Barry McCarthy, president and CEO of Peloton Interactive, walks to a morning session at the Allen & Company Sun Valley Conference on July 6, 2022 in Sun Valley, Idaho.
Kevin Dietsch | Getty Images
Platoon announced Thursday that CEO Barry McCarthy will resign and the company will lay off 15% of its workforce because it “simply had no other way to align its expenses with its revenues.”
McCarthy, a former Spotify And Netflix executive, will become a strategic advisor to Peloton through the end of the year, while Karen Boone, the company's chairman, and director Chris Bruzzo will serve as interim co-CEOs. Boone most recently served as CFO of Restoration hardware while Bruzzo was director of for a long time Electronic art. Peloton is looking for a permanent CEO.
The company also announced a broad restructuring plan that will reduce its global workforce by 15%, or approximately 400 employees. The company plans to continue closing showrooms and changing its international sales plan.
The measures are intended to realign Peloton's cost structure with the current size of its business, the company said in a news release. Annual run-rate costs are expected to decline by more than $200 million by the end of fiscal year 2025. About half of those savings will come from pay cuts, while the rest will come from lower marketing spend, a smaller store footprint, and reduced IT and software spending, chief financial officer Liz Coddington said.
The departments most affected by the restructuring are Peloton's research and development teams, marketing teams and international teams, Coddington said.
“This restructuring will position Peloton for sustainable, positive free cash flow while enabling the company to continue investing in software, hardware and content innovation, improvements to the member support experience, and optimizations to marketing efforts to scale the business,” said Company. said.
Shares of Peloton rose more than 12% in premarket trading, but opened more than 6% lower after the company's conference call with Wall Street analysts concluded.
Peloton board ready for its next CEO
McCarthy took the helm of Peloton from founder John Foley in February 2022 and has spent the past two years restructuring the company and working to get it growing again.
As soon as he took over, he implemented mass layoffs that fit Peloton's cost structure, closed some of the company's splashy showrooms and implemented new strategies to grow membership. He reorganized Peloton's executive team, oversaw its rebranding and created new revenue streams such as the company's rental program.
The latest round of cuts, which affected 500 employees, was announced in October 2022. McCarthy later said the company's restructuring was “complete” and was instead focusing on “growth.”
“We are done now,” McCarthy had said of the layoffs in November 2022. “No more heads need to be removed from the case.”
Unlike Peloton's founder, McCarthy shifted Peloton's focus to its app as a way to engage members who might not be able to afford the company's expensive bikes or treadmills but might be interested in tracking the digital classes.
In a letter to staff, McCarthy said the company now had to implement further layoffs because it would not be able to generate sustainable free cash flow with its current cost structure. Peloton hasn't turned a profit since December 2020 and can only burn cash for so long if it has more than $1 billion in debt on its balance sheet.
'Achieve positively [free cash flow] makes Peloton a more attractive borrower, which is important as the company focuses its attention on the necessary task of successfully refinancing its debt,” McCarthy said in the memo.
In a letter to shareholders, the company said it is “mindful” of the timing of the maturities of its debt, which includes convertible notes and a term loan. It said it is working closely with its lenders JPMorgan And Goldman Sachs on a 'refinancing strategy'.
“Overall, our refinancing objectives are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more on this topic.”
In a press release, Boone thanked McCarthy for his contributions.
“Barry joined Peloton at an incredibly challenging time for the company. During his tenure, he laid the foundation for scalable growth by steadily restructuring the company's cost structure to create stability and achieve the important milestone of achieving positive free cash flow reaches.” Boone said.
“With a strong leadership team in place and the company now on solid foundations, the Board of Directors has determined that this is an opportune time to begin the search for Peloton's next CEO.”
On a conference call with analysts, Boone said Peloton's board is looking for a leader who can “design and lead the next phase of growth for the company.”
