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 ofDecember 31, 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+, Guide, and Row. 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 ourConnected 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.
Second 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 over 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 ourConnected 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. Product and Content Highlights Our annualThanksgiving Day and "Turkey Burn" classes were again a Member hit, with over 790 thousand Members completing 1.3 million workouts. Responding to member feedback for new and innovative class formats, November saw the debut of "LOL Cody", our first "variety class" series created to break down pop culture's biggest moments. Cycling instructorCody Rigsby hosted a collection of live classes featuring special guests such asMariah Carey ,Carly Rae Jepsen ,Bowen Yang , andMatt Rogers , as well as drop-ins by guest Peloton instructors. November also saw the launch of our "Extra 10" series, a collection of classes designed to provide members ten extra minutes of focused workout time, without warm-up introductions. Extra 10s are a mixture of intervals, climbs, and low-impact cycling and Tread classes, which we plan to extend to additional modalities in the new calendar year. An instant hit with Members, Extra 10s saw over 1.3 million workouts taken in the quarter by over 540 thousand Members.
In December, we officially launched and began deliveries of our new
To support our growing community of Tread users,Logan Aldridge ,Hannah Frankson ,Camila Ramon , andAlex Toussaint joined our Tread instructor roster during the quarter, bringing our Tread instructor count up to 24. In the quarter, we produced over 700 classes across our running, walking, and Tread bootcamp modalities, bringing our total Tread class count to over 7,300 at quarter's end. Lastly, in December we announced that our award-winning Tread will be available inAustralia starting in February. 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.
In
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Additionally, on August 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 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 $62.4 million and $232.2
million for the three and six months ended December 31, 2022 , respectively.
Total charges for the three months ended December 31, 2022 consisted of cash
charges of $34.1 million for severance and other personnel costs and $8.9
million for professional fees and other related charges, and non-cash charges of
$9.7 million related to non-inventory asset write-downs and write-offs and $6.0
million for stock-based compensation expense. Total charges for the six months
ended December 31, 2022 consisted of cash charges of $61.1 million for severance
and other personnel costs and $12.0 million for professional fees and other
related charges, and non-cash charges of $72.6 million related to non-inventory
asset write-downs and write-offs and $82.8 million for stock-based compensation
expense.
In connection with the Restructuring Plan, the Company estimates that it will
incur additional cash charges of approximately $35 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
$25 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 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 Recall Update
On May 5, 2021 , we announced separate, voluntary recalls of each of our Tread+
and Tread products in collaboration with the Consumer Product Safety Commission
(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 in August 2021 , shortly before
resuming sales. We continue to work on potential hardware enhancements for
Tread+, which remains recalled. In August 2022 , the CPSC notified us that the
agency staff believes we failed to meet our statutory obligations under the
Consumer Product Safety Act (the "CPSA"), and, in January 2023 , the CPSC
announced a settlement involving civil monetary penalties. To continue our
cooperation with the CPSC, we agreed to pay the $19.1 million civil penalty,
resolving the CPSC's charges that we knowingly failed to immediately report
hazards associated with the Tread+, and we continue to work cooperatively with
the CPSC to further enhance the safety of our products. On October 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, to November 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 to Connected Fitness Products revenue
for actual and estimated future returns of $166.9 million , and return reserves
of $44.5 million and $26.7 million were included within Accounts payable and
accrued expenses in the Condensed Consolidated Balance Sheets related to the
impacts of the recall as of December 31, 2022 and 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.
