includes the Peloton Bike, Bike+, Tread, Tread+, and our first connected strength product, Peloton Guide. Our revenue is generated primarily from recurring Subscription revenue and the sale of our Connected Fitness Products. We have historically experienced significant growth in sales of our Connected Fitness Products, which, when combined with our low Average Net Monthly Connected Fitness Churn has led to significant growth in Connected Fitness Subscriptions.
Our financial profile has been characterized by strong retention, recurring revenue, and efficient customer acquisition. Our low Average Net Monthly Connected Fitness Churn, together with our high Subscription Contribution Margin, yields an attractive lifetime value (LTV) for our Connected Fitness Subscriptions well in excess of our customer acquisition cost (CAC). Maintaining an attractive LTV/CAC ratio is a primary goal of our customer acquisition strategy.
First Quarter Fiscal 2023 Update and Recent Developments As we have previously disclosed, forecasting for our business during and following the COVID-19 pandemic, particularly in its more recent stages, has proven to be very challenging. While we have been able to grow more than we anticipated just two years ago, fluctuations in demand and supply that we have been navigating during this time period led us to grow our operations beyond what we believe is currently best suited to our business. Although our belief in the positive long-term outlook forConnected Fitness remains unchanged, the long-term cost demands of our business require us to recalibrate our near-term expectations. Additionally, while demand for our Connected Fitness Products has continued to strongly outpace pre-pandemic levels, we have had significant difficulty in forecasting near-term consumer demand and, as a result, our expected near-term operating performance. See "Risk Factors-Risks Related to Our Business-Our operating results have been, and could in the future be, adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory" in our Form 10-K. Restructuring Plan InFebruary 2022 , we announced and began implementing a restructuring plan to realign our operational focus to support our multi-year growth, scale the business, and improve costs (the "Restructuring Plan"). The Restructuring Plan originally included: (i) reducing our headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for our previously plannedPeloton Output Park ; (iii) closing and consolidating several distribution facilities; and (iv) shifting to third-party logistics providers in certain locations. We expect the Restructuring Plan to be substantially implemented by the end of fiscal 2024. InJuly 2022 ,August 2022 andOctober 2022 , we took actions to update the Restructuring Plan. OnJuly 12, 2022 , we announced we are exiting all owned-manufacturing operations and our expansion of our current relationship with Taiwanese manufacturer Rexon Industrial Corp. Additionally, onAugust 12, 2022 , we announced our decision to perform the following additional restructuring activities: (i) fully transition our North American Field Operations to third-party providers, including the significant reduction of our delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit our real-estate footprints in our Plano and Tempe locations; and (iii) reduce ourNorth America retail showroom presence. OnOctober 6, 2022 , we announced approximately 500 global team member positions have been eliminated..
Total charges related to the Restructuring Plan were
In connection with the Restructuring Plan, the Company estimates that it will incur additional cash charges of approximately$70 million , primarily composed of severance and other exit costs in fiscal year 2023 and beyond. Additionally, the Company expects to recognize additional non-cash charges of approximately$70 million , primarily composed of asset impairment and stock-based compensation charges in fiscal year 2023 in connection with the Restructuring Plan.
We may not be able to fully realize the cost savings and benefits initially anticipated from the Restructuring Plan, and the expected costs may be greater than expected. See "Risk Factors-Risks Related to Our Business-We may not successfully execute or achieve the expected benefits of our
23
--------------------------------------------------------------------------------restructuring initiatives and other cost-saving measures we may take in the future, and our efforts may result in further actions and/or additional asset impairment charges and adversely affect our business" in our Form 10-K.
Product and Content Highlights
OnSeptember 20, 2022 , we announced the launch ofPeloton Row . Row combines the innovative software, premium hardware design, and exclusive content that make up the signature Peloton experience, providing Members with a unique low-impact, full-body cardio and strength workout. Currently available through our online store and in 71 U.S. Peloton showrooms, we look forward to expanding Row's availability to additionalU.S. Peloton showrooms in the near future and internationally over time. Veteran Peloton instructorsMatt Wilpers andAdrian Williams are joined by formerU.S. Olympic Team rowerAlex Karwoski , formerOhio State University rower and coachAsh Pryor , andKatie Wang , who will lead Row Bootcamp offerings. In the first quarter of fiscal year 2023, we were able to deliver on our promise of an always-improving experience for Peloton Members. Peloton Tread Members now have the option for an even smoother workout with Auto-Incline, and can dial in the perfect workout with mile splits and the ability to set Goals in a Just Run workout. We also launched Tread Talkback to empower blind and low vision Members to use the Tread independently. We also introduced the much-requested Rep Counting to Guide Members, enabling them to see target reps for a given move in class, record the weight they are using, and automatically track their total weight lifted over time for the ultimate in effortless strength training. We also invested in the cross-platform member experience, including personalizing the home-screen and post-class recommendations and improving Lanebreak with additional filtering options and entry-points. OnOctober 3, 2022 , we announced our industry-first partnership with Hilton, which will become the first hospitality brand to feature Peloton bikes across its entire hotel portfolio. The partnership also includes offeringHilton Honors members free access to special Peloton offers, including a 90-dial trial subscription to the Peloton App, as well as preferred pricing on select Peloton connected fitness products. OnOctober 13, 2022 , Amazon announced that Peloton was one of the best sellers among the Top 100 Deals for Amazon's Prime Early Access sale. Expanding our third-party retail strategy, Peloton products will soon be available through over 100 DICK's Sporting Goods retail locations and through DICKS.com.
