Barry McCarthy, President and CEO of Peloton Interactive, walks in a morning session at the Allen & Company Sun Valley Conference on July 06, 2022 in Sun Valley, Idaho.
Kevin Deitch | Getty Images
Peloton It announced Thursday that CEO Barry McCarthy will step down and the company will lay off 15% of its employees because it “simply has no other way to bring its spending in line with its revenue.”
McCarthy, ex Spotify And Netflix The CEO will become a strategic advisor to Peloton through the end of the year, while Karen Boone, the company's president, and director Chris Brozo, will serve as interim co-CEOs. Boone most recently served as CFO Hardware recovery While Brozo was a long-time CEO at Electronic Arts. Peloton is looking for a permanent CEO.
The company also announced a broad restructuring plan that will see its global headcount reduced by 15%, or about 400 employees. It plans to continue closing its retail showrooms and making changes to its international sales plan.
These moves are aimed at realigning Peloton's cost structure with the current size of its business, it said in a press release. It is expected to reduce annual run-rate expenses by more than $200 million by the end of fiscal 2025. About half of those savings will come from payroll reductions, while the rest will come from reduced marketing spending and reduced retail store space, CFO Liz Coddington said. Reduced spending on IT and software.
Coddington said the departments most affected by the restructuring will be Peloton's research and development, marketing and international teams.
“This restructuring will enable Peloton to have sustained, positive free cash flow, while enabling the company to continue investing in software, hardware and content innovation, improvements to its member support experience, and improved marketing efforts to expand the business.” He said.
Peloton shares rose more than 12% in premarket trading but opened down more than 6% after the conclusion of the company's conference call with Wall Street analysts.
Peloton's board of directors is ready for its next CEO
McCarthy took over the helm of Peloton in February 2022 from founder John Foley and has spent the past two years restructuring the company and working to return it to growth.
Once in office, he implemented mass layoffs right-sized for Peloton's cost structure, closed some of the company's impressive showrooms and enacted new strategies aimed at growing membership. He overhauled Peloton's executive team, oversaw its rebranding and created new revenue drivers like the company's rental program.
The latest round of cuts, affecting 500 employees, was announced in October 2022. McCarthy later said the company's restructuring was “complete” and that it was instead focused on “growth”.
“We're done now,” McCarthy said in November 2022 of the layoffs. “There are no more heads to put out of business.”
Unlike Peloton's founder, McCarthy redirected Peloton's attention to its app as a way to attract members who might not be able to afford the company's expensive bikes or treadmills but might be interested in taking its digital classes.
In a letter to employees, McCarthy said the company now needs to implement layoffs again because it will not be able to generate sustainable free cash flow with its current cost structure. Peloton hasn't made a profit since December 2020 and can only burn cash for so long when it has more than $1 billion in debt on its balance sheet.
“Achieving positive (free cash flow) makes Peloton a more attractive borrower, which is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in the note.
In a letter to shareholders, the company said it was “aware” of the timing of maturity of its debt, which includes convertible notes and a term loan. She works closely with her lenders JP Morgan And Goldman Sachs On “Refinancing Strategy”.
“In general, our refinancing objectives are to reduce debt and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and interest from our existing lenders and investors and look forward to sharing more on this topic.”
In a press release, Boone thanked McCarthy for his contributions.
“Barry joined Peloton during an extremely challenging time for the company. During his tenure, he laid the foundation for scalable growth by steadily restructuring the company's cost structure to stabilize and reach the important milestone of positive free cash flow.” Boone said.
“With a strong leadership team in place and the company now on a solid footing, the Board of Directors has decided that now is the right time to search for Peloton’s next CEO.”
During a conference call with analysts, Boone said Peloton's board is looking for a leader who can “architecture and lead the next phase of growth for the company.”