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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 December 31,
2022 2021
Ending Connected Fitness Subscriptions 3,033,352 2,766,816
Average Net Monthly Connected Fitness Churn 1.1 % 0.8 %
Subscription Gross Profit (in millions) $ 277.9 $ 229.3
Subscription Contribution (in millions)(1) $ 296.6 $ 240.9
Subscription Gross Margin 67.6 % 67.9 %
Subscription Contribution Margin(1) 72.1 % 71.4 %
Net loss (in millions) $ (335.4) $ (439.4)
Adjusted EBITDA (in millions)(2) $ (122.4) $ (266.5)
Net Cash Used in Operating Activities (in millions)(3) $ (88.5) $ (446.6)
Free Cash Flow (in millions)(3) $
(94.4)
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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" 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 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, Guide
or Row product in the same household, the price of the Subscription remains $44
monthly (price increased from $39 to $44 USD effective as of June 1, 2022 ). As
of December 31, 2022 , approximately 7% 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 December 31, Six Months Ended December 31,
2022 2021 2022 2021
(in millions)
Consolidated Statement of Operations Data:
Revenue
Connected Fitness Products $ 381.4 $ 796.4 $ 585.6 $ 1,297.4
Subscription 411.3 337.5 823.6 641.7
Total revenue 792.7 1,133.9 1,409.2 1,939.1
Cost of revenue(1)(2)
Connected Fitness Products 424.2 745.0 684.1 1,185.8
Subscription 133.4 107.9 272.9 209.4
Total cost of revenue 557.6 853.0 957.0 1,395.1
Gross profit 235.0 281.0 452.2 544.0
Operating expenses
Sales and marketing(1)(2) 217.1 348.9 355.8 633.0
General and administrative(1)(2) 192.6 248.5 386.1 489.0
Research and development(1)(2) 80.0 99.8 168.1 197.5
Impairment expense 9.7 9.4 72.6 9.9
Restructuring expense(1) 49.0 - 155.9 -
Supplier settlements 17.9 - 19.1 -
Total operating expenses 566.4 706.6 1,157.6 1,329.4
Loss from operations (331.3) (425.7) (705.3) (785.4)
Other (expense) income, net:
Interest expense (22.2) (8.8) (43.2) (17.4)
Interest income 5.8 0.3 9.8 0.9
Foreign exchange gains (losses) 11.8 (1.7) (5.2) (7.6)
Other income (expense), net 2.4 (0.4) 2.6 (0.4)
Total other income (expense), net (2.2) (10.6) (35.9) (24.6)
Loss before provision for income taxes (333.5) (436.3) (741.2) (809.9)
Income tax expense 1.9 3.1 2.7 5.4
Net loss $ (335.4) $ (439.4) $ (743.9) $ (815.3)
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(1) Includes stock-based compensation expense as follows:
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
(in millions)
Cost of revenue
Connected Fitness Products $ 2.0 $ 6.6 $ 9.3 $ 11.0
Subscription 10.0 5.1 22.7 8.7
Total cost of revenue 12.0 11.7 32.1 19.7
Sales and marketing 7.5 9.0 18.2 15.5
General and administrative 40.5 38.3 92.8 67.8
Research and development 15.6 12.9 37.8 21.7
Restructuring 6.0 - 82.8 -
Total stock-based compensation expense $ 81.6 OnJuly 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$5.1 million and$31.7 million of stock-based compensation expense being pulled forward and recognized in the three and six months endedDecember 31, 2022 . Additionally, onJuly 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 throughJuly 25, 2022 . The repricing did not apply to ourU.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 endedSeptember 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 December 31, Six Months Ended December 31,
2022 2021 2022 2021
(in millions)
Cost of revenue
Connected Fitness Products $ 4.7 $ 4.6 $ 7.5 $ 8.2
Subscription 8.8 6.4 17.3 11.9
Total cost of revenue 13.4 11.0 24.8 20.0
Sales and marketing 8.3 8.0 16.7 12.4
General and administrative 6.6 11.9 13.7 21.7
Research and development 2.9 5.1 5.7 10.1
Total depreciation and amortization expense $ 31.2 $ 36.1 $ 60.9 $ 64.2
Comparison of the Three and Six Months Ended December 31, 2022 and 2021
Revenue
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Revenue:
Connected Fitness Products $ 381.4 $ 796.4 (52.1)% $ 585.6 $ 1,297.4 (54.9)%
Subscription 411.3 337.5 21.8 823.6 641.7 28.3
Total revenue $ 792.7 $ 1,133.9 (30.1)% $ 1,409.2 $ 1,939.1 (27.3)%
Percentage of revenue
Connected Fitness Products 48.1 % 70.2 % 41.6 % 66.9 %
Subscription 51.9 29.8 58.4 33.1
Total 100.0 % 100.0 % 100.0 % 100.0 %
30-------------------------------------------------------------------------------- Three and Six Months EndedDecember 31, 2022 and 2021 Connected Fitness Products revenue decreased$415.0 million and$711.8 million for the three and six months endedDecember 31, 2022 , respectively, compared to the three and six months endedDecember 31, 2021 . These decreases were primarily attributable to fewer Bike, Tread and Accessory deliveries due to a return to our historical seasonality following the strong demand for home fitness in fiscal 2022 attributable to the COVID-19 pandemic. These decreases were partially offset by revenues generated fromPeloton Row which launched in the second quarter of fiscal 2023. Subscription revenue increased$73.7 million and$181.9 million for the three and six months endedDecember 31, 2022 , respectively, compared to the three and six months endedDecember 31, 2021 . These increases were 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 and the three months endedSeptember 30, 2022 under new Subscriptions and our low Average Net Monthly Connected Fitness Churn of 1.14% for both the three and six month periods endingDecember 31, 2022 .