Product Recall Update
OnMay 5, 2021 , we announced separate, voluntary recalls of each of our Tread+ and Tread products in collaboration with the CPSC and halted sales of these products to work on product enhancements. Members were notified that they could return their Tread or Tread+ for a full refund, or wait until a solution is available. Tread+ owners were also given the option to have Peloton move their Tread+ to a different location within their home. We announced a repair for the Tread inAugust 2021 , shortly before resuming sales. We continue to work on potential hardware enhancements for Tread+, which remains recalled. More recently, inAugust 2022 , we were notified by the CPSC that the agency staff believes we failed to meet our statutory obligations under the Consumer Product Safety Act and intends to seek civil monetary penalties. While we disagree with the agency staff, we are engaged in ongoing confidential discussions with the CPSC. OnOctober 18, 2022 , we announced a one- year extension of the full refund period for our Tread+ if consumers wish to return their Tread+ pursuant to the recall. With the extension of the full refund period by one additional year, toNovember 6, 2023 , the Company expects that more Members will opt for a full refund, and has accordingly increased the Company's return reserve. For the recall-to-date period, the Company recognized a reduction toConnected Fitness Products revenue for actual and estimated future returns of$166.9 million , and a return reserve of$57.9 million and$31.1 million is included within Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets related to the impacts of the recall as ofSeptember 30, 2022 andSeptember 30, 2021 , respectively. We may continue to incur additional costs that could include costs for which we have not accrued or established adequate reserves, including increases to the return reserves, inventory write-downs, logistics costs associated with Member requests to return or move their hardware, subscription waiver variable costs of service, anticipated recall-related hardware development and repair costs, and related legal and advisory fees. Recall charges are based upon estimates associated with our expected and historical consumer response rates. Our plan for the Tread+ recall is still being finalized and actual costs related to this matter may vary from the estimate, and may result in further impacts to our future results of operations and business. See "Risk Factors-Risks Related to Our Connected Fitness Products and Members-We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater product returns than expected, either of which could have an adverse effect on our business, financial condition, and operating results" in our Form 10-K. 24 -------------------------------------------------------------------------------- Key Operational and Business Metrics In addition to the measures presented in our interim condensed consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. Three Months Ended September 30, 2022 2021 Ending Connected Fitness Subscriptions 2,973,371 2,491,711 Average Net Monthly Connected Fitness Churn 1.1 % 0.8 % Subscription Gross Profit (in millions) $ 272.8$ 202.7 Subscription Contribution (in millions)(1) $ 294.1$ 211.7 Subscription Gross Margin 66.2 % 66.7 % Subscription Contribution Margin(1) 71.3 % 69.6 % Net loss (in millions)$ (408.5) $ (376.0) Adjusted EBITDA (in millions)(2) $ (33.4)$ (233.7) Adjusted EBITDA Margin(2) (5.4) % (29.0) %
$
(246.3)
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(1) Please see the section titled "Non-GAAP Financial Measures-Subscription Contribution and Subscription Contribution Margin" for a reconciliation of Subscription Gross Profit to Subscription Contribution and an explanation of why we consider Subscription Contribution and Subscription Contribution Margin to be helpful measures for investors. (2) Please see the section titled "Non-GAAP Financial Measures-Adjusted EBITDA and Adjusted EBITDA Margin" for a reconciliation of Net loss to Adjusted EBITDA and an explanation of why we consider Adjusted EBITDA to be a helpful measure for investors. (3) Please see the section titled "Non-GAAP Financial Measures-Free Cash Flow" for a reconciliation of net cash provided by (used in) operating activities to Free Cash Flow and an explanation of why we consider Free Cash Flow to be a helpful measure for investors. Connected Fitness Subscriptions Our ability to expand the number of Connected Fitness Subscriptions is an indicator of our market penetration and growth. We define a "Connected Fitness Subscription" as a person, household, or commercial property, such as a hotel or residential building, who has either paid for a subscription to a Connected Fitness Product (a Connected Fitness Subscription with a successful credit card billing or with prepaid subscription credits or waivers) or requested a "pause" to their subscription for up to three months. We do not include canceled or unpaid Connected Fitness Subscriptions in the Connected Fitness Subscription count. A subscription is canceled and ceases to be reflected in the above metrics as of the effective cancellation date, which is the Member's next scheduled billing date. Average Net Monthly Connected Fitness Churn We use Average Net Monthly Connected Fitness Churn to measure the retention of our Connected Fitness Subscriptions. We define "Average Net Monthly Connected Fitness Churn" as Connected Fitness Subscription cancellations, net of reactivations, in the quarter, divided by the average number of beginning Connected Fitness Subscriptions in each month, divided by three months. When a Connected Fitness Subscription payment method fails, we communicate with our Members to update their payment method and make multiple attempts over several days to charge the payment method on file and reactivate the subscription. We cancel a Member's Connected Fitness Subscription when it remains unpaid for two days after their billing cycle date. This metric does not include data related to our Peloton Digital subscriptions for Members who pay a monthly fee for access to our content library on their own devices. Components of our Results of Operations
Revenue
Connected Fitness Products Connected Fitness Product revenue consists of sales of our portfolio of Connected Fitness Products and related accessories, delivery and installation services, branded apparel, extended warranty agreements, and the sale, service, installation, and delivery contracts of our commercial business. Connected Fitness Product revenue is recognized at the time of delivery, except for extended warranty revenue that is recognized over the warranty period and service revenue that is recognized over the term, and is recorded net of returns and discounts and third-party financing program fees, when applicable.
Subscription
Subscription revenue consists of revenue generated from our monthly Connected Fitness Subscription and Peloton Digital subscription.
As of
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If a Connected Fitness Subscription owns a combination of a Bike, Tread or Guide
product in the same household, the price of the Subscription remains $44.00
monthly (price increased from $39 to $44 USD effective as of June 1, 2022 ). As
of September 30, 2022 , approximately 6% of our Connected Fitness Subscriptions
owned both a Bike and Tread product.
Cost of revenue
Connected Fitness Products
Connected Fitness Product cost of revenue consists of our portfolio of Connected
Fitness Products and branded apparel product costs, including manufacturing
costs, duties and other applicable importing costs, shipping and handling costs,
packaging, warranty replacement and service costs, fulfillment costs,
warehousing costs, depreciation of property and equipment, and certain costs
related to management, facilities, and personnel-related expenses associated
with supply chain logistics.
Subscription
Subscription cost of revenue includes costs associated with content creation and
costs to stream content to our Members. These costs consist of both fixed costs,
including studio rent and occupancy, other studio overhead, instructor and
production personnel-related expenses, depreciation of property and equipment as
well as variable costs, including music royalty fees, content costs for past
use, third-party platform streaming costs, and payment processing fees for our
monthly subscription billings.
Operating expenses
Sales and marketing
Sales and marketing expense consists of performance marketing media spend, asset
creation, and other brand creative, all showroom expenses and related lease
payments, payment processing fees incurred in connection with the sale of our
Connected Fitness Products, sales and marketing personnel-related expenses,
expenses related to the Peloton App, and depreciation of property and equipment.