Disappointing earnings, lowering expectations
Also on Thursday, Peloton announced its third-quarter financial results and fell short of Wall Street's expectations for the bottom line. Here's how the connected fitness company's performance compared to what Wall Street expected, based on a survey of analysts conducted by LSEG:
Loss per share: 45 cents vs. expected loss of 37 cents Revenue: $718 million vs. $723 million expected
The company's reported net loss for the three-month period ending March 31 was $167.3 million, or 45 cents per share, compared to a loss of $275.9 million, or 79 cents per share, in the previous year.
Sales fell to $718 million, down about 4% from $748.9 million the previous year.
Peloton has tried a little of everything to get the company back to sales growth. It has removed the free membership option from its fitness app, expanded its corporate health offerings and partnered with huge brands like Lululemon To increase membership, but none of the initiatives were enough to increase sales.
For the ninth straight quarter, Peloton's revenues declined during the third fiscal quarter, compared to the same period last year. It has not seen sales growth compared to the same quarter last year since December 2021, when demand for the company's stationary bikes was still high and many had not yet returned to gyms amid the COVID-19 pandemic.
The business continues to hemorrhage money and has not made a net profit since December 2020.
For the current fiscal year, Peloton lowered its forecasts for paid connected fitness subscriptions, app subscriptions and revenue. It cut its connected fitness subscription forecast by 30,000 members, or 1%, to 2.97 million as it looks toward the current quarter, which is typically the toughest because people tend to exercise less in the spring and summer months.
“Connected Fitness paid subscription guidance reflects an updated forecast for device sales based on current demand trends and expectations of seasonally lower demand,” the company said.
Peloton now expects app subscriptions to fall by 150,000, or 19%, to 605,000.
“We are maintaining our disciplined approach to app media spend as we evaluate our app tiers and pricing and optimize the path to acquisition of paid app subscriptions,” the company said.
As a result of the expected contraction in subscription sales, Peloton now expects full-year revenue to reach $2.69 billion, a decrease of about $25 million, or 1%. That's below expectations of $2.71 billion, according to LSEG.
However, the company raised its full-year forecast for gross margin and adjusted EBITDA. It now expects gross margin to grow by 50 basis points, to 44.5%, and adjusted EBITDA to grow by $37 million, to negative $13 million.
“This increase was largely driven by the outperformance from the third quarter, coupled with lower media spending and cost reductions from the restructuring plan announced today,” the company said.
Striving to reach positive free cash flow
Last February, McCarthy set a goal of returning Peloton to revenue growth within a year. When it failed to reach that milestone, McCarthy pushed back and said he now expects the company to return to growth in June, at the end of the current financial year.
McCarthy also expected Peloton to reach positive free cash flow by June — a goal the company said it reached early during the third quarter. It's the first time Peloton has reached that number in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow but it's unclear how sustainable that number is.
Last month, CNBC reported that Peloton wasn't paying its vendors on time, which could temporarily stretch its balance sheet. Data from business intelligence firm Creditsafe showed that Peloton's late payments to vendors rose in December and again in February after improving in January.
The company did not provide specific guidance on what investors can expect in terms of free cash flow in the coming quarters, but said it expects to “deliver modest positive free cash flow” in the current quarter and in fiscal 2025.
“While we strongly intend to return the business to growth, with the cost reductions announced today, we are reducing our cost base and see a path to positive free cash flow without requiring a significant improvement in growth to get there,” Coddington said. Conference call. “I also want to make clear that we have carefully reviewed these cost metrics to ensure that we still have the capacity to invest in innovation so that the business can grow profitably.”
Part of the reason Peloton has failed to reach positive free cash flow is that it simply doesn't sell enough of its equipment, which is expensive to manufacture and has become less popular since the Covid-19 pandemic ended and people returned to gyms.
“Looking at the numbers in more detail, the biggest problem is in the part of the business where Peloton first made its name: exercise equipment. Connected fitness product revenues were down 13.6% compared to last year in a sign that consumers are still cooling off.” The equipment, while aesthetically and technically pleasing, is very expensive, Neil Saunders, GlobalData's managing director, said in a note. “A lot of people who want Peloton equipment already own it and aren't likely to upgrade anytime soon; the balance of the market is either not interested or needs a lot of convincing to buy into Peloton.”