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Cost of Revenue:
Connected Fitness Products $ 424.2 $ 745.0 (43.1)% $ 684.1 $ 1,185.8 (42.3)%
Subscription 133.4 107.9 23.6 272.9 209.4 30.3
Total cost of revenue $ 557.6 $ 853.0 (34.6)% $ 957.0 $ 1,395.1 (31.4)%
Gross Profit:
Connected Fitness Products $ (42.8) $ 51.4 (183.4)% $ (98.4) $ 111.7 (188.2)%
Subscription 277.9 229.6 21.0 550.7 432.3 27.4
Total Gross profit $ 235.0 $ 281.0 (16.3)% $ 452.2 $ 544.0 (16.9)%
Gross Margin:
Connected Fitness Products (11.2) % 6.5 % (16.8) % 8.6 %
Subscription 67.6 % 68.0 % 66.9 % 67.4 %
Three Months Ended
Connected Fitness Products cost of revenue for the three months endedDecember 31, 2022 decreased$320.8 million , or 43.1%, compared to the three months endedDecember 31, 2021 . This decrease was primarily driven by fewer deliveries for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . Our Connected Fitness Products Gross Margin decreased to (11.2)% for the three months endedDecember 31, 2022 compared to 6.5% for the three months endedDecember 31, 2021 , primarily driven by promotional pricing in place during the quarter as well as inventory reserves and write downs, partially offset by reduced payroll expenses resulting from restructuring efforts. Subscription cost of revenue for the three months endedDecember 31, 2022 increased$25.5 million , or 23.6%, compared to the three months endedDecember 31, 2021 . This increase was primarily driven by an increase of$17.9 million in music royalties and platform streaming costs, and an increase of$4.8 million in stock-based compensation expense primarily driven by the acceleration of certain restricted stock unit vesting schedules and an increased number of awards vesting.
Subscription Gross Margin remained consistent for the three months ended
Six Months Ended
Connected Fitness Products cost of revenue for the six months endedDecember 31, 2022 decreased$501.7 million , or 42.3%, compared to the six months endedDecember 31, 2021 . This decrease was primarily driven by fewer deliveries for the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . Our Connected Fitness Products Gross Margin decreased to (16.8)% for the six months endedDecember 31, 2022 compared to 8.6% for the six months endedDecember 31, 2021 , primarily driven by inventory reserves and write downs, promotional pricing in place during the quarter, and higher logistics expenses per delivery.
Subscription cost of revenue for the six months ended
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increase of
Subscription Gross Margin remained consistent for the six months ended
Operating Expenses
Sales and Marketing
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Sales and marketing $ 217.1 $ 348.9 (37.8)% $ 355.8 $ 633.0 (43.8)%
As a percentage of total
revenue 27.4 % 30.8 % 25.2 % 32.6 %
Three and Six Months Ended
Sales and marketing expense decreased$131.8 million and$277.2 million in the three and six months endedDecember 31, 2022 , respectively, when compared to the three and six months endedDecember 31, 2021 . These decreases were primarily due to decreases in spending on advertising and marketing programs of$107.1 million and$244.7 million during the three and six months endedDecember 31, 2022 , respectively. These decreases were also due to decreases in personnel-related expenses of$13.2 million and$20.3 million for the three and six months endedDecember 31, 2022 , respectively, primarily due to decreased average headcount.