General and administrative
General and administrative expense includes personnel-related expenses and
facilities-related costs primarily for our executive, finance, accounting,
legal, human resources, IT functions and member support. General and
administrative expense also includes fees for professional services principally
comprised of legal, audit, tax and accounting services, depreciation of property
and equipment, and insurance, as well as litigation settlement costs.
Research and development
Research and development expense primarily consists of personnel and
facilities-related expenses, consulting and contractor expenses, tooling and
prototype materials, software platform expenses, and depreciation of property
and equipment. We capitalize certain qualified costs incurred in connection with
the development of internal-use software that may also cause research and
development expenses to vary from period to period.
Impairment expense
Impairment expense consists of non-cash impairment charges relating to
long-lived assets. Impairments are determined using management's judgment about
our anticipated ability to continue to use fixed assets in-service and under
development, current economic and market conditions and their effects based on
information available as of the date of these condensed consolidated financial
statements. Management disposes of fixed assets during the regular course of
business due to damage, obsolescence, strategic shifts, and loss.
Additionally, long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset group may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset group to future undiscounted net
cash flows expected to be generated by the assets. If the carrying amount of an
asset group exceeds its estimated undiscounted net future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset group exceeds its fair value.
Restructuring expense
Restructuring expense consists of severance and other personnel costs, including
stock-based compensation expense, professional services, facility closures and
other costs associated with exit and disposal activities.
Supplier settlements
Supplier settlements are payments made to third-party suppliers to terminate
certain future inventory purchase commitments.
Non-operating income and expenses
Other income (expense), net
Other income (expense), net consists of interest income (expense), unrealized
and realized gains (losses) on investments, and impacts from foreign exchange
transactions.
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Income tax provision
The provision for income taxes consists primarily of income taxes related to
state and international taxes for jurisdictions in which we conduct business. We
maintain a valuation allowance on the majority of our deferred tax assets as we
have concluded that it is more likely than not that the deferred assets will not
be utilized.
Results of Operations
The following tables set forth our consolidated results of operations in dollars
and as a percentage of total revenue for the periods presented.
The period-to-period comparisons of our historical results are not necessarily
indicative of the results that may be expected in the future.
Three Months Ended
2022 2021
(in millions)
Consolidated Statement of Operations Data:
Revenue
Connected Fitness Products $ 204.2 $ 501.0
Subscription 412.3 304.1
Total revenue 616.5 805.2
Cost of revenue(1)(2)
Connected Fitness Products 259.8 440.7
Subscription 139.5 101.4
Total cost of revenue 399.3 542.2
Gross profit 217.2 263.0
Operating expenses
Sales and marketing(1)(2) 138.7 284.1
General and administrative(1)(2) 193.5 240.4
Research and development(1)(2) 88.1 97.7
Impairment expense 62.9 0.6
Restructuring expense(1) 106.9 -
Supplier settlements 1.1 -
Total operating expenses 591.1 622.7
Loss from operations (374.0) (359.7)
Other (expense) income, net:
Interest expense (20.9) (8.6)
Interest income 4.0 0.6
Foreign exchange losses (17.0) (5.2)
Other income (expense), net 0.2 (0.7)
Total other expense, net (33.7) (13.9)
Loss before provision for income taxes (407.7) (373.6)
Income tax expense 0.8 2.4
Net loss $ (408.5) $ (376.0)
____________________
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(1) Includes stock-based compensation expense as follows:
Three Months Ended
2022 2021
(in millions)
Cost of revenue
Connected Fitness Products $
7.3 $ 4.4
Subscription 12.7 3.6
Total cost of revenue 20.1 8.0
Sales and marketing 10.7 6.5
General and administrative 52.3 29.5
Research and development 22.2 8.9
Restructuring 76.8 -
Total stock-based compensation expense $ 182.1 $ 52.9
On July 1, 2022 , the Compensation Committee of the Board of Directors of the
Company (the "Compensation Committee") approved accelerating the vesting
requirement for unvested restricted stock units held by certain employees by one
year. This applied to eligible unvested restricted stock units that had more
than eight quarterly vesting dates remaining in their vesting schedule. The
acceleration resulted in approximately $26.6 million of stock-based compensation
pulled forward and recognized in the three months ended September 30, 2022 . The
remaining unvested restricted stock units have approximately $376.0 million of
unamortized expense to be recognized over the remaining weighted-average vesting
term of approximately 2.6 years. Additionally, on July 1, 2022 , the Compensation
Committee approved a one-time repricing of certain stock option awards that had
been granted to date under the 2019 Plan. The repricing impacted stock options
held by all employees who remained employed through July 25, 2022 . The repricing
did not apply to our U.S. -based hourly employees (or employees with equivalent
roles in non-U.S. locations) or our C-level executives. The modification
resulted in incremental stock-based compensation expense of $21.9 million in the
aggregate. Approximately $4.7 million was recognized immediately during the
three months ended September 30, 2022 , for vested options, with the remainder to
be recognized over the remaining weighted-average vesting term of approximately
2.9 years.
____________________
(2) Includes depreciation and amortization expense as follows:
Three Months Ended
2022 2021
(in millions)
Cost of revenue
Connected Fitness Products $ 2.1 $ 3.5
Subscription 8.5 5.4
Total cost of revenue 10.6 9.0
Sales and marketing 8.5 4.4
General and administrative 7.1 9.8
Research and development 2.8 4.9
Total depreciation and amortization expense $ 29.0 $ 28.1
Comparison of the Three Months Ended September 30, 2022 and 2021
Revenue
Three Months Ended September 30,
2022 2021 % Change
(dollars in millions)
Revenue:
Connected Fitness Products $ 204.2 $ 501.0 (59.2)%
Subscription 412.3 304.1 35.6
Total revenue $ 616.5 $ 805.2 (23.4)%
Percentage of revenue
Connected Fitness Products 33.1 % 62.2 %
Subscription 66.9 37.8
Total 100.0 % 100.0 %
28-------------------------------------------------------------------------------- Connected Fitness Products revenue decreased$296.8 million for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This decrease was primarily attributable to fewer Bike and Accessory deliveries, and charges associated with the voluntary product recalls. Subscription revenue increased$108.1 million for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This increase was primarily attributable to the year-over-year growth in our Connected Fitness Subscriptions and the price increase of the All-Access membership fee from$39 to$44 , effective as ofJune 1, 2022 . The growth of our Connected Fitness Subscriptions was primarily driven by the number of Connected Fitness Products delivered during the fiscal year endedJune 30, 2022 under new Subscriptions and our low Average Net Monthly Connected Fitness Churn of 1.14% for the three months endedSeptember 30, 2022 .