Disappointing earnings, lowered prospects
Also on Thursday, Peloton reported its fiscal third-quarter results and fell short of Wall Street expectations on both revenue and profit. Here's how the affiliated fitness company fared compared to what Wall Street expected, based on a survey of analysts by LSEG:
- Loss per share: 45 cents versus an expected loss of 37 cents
- Gain: $718 million versus $723 million expected
The company's reported net loss for the three-month period ended March 31 was $167.3 million, or 45 cents per share, compared with a loss of $275.9 million, or 79 cents per share, a year earlier.
Revenue fell to $718 million, down about 4% from $748.9 million a year earlier.
Peloton has tried everything to get the company back to revenue growth. It removed the free membership option from its fitness app, expanded its corporate wellness offering and partnered with mega brands such as Lululemon to grow membership, but none of the initiatives have been sufficient to grow revenue.
For the ninth straight quarter, Peloton's revenue fell during the fiscal third quarter, compared to the same period a year ago. Since December 2021, sales have not increased compared to the previous year's quarter, when the company's exercise bikes were still in high demand and many had not yet returned to gyms during the Covid-19 pandemic.
The company continues to bleed money and has not made a net profit since December 2020.
For the current fiscal year, Peloton lowered its outlook for paid connected fitness subscriptions, app subscriptions and revenue. It lowered its outlook for affiliated fitness subscriptions by 30,000 members, or 1%, to 2.97 million as it looks at the current quarter, which is typically the most difficult because people tend to exercise less in the spring and summer months.
“Our Paid Connected Fitness Subscription guidance reflects updated hardware sales outlook based on current demand trends and expectations for seasonally lower demand,” the company said.
Peloton now expects app subscriptions to drop 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 refine the acquisition funnel for paid app subscriptions,” the company said.
Due to the expected decline in subscription sales, Peloton now expects full-year revenue to reach $2.69 billion, down approximately $25 million, or 1%. According to LSEG, that is less than expectations of $2.71 billion.
However, the company raised its full-year guidance for gross margin and adjusted EBITDA. It now expects total 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 is largely due to improved third quarter performance, combined with lower media spend and cost savings resulting from the restructuring plan announced today,” the company said.
The search for positive free cash flow
Last February, McCarthy set a goal for Peloton to return to revenue growth within a year. When it didn't reach that milestone, McCarthy pushed it back and said he now expects the company to return to growth in June, at the end of the current fiscal year.
McCarthy also expected Peloton to reach positive free cash flow by June — a goal the company said it achieved early in the third quarter. It is the first time in thirteen quarters that Peloton has achieved that goal. 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 had not paid its suppliers on time, which could temporarily pad its balance sheet. Data from business intelligence firm Creditsafe showed that Peloton's late payments to suppliers spiked in December and again in February, after improving in January.
The company didn't provide specific guidance on what investors can expect with free cash flow in the coming quarters, but it does expect to deliver “modestly positive free cash flow” in the current quarter and into fiscal 2025.
“While we fully intend to return to business growth, the cost savings announced today reduce our cost base and see a path to positive free cash flow without requiring a significant improvement in growth,” Coddington said. the conference call. “I also want to make it clear that we have carefully assessed these cost measures to ensure we still have the opportunity to invest in innovation so that the business can grow profitably.”
Part of the reason Peloton has failed to achieve positive free cash flow is because it simply doesn't sell enough of its hardware, which is expensive to make and has become less popular since the end of the Covid-19 pandemic. pandemic and people returned to gyms.
“Looking at the numbers in more detail, the biggest problem lies in the part of the business where Peloton first made its name: fitness equipment. Revenue from connected fitness products fell 13.6% last year, a sign that consumers are still cooling off. equipment that, while aesthetically and technically attractive, is very expensive,” GlobalData director Neil Saunders said in a note. “Many people who want Peloton gear already have it and probably won't upgrade anytime soon; the rest of the market isn't interested or needs a lot of persuading to buy Peloton.”