General and Administrative
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
General and administrative $ 192.6 $ 248.5 (22.5)% $ 386.1 $ 489.0 (21.0)%
As a percentage of total
revenue 24.3 % 21.9 % 27.4 % 25.2 %
Three and Six Months Ended
General and administrative expense decreased$55.9 million and$102.8 million in the three and six months endedDecember 31, 2022 , respectively, when compared to the three and six months endedDecember 31, 2021 . These decreases were primarily due to decreases in professional services fees of$27.3 million and$73.2 million during the three and six months endedDecember 31, 2022 , respectively. These decreases were also due to decreases in personnel-related expenses of$17.5 million and$28.1 million for the three and six months endedDecember 31, 2022 , respectively, primarily due to decreased average headcount. The overall decreases were partially offset by increases in stock-based compensation expense of$2.2 million and$25.0 million for the three and six months endedDecember 31, 2022 , respectively, 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 December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Research and development $ 80.0 $ 99.8 (19.8)% $ 168.1 $ 197.5 (14.9)%
As a percentage of total
revenue 10.1 % 8.8 % 11.9 % 10.2 %
Three and Six Months Ended
Research and development expense decreased$19.8 million and$29.4 million in the three and six months endedDecember 31, 2022 , respectively, when compared to the three and six months endedDecember 31, 2021 . These decreases were primarily due to decreases in product development and research costs associated with development of new software features and products of$7.7 million and$17.4 million during the three and six months endedDecember 31, 2022 , respectively. Additionally, decreases of$4.1 million and$8.0 million for the three and six months endedDecember 31, 2022 , respectively, were driven by decreased costs associated with software and web platform costs. The decreases were also due to decreases in personnel-related expenses of$8.1 million and$15.1 million for the three and six months endedDecember 31, 2022 , respectively, primarily due to decreased average headcount. The overall decreases in research and development expenses were partially offset by increases in stock-based compensation expense of$2.7 million and$16.0 million for the three and six months ended 32 --------------------------------------------------------------------------------December 31, 2022 , respectively, 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 December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Impairment expense $ 9.7 $ 9.4 3.7% $ 72.6 $ 9.9 NM*
___________________________
*NM - not meaningful
Impairment expense for the three months endedDecember 31, 2022 was$9.7 million comprised primarily of asset write-downs and write-offs related to retail showroom locations and capitalized software. Impairment expense for the six months endedDecember 31, 2022 was$72.6 million comprised primarily of 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 and retail showroom locations, which we exited during the six months endedDecember 31, 2022 . We expect additional impairments related to assets associated with retail showroom locations as we continue to reduce our footprint during the fiscal year in connection with the Restructuring Plan.
Restructuring expense
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Restructuring expense $ 49.0 $ - NM* $ 155.9 $ - NM*
___________________________
*NM - not meaningful
Restructuring expense for the three and six months endedDecember 31, 2022 was$49.0 million and$155.9 million , respectively. Restructuring expense consisted of$6.0 million and$82.8 million of stock-based compensation expense for the three and six months endedDecember 31, 2022 , respectively, 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$34.1 million and$61.1 million of cash severance and other personnel costs for the three and six months endedDecember 31, 2022 , respectively. In addition, there were increases of$8.9 million and$12.0 million in professional fees and other costs associated with exit and disposal activities for the three and six months endedDecember 31, 2022 , respectively. There were no restructuring expenses for the three and six months endedDecember 31, 2021 .
Supplier Settlements
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Supplier Settlements $ 17.9 $ - NM* $ 19.1 $ - NM*
Supplier settlements were $17.9 million and $19.1 million for the three and six
months ended December 31, 2022 , respectively, which consisted of settlement and
related costs paid to third-party suppliers to terminate certain future
inventory purchase commitments.
Other Income (Expense), Net and Income Tax Expense
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 % Change 2022 2021 % Change
(dollars in millions)
Interest expense $ (22.2) $ (8.8) *NM $ (43.2) $ (17.4) *NM
Interest income 5.8 0.3 *NM 9.8 0.9 *NM
Foreign exchange gains
(losses) 11.8 (1.7) *NM (5.2) (7.6) *NM
Other income (expense), net 2.4 (0.4) *NM 2.6 (0.4) *NM
Income tax expense 1.9 3.1 *NM 2.7 5.4 *NM
___________________________
*NM - not meaningful
33
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Other income, net, was comprised of the following for the three and six months
ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$22.2 million and$43.2 million , respectively; •Interest income from cash, cash equivalents, and short-term investments of$5.8 million and$9.8 million , respectively; and •Foreign exchange gains (losses) of$11.8 million and$(5.2) , respectively.