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended September 30,
2022 2021 % Change
(dollars in millions)
Cost of Revenue:
Connected Fitness Products $ 259.8 $ 440.7 (41.0)%
Subscription 139.5 101.4 37.6
Total cost of revenue $ 399.3 $ 542.2 (26.3)%
Gross Profit:
Connected Fitness Products $ (55.6) $ 60.3 (192.2)%
Subscription 272.8 202.7 34.6
Total Gross profit $ 217.2 $ 263.0 (17.4)%
Gross Margin:
Connected Fitness Products (27.2) % 12.0 %
Subscription 66.2 % 66.7 %
Three Months Ended
Connected Fitness Products cost of revenue for the three months endedSeptember 30, 2022 decreased$180.9 million , or 41.0%, compared to the three months endedSeptember 30, 2021 . This decrease was primarily driven by fewer deliveries for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Our Connected Fitness Products Gross Margin decreased to (27.2)% from 12.0% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily driven by higher logistics expenses per delivery, increased port and storage costs, fixed logistics cost deleveraging, and charges associated with the voluntary recall of our Tread+ product. Subscription cost of revenue for the three months endedSeptember 30, 2022 increased$38.1 million , or 37.6%, compared to the three months endedSeptember 30, 2021 . This increase was primarily driven by an increase of$21.5 million in music royalties and platform streaming costs, an increase of$9.2 million in stock-based compensation expense primarily driven by the acceleration of certain restricted stock unit vesting schedules, the repricing of certain stock option awards, and an increased number of awards vesting.
Subscription Gross Margin remained consistent for the three months ended
Operating Expenses
Sales and Marketing
Three Months Ended September 30,
2022 2021 % Change
(dollars in millions)
Sales and marketing $ 138.7 $ 284.1 (51.2)%
As a percentage of total revenue 22.5 % 35.3 %
Sales and marketing expense decreased$145.4 million in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The decrease was primarily due to a decrease in spending on advertising and marketing programs of$137.5 million and a decrease in personnel-related expenses of$7.1 million , primarily due to decreased average headcount. The overall decrease was partially offset 29 -------------------------------------------------------------------------------- by an increase in stock-based compensation expense of$4.1 million , primarily driven by the acceleration of certain restricted stock unit vesting schedules, the repricing of certain stock option awards, and an increased number of awards vesting. General and Administrative Three Months Ended September 30, 2022 2021 % Change (dollars in millions) General and administrative$ 193.5 $ 240.4 (19.5)% As a percentage of total revenue 31.4 % 29.9 % General and administrative expense decreased$46.9 million when comparing the three months endedSeptember 30, 2022 with the three months endedSeptember 30, 2021 . This decrease was primarily due to a decrease in professional services fees and IT costs of$45.9 million and a decrease in personnel-related expenses of$17.7 million , primarily due to decreased average headcount. The overall decrease was partially offset by an increase in stock-based compensation expense of$22.8 million , primarily driven by the acceleration of certain restricted stock unit vesting schedules, the repricing of certain stock option awards, and an increased number of awards vesting. Research and Development Three Months Ended September 30, 2022 2021 % Change (dollars in millions) Research and development $ 88.1$ 97.7 (9.8)% As a percentage of total revenue 14.3 % 12.1 % Research and development expense for the three months endedSeptember 30, 2022 decreased$9.6 million , or 9.8%, compared to the three months endedSeptember 30, 2021 . The decrease was primarily due to a decrease in product development and research costs associated with development of new software features and products of$9.7 million and a decrease in personnel-related expenses of$7.0 million , primarily due to decreased average headcount. The overall decrease was partially offset by an increase in stock-based compensation expense of$13.3 million , primarily driven by an acceleration of certain restricted stock unit vesting schedules, the repricing of certain stock option awards, and an increased number of awards vesting. Impairment expense Three Months Ended September 30, 2022 2021 % Change (dollars in millions) Impairment expense $ 62.9$ 0.6 NM* ___________________________ *NM - not meaningful Impairment expense was comprised primarily of asset write-downs and write-offs related to our previously announced restructuring initiatives, including write-downs and write-offs related toConnected Fitness assets comprised primarily of connected fitness and supply chain asset impairments related to our exits of our remaining field operations locations, as well as assets at certain corporate office locations, which we exited during the quarter. Restructuring expense Three Months Ended September 30, 2022 2021 % Change (dollars in millions) Restructuring expense$ 106.9 $ - NM* ___________________________ *NM - not meaningful Restructuring expense was$106.9 million in the three months endedSeptember 30, 2022 . The restructuring expenses consisted of$76.8 million of stock-based compensation expense, driven by incremental stock-based compensation expense from exercise window modifications and the acceleration of certain restricted stock unit vesting schedules pursuant to severance arrangements, and$27.0 million of cash severance and 30 -------------------------------------------------------------------------------- other personnel costs. In addition, there was an increase of$3.0 million in professional fees and other costs associated with exit and disposal activities. There were no restructuring expenses for the three months endedSeptember 30, 2021 .
Other Expense, Net and Income Tax Expense
Three Months Ended September 30,
2022 2021 % Change
(dollars in millions)
Interest expense $ (20.9) $ (8.6) NM*
Interest income 4.0 0.6 NM*
Foreign exchange losses (17.0) (5.2) NM*
Other income (expense), net 0.2 (0.7) NM*
Income tax expense 0.8 2.4 NM*
___________________________
*NM - not meaningful
Other expense, net, was comprised of the following for the three months ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$(20.9) million ; •Interest income from cash, cash equivalents, and short-term investments of$4.0 million ; and •Foreign exchange losses of$(17.0) million .
Other expense, net, was comprised of the following for the three months ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$(8.6) million ; •Interest income from cash, cash equivalents, and short-term investments of$0.6 million ; •Foreign exchange losses of$(5.2) million ; and •Unrealized losses on short-term investments of$(0.7) million .
Income tax expense for the three months ended
Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles
generally accepted in
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net (loss) income adjusted to exclude: other
expense (income), net; income tax expense (benefit); depreciation and
amortization expense; stock-based compensation expense; impairment expense;
product recall costs; litigation and settlement expenses; transaction and
integration costs; reorganization, severance, exit, disposal and other costs
associated with restructuring plans; supplier settlements; and other adjustment
items that arise outside the ordinary course of our business. Adjusted EBITDA
Margin is calculated by dividing Adjusted EBITDA by total revenue.
