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Peloton balances connected fitness activities on a dwindling pile of cash

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Turnarounds are full of surprises, Barry McCarthy noted on Tuesday, as the veteran CFO credited with pulling Netflix and Spotify through their rocky early years held his first call with analysts since becoming chief executive. of Platoon.

Three months into the connected fitness company’s hiring, the biggest surprise has been its cash flow, he said. To some on Wall Street, that was an understatement.

In the quarter to March 31, nearly $750 million of cash was withdrawn from the company, up from about $200 million a year earlier. The company which raised more than $1.1 billion when it went public in September 2019 ended the period with less than $880 million in unrestricted cash and cash equivalents.

That, McCarthy admitted, left him “barely capitalized” for his size. Peloton had arranged to borrow an additional $750 million, he said, but the company declined to disclose the interest rate charged by the banks.

The unwelcome cash flow surprise sent Peloton shares to new lows, reducing its valuation to around half of what it was at the time of the IPO and less than a tenth of where it had peaked in 2020, when investors bet that a pandemic era shift from gyms to home fitness would survive Covid-19.

The collapse of those hopes in the face of pressure from activist investor Blackwells Capital has already led Peloton to move co-founder John Foley from the CEO’s chair.

It also abandoned a planned $400 million plant in Ohio and cut its workforce by 2,800 people as part of an effort to cut costs by $800 million. And he has faced speculation he could be sold to a larger group – despite McCarthy’s insistence he hasn’t joined the company to sell him.

But Tuesday’s results left analysts repeating the questions they had before Foley backtracked: Is Peloton’s long-term view of the size of its potential market realistic, and is it even wise to pursue? a mass-market strategy when it built its brand on the fanatical loyalty of a wealthy but much smaller group of customers?

Chief Financial Officer Jill Woodworth reiterated the belief Foley expressed at the height of Wall Street’s optimism about the company: that half of the world’s current gym membership – or 100 million people – could one day be customers of Peloton.

“It looks like new direction, same story,” said BMO Capital Markets analyst Simeon Siegel, a longtime skeptic: “The company recognizes that it needs to recover and restructure while maintaining its long-term opportunities. term have not changed.”

With just 7 million members at the end of the last quarter, Woodworth conceded, “we need to scale the strategy quite significantly to get to that 100 million.”

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There are four “drivers” of this evolution, she said: international growth, retail partnerships, expanding the reach of an application that does not require a bicycle or a treadmill, and the rolling out a “fitness-as-a-service” program that allows users to rent Peloton equipment and access its classes for a monthly fee.

The call McCarthy and Woodworth had with analysts on Tuesday, however, made it clear that there is still significant uncertainty about each of these strategies.

McCarthy said he was “not yet sure” of the international rollout, noting Peloton’s “finite” resources and the fact that geographic expansion would cost money in the short term. “International has the potential to generate significant growth, but the more growth it generates early in the process, the more money we lose,” he observed.

It was too early to talk about potential partnerships with retailers, he added. Similarly, when asked what value digital app subscriptions would add, he said he didn’t know.

The app “could be a type of premium model. It could be a direct subscription model. Not sure yet,” he said.

And while he hailed the early growth of its fitness-as-a-service offering as encouraging Peloton’s belief that such subscriptions could appeal to a “mass market” audience of low-income customers, he noted that it had so far only involved 1,000 units.

He was “just in love with everything,” he said of the fitness-as-a-service concept, but admitted he wasn’t sure it would bring the returns Peloton was hoping for.

However, McCarthy was more definitive about what was still holding the company back from realizing some of its ambitions. The company had “exploded” from about 700,000 subscribers to millions since the start of the pandemic, he noted, but its systems still relied on “the original code that was hacked during the first organization of the company”.

It slowed down the speed at which it could do things like test alternative versions of its fitness-as-a-service offering, he said. “I mean really? You have to wait until the end of June to be able to do A/B testing on the site? It’s something that would take a day and a half at Netflix, even at the beginning,” he recalls.

Some analysts, such as Baird, are also turning to Netflix and Spotify analogies, valuing Peloton in reference to McCarthy’s former companies, but he has yet to convince others that he can find a similar mass market of subscribers. .

“The problem is that the company built its business on the belief that demand would never stop,” Siegel said.

McCarthy maintains that he remains optimistic about the way forward, “stock price notwithstanding.” However, he has yet to convince holders of that action like Blackwells, who declined to comment on Tuesday.

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