Other expense, net, was comprised of the following for the three and six months
ended
•Interest expense primarily related to the amortization of the convertible notes discount and deferred financing costs of$8.8 million and$17.4 million , respectively; •Interest income from cash, cash equivalents, and short-term investments of$0.3 million and$0.9 million , respectively; •Foreign exchange losses of$1.7 million and$7.6 million , respectively; and •Unrealized losses on short-term investments of$0.4 million and$0.4 million , respectively.
Income tax expense for the three and six months ended
Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles
generally accepted in
Adjusted EBITDA 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. We use Adjusted EBITDA as a measure 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 is 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 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 provides 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 has limitations as an analytical tool, and you should not consider this measure 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: •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 does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; •Adjusted EBITDA excludes 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 does 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 does 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 does not reflect transaction and integration costs related to acquisitions;
•Adjusted EBITDA does not reflect impairment charges for goodwill and fixed assets, and gains (losses) on disposals for fixed assets;
•Adjusted EBITDA does not reflect the impact of purchase accounting adjustments
to inventory related to the
34
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•Adjusted EBITDA does 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 does not reflect reorganization, severance, exit, disposal and other costs associated with restructuring plans;
•Adjusted EBITDA does not reflect non-recurring supplier settlements; and
•The expenses and other items that we exclude in our calculation of Adjusted
EBITDA 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 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
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
(dollars in millions)
Net loss $ (335.4) $
(439.4)
2.2 10.6 35.9 24.6
Income tax expense 1.9 3.1 2.7 5.4
Depreciation and amortization expense 31.2 36.1 60.9 64.2
Stock-based compensation expense 75.6 71.9 180.9 124.8
Impairment expense 9.7 9.4 72.6 9.9
Restructuring expense 52.7 - 159.6 -
Supplier settlements 17.9 - 19.1 -
Product recalls(1) 2.3 14.7 31.2 27.5
Litigation and settlement expenses(2) 19.3 25.3 25.0 51.8
Other adjustment items 0.2 1.9 1.0 6.9
Adjusted EBITDA $ (122.4) $ (266.5) $ (155.1) $ (500.1)
______________________
(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
zero and $26.5 million , recorded costs in Connected Fitness Products cost of
revenue associated with inventory write-downs and logistic costs of zero and
$2.5 million , and operating expenses of $2.3 million and $2.3 million associated
with recall-related hardware development costs, in each case for the three and
six months ended December 31, 2022 , respectively. For the three and six months
ended December 31, 2021 , these include a reduction to Connected Fitness Products
revenue for actual and estimated future returns of $7.4 million and $18.9
million , recorded costs in Connected Fitness Products cost of revenue associated
with inventory write-downs and logistic costs of $5.2 million and $5.7 million ,
and operating expenses of $2.1 million and $3.0 million associated with
recall-related hardware development costs, respectively.
(2) Includes litigation-related expenses and settlement for certain
non-recurring patent infringement litigation, securities litigation, consumer
arbitration, and product recalls for the three and six months ended December 31,
2022 and 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 our Connected 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:
35
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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
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 December 31, Six Months Ended December 31,
2022 2021 2022 2021
(dollars in millions)
Subscription Revenue $ 411.3 $ 337.5 $ 823.6 $ 641.7
Less: Cost of Subscription 133.4 107.9 272.9 209.4
Subscription Gross Profit $ 277.9 $ 229.6 $ 550.7 $ 432.3
Subscription Gross Margin 67.6 % 68.0 % 66.9 % 67.4 %
Add back:
Depreciation and amortization expense $ 8.8 $ 6.4 $ 17.3 $ 11.9
Stock-based compensation expense 10.0 5.1 22.7 8.7
Subscription Contribution $ 296.6 $ 241.2 $ 590.7 $ 452.9
Subscription Contribution Margin 72.1 % 71.4 % 71.7 % 70.6 %
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.