We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operating
performance and the operating leverage in our business. We believe that these
non-GAAP financial measures are useful to investors for period-to-period
comparisons of our business and in understanding and evaluating our operating
results for the following reasons:
•Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and
securities analysts to measure a company's operating performance without regard
to items such as stock-based compensation expense, depreciation and amortization
expense, other expense (income), net, and provision for income taxes that can
vary substantially from company to company depending upon their financing,
capital structures, and the method by which assets were acquired;
•Our management uses Adjusted EBITDA and Adjusted EBITDA Margin in conjunction
with financial measures prepared in accordance with GAAP for planning purposes,
including the preparation of our annual operating budget, as a measure of our
core operating results and the effectiveness of our business strategy, and in
evaluating our financial performance; and
•Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and
comparability with our past financial performance, facilitate period-to-period
comparisons of our core operating results, and may also facilitate comparisons
with other peer companies, many of which use similar non-GAAP financial measures
to supplement their GAAP results.
Our use of Adjusted EBITDA and Adjusted EBITDA Margin have limitations as
analytical tools, and you should not consider these measures in isolation or as
substitutes for analysis of our financial results as reported under GAAP. Some
of these limitations are, or may in the future be, as follows:
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•Although depreciation and amortization expense are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital
expenditure requirements for such replacements or for new capital expenditure
requirements;
•Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation
expense, which has recently been, and will continue to be for the foreseeable
future, a significant recurring expense for our business and an important part
of our compensation strategy;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or
cash requirements for, our working capital needs; (2) interest expense, or the
cash requirements necessary to service interest or principal payments on our
debt, which reduces cash available to us; or (3) tax payments that may represent
a reduction in cash available to us;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect certain litigation
expenses, consisting of legal settlements and related fees for specific
proceedings that we have determined arise outside of the ordinary course of
business based on the following considerations which we assess regularly: (1)
the frequency of similar cases that have been brought to date, or are expected
to be brought within two years; (2) the complexity of the case; (3) the nature
of the remedy(ies) sought, including the size of any monetary damages sought;
(4) offensive versus defensive posture of us; (5) the counterparty involved; and
(6) our overall litigation strategy;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect transaction and integration costs related to acquisitions;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect impairment charges for goodwill and fixed assets, and gains (losses) on disposals for fixed assets;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the impact of
purchase accounting adjustments to inventory related to the
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect costs associated with Tread and Tread+ product recalls including increases to the return reserves, Tread+ inventory write-downs, logistics costs associated with Member requests on Tread and Tread+, the cost to move the Tread+ for those that elect the option, subscription waiver costs of service, and recall-related hardware development and repair costs;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect reorganization, severance, exit, disposal and other costs associated with restructuring plans;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect non-recurring supplier settlements; and
•The expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results and we may, in the future, exclude other significant, unusual expenses or other items from these financial measures. Because companies in our industry may calculate such measures differently than we do, their usefulness as comparative measures can be limited.
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.
The following table presents a reconciliation of Adjusted EBITDA to Net loss, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
Adjusted EBITDA and Adjusted EBITDA Margin
Three Months Ended September 30,
2022 2021
(dollars in millions)
Net loss $ (408.5) $ (376.0)
Adjusted to exclude the following:
Other expense, net 33.7 13.9
Income tax expense 0.8
2.4
Depreciation and amortization expense 29.0
28.1
Stock-based compensation expense 105.3 52.9 Impairment expense 62.9 0.6 Restructuring expense 106.9 - Product recalls(1) 28.9 12.9 Litigation and settlement expenses(2) 5.7 26.5 Other adjustment items (3) 2.0 5.0 Adjusted EBITDA $ (33.4)$ (233.7) Adjusted EBITDA margin (5.4) % (29.0) % ______________________ (1) Represents adjustments and charges associated with the Tread and Tread+ product recall, as well as accrual adjustments. These include a reduction to Connected Fitness Products revenue for actual and estimated future returns of$26.5 million and$11.4 million , recorded costs in Connected Fitness Products cost of revenue associated with inventory write-downs and logistic costs of$2.5 million and$0.5 million , and operating expenses of zero and$1.0 million associated with recall-related hardware development costs, in each case for the three months endedSeptember 30, 2022 and 2021, respectively. 32 --------------------------------------------------------------------------------
(2) Includes litigation-related expenses for certain non-recurring patent
infringement litigation, consumer arbitration, and product recalls for the three
months ended
(3) Includes transaction and integration costs of$0.8 million and$3.1 million for the three months endedSeptember 30, 2022 and 2021, respectively, supplier settlements of$1.1 million for the three months endedSeptember 30, 2022 , and short-term purchase accounting adjustments of$1.9 million for the three months endedSeptember 30, 2021 . Subscription Contribution and Subscription Contribution Margin We define "Subscription Contribution" as Subscription revenue less cost of Subscription revenue, adjusted to exclude from cost of Subscription revenue, depreciation and amortization expense, and stock-based compensation expense. Subscription Contribution Margin is calculated by dividing Subscription Contribution by Subscription revenue. We use Subscription Contribution and Subscription Contribution Margin to measure our ability to scale and leverage the costs of ourConnected Fitness Subscriptions. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results because our management uses Subscription Contribution and Subscription Contribution Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. The use of Subscription Contribution and Subscription Contribution Margin as analytical tools has limitations, and you should not consider these in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are as follows: •Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Subscription Contribution and Subscription Contribution Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and •Subscription Contribution and Subscription Contribution Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy.
Because of these limitations, Subscription Contribution and Subscription Contribution Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.
The following table presents a reconciliation of Subscription Contribution to Subscription Gross Profit, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
Three Months Ended September 30,
2022 2021
(dollars in millions)
Subscription Revenue $ 412.3 $ 304.1
Less: Cost of Subscription 139.5 101.4
Subscription Gross Profit$ 272.8 $ 202.7 Subscription Gross Margin 66.2 % 66.7 % Add back: Depreciation and amortization expense $ 8.5$ 5.4 Stock-based compensation expense 12.7
3.6
Subscription Contribution$ 294.1 $ 211.7 Subscription Contribution Margin 71.3 %
69.6 %
The continued growth of our Connected Fitness Subscription base will allow us to
improve our Subscription Contribution Margin. While there are variable costs,
including music royalties, associated with our Connected Fitness Subscriptions,
a significant portion of our content creation costs are fixed given that we
operate with a limited number of production studios and instructors. We expect
the fixed nature of those expenses to scale over time as we grow our Connected
Fitness Subscription base.
Free Cash Flow
We define Free Cash Flow as Net cash (used in) provided by operating activities
less capital expenditures and capitalized internal-use software development
costs. Free cash flow reflects an additional way of viewing our liquidity that,
we believe, when viewed with our GAAP results, provides management, investors
and other users of our financial information with a more complete understanding
of factors and trends affecting our cash flows.
The use of Free Cash Flow as an analytical tool has limitations due to the fact
that it does not represent the residual cash flow available for discretionary
expenditures. For example, Free Cash Flow does not incorporate payments made for
purchases of marketable securities, business combinations and asset
acquisitions. Because of these limitations, Free Cash Flow should be considered
along with other operating and financial performance measures presented in
accordance with GAAP.
33
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The following table presents a reconciliation of Free Cash Flow to Net cash used
in operating activities, the most directly comparable financial measure prepared
in accordance with GAAP, for each of the periods indicated:
Three Months Ended September 30,
2022 2021
(in millions)
Net cash used in operating activities $ (202.8) $ (561.0)
Capital expenditures, including software (43.6) (91.0)
Free Cash Flow $ (246.3) $ (651.9)
Liquidity and Capital Resources
Our operations have been funded primarily through net proceeds from the sales of
our equity and convertible debt securities, and term loan, as well as cash flows
from operating activities. As of September 30, 2022 , we had Cash and cash
equivalents of approximately $938.5 million .
We anticipate approximately $75 million to $100 million of capital expenditures
over the next 12 months, which includes amounts related to capitalized labor,
investments in content and our studios, product development, systems
implementation, and the impact of expenditures before any proceeds from the
expected eventual sale of Peloton Output Park .
We believe our existing cash and cash equivalent balances and cash flow from
operations will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. Our future capital
requirements may vary materially from those currently planned and will depend on
many factors, including our rate of revenue growth, timing to adjust our supply
chain and cost structures in response to material fluctuations in product
demand, timing and amount of spending related to acquisitions, the timing and
amount of spending on research and development and manufacturing initiatives,
the timing and financial impact of product recalls, sales and marketing
activities, the timing of new product introductions, market acceptance of our
Connected Fitness Products, timing and investments needed for international
expansion, and overall economic conditions. To the extent that current and
anticipated future sources of liquidity are insufficient to fund our future
business activities and requirements, we may be required to seek additional
equity or debt financing. The sale of additional equity would result in
additional dilution to our stockholders. The incurrence of debt financing would
result in debt service obligations and the instruments governing such debt could
provide for operating and financing covenants that would restrict our
operations. There can be no assurances that we will be able to raise additional
capital. The inability to raise capital would adversely affect our ability to
achieve our business objectives.
Restructuring Plan
In February 2022 , we announced and began implementing the Restructuring Plan to
realign our operational focus to support our multi-year growth, scale the
business, and improve costs. The Restructuring Plan originally included: (i)
reducing our headcount; (ii) closing several assembly and manufacturing plants,
including the completion and subsequent sale of the shell facility for our
previously planned Peloton Output Park ; (iii) closing and consolidating several
distribution facilities; and (iv) shifting to third-party logistics providers in
certain locations. We expect the Restructuring Plan to be substantially
implemented by the end of fiscal 2024.
In July 2022 , August 2022 and October 2022 , the Company took actions to update
the Restructuring Plan. On July 12, 2022 we announced we are exiting all
owned-manufacturing operations and our expansion of our current relationship
with Taiwanese manufacturer Rexon Industrial Corporation. Additionally, on
August 12, 2022 , we announced the decision to perform the following additional
restructuring activities: (i) fully transition our North American Field
Operations to third-party providers, including the significant reduction of our
delivery workforce teams; (ii) eliminate a significant number of roles on the
North America Member Support team and exit our real-estate footprints in our
Plano and Tempe locations; and (iii) reduce our North America retail showroom
presence. On October 6, 2022 , we announced approximately 500 global team member
positions have been eliminated.
Total charges related to the Restructuring Plan were $169.8 million for three
months ended September 30, 2022 , consisting of cash charges of $27.0 million for
severance and other personnel costs and $3.1 million for professional fees and
other related charges, and non-cash charges of $62.9 million related to
non-inventory asset write-downs and write-offs, and $76.8 million for
stock-based compensation expense.
In connection with the Restructuring Plan, the Company estimates that it will
incur additional cash charges of approximately $70 million , primarily composed
of severance and other exit costs in fiscal year 2023 and beyond. Additionally,
the Company expects to recognize additional non-cash charges of approximately
$70 million , primarily composed of asset impairment and stock-based compensation
charges in fiscal year 2023 in connection with the Restructuring Plan.
We may not be able to realize the cost savings and benefits initially
anticipated as a result of the Restructuring Plan, and the costs may be greater
than expected. See "Risk Factors-Risks Related to Our Business-We may not
successfully execute or achieve the expected benefits of our restructuring
initiatives and other cost-saving measures we may take in the future, and our
efforts may result in further actions and/or additional asset impairment charges
and adversely affect our business" in our Form 10-K.
34
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Convertible Notes
In February 2021 , we issued $1.0 billion aggregate principal amount of 0%
Convertible Senior Notes due 2026 (the "Notes") in a private offering, including
the exercise in full of the over-allotment option granted to the initial
purchasers of $125.0 million . The Notes were issued pursuant to an Indenture
between us and U.S. Bank National Association , as trustee. The Notes are our
senior unsecured obligations and do not bear regular interest, and the principal
amount of the Notes does not accrete. The net proceeds from the offering were
approximately $977.2 million , after deducting the initial purchasers' discounts
and commissions and our offering expenses.