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 December 31, Six Months Ended December 31,
2022 2021 2022 2021
(in millions)
Net cash used in operating activities $ (88.5) $ (446.6) $ (291.3) $ (1,007.6)
Capital expenditures and capitalized
internal-use software development costs (5.9) (100.1) (49.5) (191.0)
Free Cash Flow $ (94.4) $ (546.7) $ (340.7) $ (1,198.6)
36
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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 December 31, 2022 , we had Cash and cash
equivalents of approximately $871.0 million .
We anticipate capital expenditures over the next 12 months which include
capitalized labor, investments in content and our studios, product development
and systems implementation, offset by 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 $62.4 million and $232.2
million for the three and six months ended December 31, 2022 , respectively.
Total charges for the three months ended December 31, 2022 consisted of cash
charges of $34.1 million for severance and other personnel costs and $8.9
million for professional fees and other related charges, and non-cash charges of
$9.7 million related to non-inventory asset write-downs and write-offs and $6.0
million for stock-based compensation expense. Total charges for the six months
ended December 31, 2022 consisted of cash charges of $61.1 million for severance
and other personnel costs and $12.0 million for professional fees and other
related charges, and non-cash charges of $72.6 million related to non-inventory
asset write-downs and write-offs and $82.8 million for stock-based compensation
expense.
In connection with the Restructuring Plan, the Company estimates that it will
incur additional cash charges of approximately $35 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
$25 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.
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
37
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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. 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. As stipulated in the Second Amended and Restated Credit Agreement, the applicable rates increased one time by 0.50% per annum as the Company chose not to obtain a public rating for the Term Loan fromS&P Global Ratings orMoody'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. 38 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , we were in compliance with the covenants under the Second Amended and Restated Credit Agreement. As ofDecember 31, 2022 , we had drawn the full amount of the Term Loan and we had not drawn on the Revolving Facility, and we therefore had$746.3 million total outstanding borrowings under the Second Amended and Restated Credit Agreement. As ofDecember 31, 2022 , we had outstanding letters of credit totaling$85.4 million , of which$80.6 million is classified as Restricted cash on the Condensed Consolidated Balance Sheet. Upon entering the Term Loan, the effective interest rate was 10.2% and onNovember 25, 2022 the rate was updated to 13.7%. Cash Flows Six Months Ended December 31, 2022 2021 (in millions) Net cash used in operating activities$ (291.3) $ (1,007.6) Net cash (used in) provided by investing activities (49.5) 299.6 Net cash provided by financing activities 27.9 1,287.2 Operating Activities Net cash used in operating activities of$291.3 million for the six months endedDecember 31, 2022 was primarily due to a net loss of$743.9 million and a net increase in operating assets and liabilities of$27.7 million , partially offset by an increase in non-cash adjustments of$425.0 million . The increase in operating assets and liabilities was primarily due to a$218.5 million decrease in accounts payable and accrued expenses as a result of a decrease in accrued expense and payables due to supplier settlements and decreased inventory spending, partially offset by a$316.4 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 six months endedDecember 31, 2022 of$49.5 million was a result of capital expenditures primarily related to software development, and the continued build out of our warehouses and studios. Financing activities Net cash provided by financing activities of$27.9 million for the six months endedDecember 31, 2022 was primarily related to exercises of stock options of$29.9 million , partially offset by a$3.8 million principal repayment to the Term Loan.
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) $ 963.3 $ 123.4 $ 214.5 $ 184.5 $ 441.0
Minimum guarantees (2) 236.0 149.5 86.5 - -
Unused credit facility fee
payments (3) 6.2 1.6 3.1 1.4 -
Other purchase obligations (4) 165.7 59.9 47.7 58.1 -
Convertible senior notes (5) 1,000.0 - - 1,000.0 -
Supplier settlements (6) 19.8 19.8 - - -
Term loan 746.3 7.5 15.0 723.8 -
Total $ 3,137.3 $ 361.7 $ 366.8 $ 1,967.7 $ 441.0
(1) Lease obligations relate to our office space, warehouses, production
studios, equipment, and retail showrooms and microstores. 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 $1.2 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 December 31, 2022 ,
we had outstanding letters of credit totaling $85.4 million , of which $80.6
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.
39-------------------------------------------------------------------------------- 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 ofDecember 31, 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$274.1 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.
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
December 31, 2022 and June 30, 2022 , our returns reserve related to the impacts
of the recalls was $44.5 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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