Capped Call Transactions
In connection with the offering of the Notes, we entered into privately
negotiated capped call transactions with certain counterparties (the "Capped
Call Transactions"). The Capped Call Transactions have an initial strike price
of approximately $239.23 per share, subject to adjustments, which corresponds to
the approximate initial conversion price of the Notes. The cap price of the
Capped Call Transactions will initially be approximately $362.48 per share. The
Capped Call Transactions cover, subject to anti-dilution adjustments
substantially similar to those applicable to the Notes, 6.9 million shares of
Class A Common Stock. The Capped Call Transactions are expected generally to
reduce potential dilution to the Class A Common Stock upon any conversion of
Notes and/or offset any potential cash payments we would be required to make in
excess of the principal amount of converted Notes, as the case may be, with such
reduction and/or offset subject to a cap based on the cap price. If, however,
the market price per share of Class A Common Stock, as measured under the terms
of the Capped Call Transactions, exceeds the cap price of the Capped Call
Transactions, there would be dilution and/or there would not be an offset of
such potential cash payments, in each case, to the extent that the then-market
price per share of the Class A Common Stock exceeds the cap price of the Capped
Call Transactions.
Class A Common Stock Offering
On November 16, 2021 , we entered into an underwriting agreement (the
"Underwriting Agreement") with Goldman Sachs & Co. LLC and J.P. Morgan
Securities LLC as representatives of the several underwriters named therein
(collectively, the "Representatives") relating to the offer and sale by the
Company (the "Offering") of 27,173,912 shares (the "Shares") of the Company's
Class A Common Stock, which includes 3,260,869 shares of Class A Common Stock
issued and sold pursuant to the exercise in full by the underwriters of their
option to purchase additional shares of Class A Common Stock pursuant to the
Underwriting Agreement. We sold the Shares to the underwriters at the public
offering price of $46.00 per share less underwriting discounts. The net proceeds
from the Offering were approximately $1.2 billion , after deducting the
underwriters' discounts and commissions and our offering expenses.
Second Amended and Restated Credit Agreement
In 2019, the Company entered into an amended and restated revolving credit
agreement (as amended, modified or supplemented prior to entrance into the
Second Amended and Restated Credit Agreement (as defined below), the "Amended
and Restated Credit Agreement"). The Amended and Restated Credit Agreement
provided for a $500.0 million secured revolving credit facility, including up to
the lesser of $250.0 million and the aggregate unused amount of the facility for
the issuance of letters of credit.
The Amended and Restated Credit Agreement also permitted the incurrence of indebtedness to permit the Capped Call Transactions and issuance of the Notes.
OnMay 25, 2022 , the Company entered into an Amendment and Restatement Agreement to the Second Amended and Restated Credit Agreement (as amended, restated or otherwise modified from time to time, the "Second Amended and Restated Credit Agreement") withJPMorgan Chase Bank, N.A ., as administrative agent, and certain banks and financial institutions party thereto as lenders and issuing banks. Pursuant to the Second Amended and Restated Credit Agreement, the Company amended and restated the Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement provides for a$750.0 million term loan facility (the "Term Loan"), which will be due and payable onMay 25, 2027 or, if greater than$200.0 million of the Notes are outstanding onNovember 16, 2025 (the "Springing Maturity Condition"),November 16, 2025 (the "Springing Maturity Date"). The Term Loan amortizes in quarterly installments of 0.25%, payable at the end of each fiscal quarter and on the maturity date. The Second Amended and Restated Credit Agreement also provides for a$500.0 million revolving credit facility (the "Revolving Facility"),$35.0 million of which will mature onJune 20, 2024 (the "Non-Consenting Commitments"), with the rest ($465.0 million ) maturing onDecember 10, 2026 (the "Consenting Commitments") or if the Springing Maturity Condition is met and the Term Loan is outstanding on such date, the Springing Maturity Date. The key terms of the Revolving Facility remain substantially unchanged from those set forth in the Amended and Restated Credit Agreement, including requiring compliance with a total level of liquidity of not less than$250.0 million and maintaining a minimum total four-quarter revenue level of$3.0 billion (which are replaced with a covenant to maintain a minimum debt to adjusted EBITDA ratio upon our meeting a specified adjusted EBITDA threshold). The Revolving Facility bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 2.25% per annum or the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 1.25% per annum for the Consenting Commitments, and bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate plus 2.75% per annum or the Alternate Base Rate plus 1.75% per annum for the Non-Consenting Commitments. The Company is required to pay an annual commitment fee of 0.325% per annum and 0.375% per annum on a quarterly basis based on the unused portion of the Revolving Facility for the Consenting Commitments and the Non-Consenting Commitments, respectively. 35 -------------------------------------------------------------------------------- The Term Loan bears interest at a rate equal to, at our option, either at the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 5.50% per annum or the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 6.50% per annum. Each such margin will increase one time by 0.50% per annum if the Company chooses not to obtain a public rating for the Term Loan fromS&P Global Ratings or Moody's Investors Services, Inc. on or prior toNovember 25, 2022 . Any borrowing at the Alternate Base Rate is subject to a 1.00% floor and a term loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.50% floor and any revolving loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.00% floor. The Second Amended and Restated Credit Agreement contains customary affirmative covenants as well as customary covenants that restrict our ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Second Amended and Restated Credit Agreement also contains certain customary events of default. Certain baskets and covenant levels have been decreased and will apply equally to both the Term Loan and Revolving Facility for so long as the Term Loan is outstanding. After the repayment in full of the Term Loan, such baskets and levels will revert to those previously disclosed in connection with the Amended and Restated Credit Agreement. The obligations under the Second Amended and Restated Credit Agreement with respect to the Term Loan and the Revolving Facility are secured by substantially all of our assets, with certain exceptions set forth in the Second Amended and Restated Credit Agreement, and are required to be guaranteed by certain material subsidiaries of the Company if, at the end of future financial quarters, certain conditions are not met. As ofSeptember 30, 2022 , we were in compliance with the covenants under the Second Amended and Restated Credit Agreement. As ofSeptember 30, 2022 , we had drawn the full amount of the Term Loan and we had not drawn on the Revolving Facility, and we therefore had$748.1 million total outstanding borrowings under the Second Amended and Restated Credit Agreement. As ofSeptember 30, 2022 , we had outstanding letters of credit totaling$82.6 million , of which$77.8 million is classified as Restricted cash on the Condensed Consolidated Balance Sheet. Cash Flows Three Months Ended September 30, 2022 2021 (in millions) Net cash used in operating activities $ (202.8)$ (561.0) Net cash (used in) provided by investing activities (43.6) 29.3 Net cash provided by financing activities 2.1 29.6 Operating Activities Net cash used in operating activities of$202.8 million for the three months endedSeptember 30, 2022 was primarily due to a net loss of$408.5 million and a net increase in operating assets and liabilities of$106.8 million , offset by an increase in non-cash adjustments of$312.5 million . The increase in operating assets and liabilities was primarily due to a$178.7 million decrease in accounts payable and accrued expenses as a result of a decrease in payables due to decreased inventory spending, partially offset by a$109.9 million decrease in inventory. Non-cash adjustments primarily consisted of stock-based compensation expense, long lived asset impairment expense, depreciation and amortization, non-cash operating lease expense, and net foreign currency adjustments. Investing activities Net cash used in investing activities for the three months endedSeptember 30, 2022 of$43.6 million was a result of capital expenditures primarily related the continued build out of our showrooms and offices, and software placed into service throughout the year. Financing activities Net cash provided by financing activities of$2.1 million for the three months endedSeptember 30, 2022 was primarily related to exercises of stock options of$4.1 million , partially offset by a$1.9 million principal repayment to the Term Loan. 36 --------------------------------------------------------------------------------
Commitments
As of
Payments due by period
Total Less than 1-3 years 3-5 years More than
Contractual obligations: 1 year 5 years
(in millions)
Lease obligations (1) $ 1,037.4 $ 131.9 $ 233.4 $ 200.5 $ 471.6
Minimum guarantees (2) 270.0 149.8 120.2 - -
Unused credit facility fee
payments (3) 6.6 1.6 3.1 1.8 -
Other purchase obligations (4) 72.1 45.0 24.9 2.2 -
Convertible senior notes (5) 1,000.0 - - 1,000.0 -
Supplier settlements (6) 103.4 103.4 - - -
Term loan 748.1 7.5 15.0 725.6 -
Total $ 3,237.5 $ 439.1 $ 396.6 $ 1,930.1 $ 471.7
(1) Lease obligations relate to our office space, warehouses, production
studios, equipment, and retail showrooms and microstores. As of September 30,
2022 , the Company had additional operating leases for real estate that have not
yet commenced of $11.5 million which has been included above. The original lease
terms are between one and twenty-one years, and the majority of the lease
agreements are renewable at the end of the lease period. The Company has finance
lease obligations of $2.6 million , also included above.
(2) We are subject to minimum royalty payments associated with our license
agreements for the use of licensed content. See "Risk Factors - Risks Related to
Our Business- We are a party to many music license agreements that are complex
and impose numerous obligations upon us that may make it difficult to operate
our business, and a breach of such agreements could adversely affect our
business, operating results, and financial condition" in our Form 10-K.
(3) Pursuant to the Second Amended and Restated Credit Agreement, we are
required to pay a commitment fee of 0.325% and 0.375% on a quarterly basis based
on the unused portion of the Revolving Facility for the revolving loans maturing
on December 10, 2026 and June 20, 2024 , respectively. As of September 30, 2022 ,
we had outstanding letters of credit totaling $82.6 million , of which $77.8
million was classified as Restricted cash.
(4) Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to cloud computing costs.
(5) Refer to Note 7 - Debt in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details regarding our convertible senior notes obligations. (6) Supplier settlements relate to payments to third-party suppliers to exit purchase commitments. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. We utilize contract manufacturers to build our products and accessories. These contract manufacturers acquire components and build products based on demand forecast information we supply, which typically covers a rolling 12-month period. Consistent with industry practice, we acquire inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover our forecasted product and manufacturing requirements for periods that range a number of months. In certain instances, these agreements allow us the option to cancel, reschedule, and/or adjust our requirements based on our business needs for a period of time before the order is due to be fulfilled. While our purchase orders are legally cancellable in many situations, some purchase orders are not cancellable in the event of a demand plan change or other circumstances, such as where the supplier has procured unique, Peloton-specific designs, and/or specific non-cancellable, non-returnable components based on our provided forecasts. As ofSeptember 30, 2022 , our commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of our products were estimated to be approximately$332.0 million . See "Risk Factors-Risks Related to Our Business-Our operating results could be adversely affected if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory" in our Form 10-K.
Off-Balance Sheet Arrangements
We did not have any undisclosed off-balance sheet arrangements as of
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. In preparing the condensed consolidated
financial statements, we make estimates and judgments that affect the reported
amounts of assets, liabilities, stockholders' equity, revenue, expenses, and
related disclosures. We re-evaluate our estimates on an on-going basis. Our
estimates are based on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Because of the
uncertainty inherent in these matters, actual results may differ from these
estimates and could differ based upon other assumptions or conditions. The
critical accounting policies that reflect our more significant judgments and
estimates used in the preparation of our condensed consolidated financial
statements include those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Critical Accounting Estimates" in
Part I, Item 7 of our Form 10-K.
37
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Revenue Recognition
As described in Note 8 - Commitments and Contingencies in the Notes to Condensed
Consolidated Financial Statements, the Company announced voluntary recalls of
the Company's Tread+ and Tread products, permitting customers to return the
products for a refund. The amount of a refund customers are eligible to receive
may differ based on the status of an approved remediation of the issue driving
the recall, and the age of the Connected Fitness Unit being returned. We
estimate a returns reserve primarily based on historical and expected product
returns, product warranty, and service call trends. We also consider current
trends in consumer behavior in order to identify correlations to current trends
in returns. However, with current uncertainty in the global economy, negative
press and general sentiment surrounding Peloton's post-pandemic business and
financial performance, and the absence of a complete remediation plan with the
CPSC for our Tread+ product, predicting expected product returns based on
historical returns becomes less relevant, requiring reliance on highly
subjective estimates based on our interpretation of how current conditions and
factors will drive consumer behavior.
On October 18, 2022 , the CPSC and the Company jointly announced that consumers
now have more time to get a full refund if they wish to return their Tread+.
With the extension of the full refund period for one additional year, to
November 6, 2023 , the Company expects that more Members will opt for a full
refund, and accordingly has increased the Company's return reserve. As of
September 30, 2022 and June 30, 2022 , our returns reserve related to the impacts
of the recalls was $57.9 million and $40.8 million , respectively.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies in the Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly
Report on Form 10-Q under the section titled "Recently Issued Accounting
Pronouncements" for a discussion about new accounting pronouncements adopted and
not yet adopted as of the date of this Quarterly Report on Form 10-Q.
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