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Peloton Interactive (NASDAQ: PTON)
Q1 2025 Earnings Call
Oct 31, 2024, 8:30 a.m. ET

Peloton Announces Leadership Changes Amid Q1 2025 Financial Update

Key Updates in the Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to Peloton’s first quarter fiscal 2025 conference call. At this time, all participants are in listen-only mode. Following the speaker’s presentation, there will be a question-and-answer session. Please note, today’s conference is being recorded.

I would now like to turn the conference over to your speaker, Mr. James Marsh, Senior Vice President of Investor Relations. Please go ahead.

James Milton Marsh — Senior Vice President, Head of Investor Relations

Thank you, operator. Good morning, and welcome to Peloton’s first quarter fiscal 2025 conference call. Joining the call are Peloton board members and Interim Co-CEOs Karen Boone and Chris Bruzzo, along with Liz Coddington. Our remarks today will represent management’s views as of now and will include forward-looking statements under federal securities law.

Actual results may vary significantly from what is said today due to various risks and uncertainties. Please consult our SEC filings and today’s shareholder letter, available on our investor relations website, for a discussion of these risks.

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Now, I will hand the call over to Interim Co-CEO Karen Boone.

Karen Boone — Interim Co-Chief Executive Officer

Good morning, and thank you for participating today. Before we review our financial results, I’m excited to announce that we have found our new CEO. Peter Stern will officially take over as CEO and president on January 1, 2025.

Peter brings over 20 years of experience in hardware, software, services, and content from industry giants like Ford, Apple, and Time Warner Cable. He has played a crucial role in Apple Fitness Plus and has been part of the Peloton community since 2016, showcasing his commitment to our brand.

I am eager to welcome him to Peloton at the start of the new year. Now, let’s discuss our financial progress. We are reaffirming our fiscal 2025 financial goals, including achieving over $200 million in cost savings by the end of the fiscal year through our restructuring plan laid out in May 2024.

We aim to enhance our unit economics across all products and grow our business sustainably while investing strategically in innovation, which should help us regain top-line growth in the long run. Our first quarter results surpassed our projections, and Liz will provide further insights shortly.

Regarding profitability metrics, our Q1 shows $13 million of GAAP operating income, $11 million in free cash flow, and $116 million in adjusted EBITDA. We have over 6 million members in our connected fitness subscription program, with approximately 2.9 million paying subscribers and $1.7 billion in annualized subscription revenue, maintaining a 68% gross margin. These results reflect our ongoing efforts towards cost reduction.

We’ve been focused on improving the lifetime value (LTV) of our subscribers versus customer acquisition costs (CAC), and adjustments made in pricing and promotional activities during Q1 are part of this strategy. We’re also investing in marketing and content to enhance subscriber engagement, which is vital for growth and member retention.

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Peloton Adapts Strategy with Optimized Pricing and International Growth as Customer Base Expands

Peloton is taking decisive steps to lower customer acquisition costs and maximize profitability. In the first quarter, the company implemented pricing changes across all international markets, specifically raising the price of bike products to boost the gross margin of connected fitness products.

This strategy was particularly vital in Germany, where Peloton has shifted to a fully third-party retail model. This operational change allows Peloton’s website to serve primarily as a platform for brand awareness and education while directing sales to third-party retailers like Amazon and FitShop. Following this transition, Germany’s sales have exceeded internal expectations, and the company is hopeful that this channel strategy will facilitate future expansions into other international markets.

In Q1, Peloton reported an 8% increase in paid connected fitness subscribers outside of North America. The company remains optimistic about international markets as a key driver of long-term growth, showcasing strong retention and engagement trends similar to those in North America. Peloton aims to refine its sales channel strategy to enhance the unit economics of its North American business, including closing underperforming first-party retail locations.

Next month, Peloton will trial a new smaller store concept in Nashville, Tennessee, aimed at developing a more cost-efficient retail strategy. Additionally, ahead of the busy holiday season, the company ramped up its online and third-party retail capabilities. In early October, Peloton partnered with Truemed, allowing eligible U.S. customers to use pre-tax dollars from health savings accounts (HSA) or flexible spending accounts (FSA) to purchase products. Furthermore, for the first time, the Peloton Bike Plus will be available at Costco, featuring special pricing at 300 U.S. locations and online.

These strategic shifts place Peloton in an advantageous position to capitalize on the high demand during the holiday season while improving unit economics, gross margins, and free cash flow. As outlined by the team, these initiatives are vital in transforming Peloton into a more sustainable and profitable business for long-term member satisfaction and growth.

Chris Bruzzo — Interim Co-Chief Executive Officer

Thank you, Karen. As mentioned, we are committed to enhancing our customer acquisition costs. This involves adopting strategic marketing campaigns targeting specific growth audiences while maintaining discipline with marketing expenditures. In fact, in Q1, we reduced our total sales and marketing expense by $64 million, or 44%, compared to the previous year, led by historically low media spending during the quarter.

Our Q1 marked the lowest media spend since fiscal 2020, four years ago. This deliberate pullback occurred because Q1 is historically a slow sales period for hardware. As we approach the holiday season, we plan to increase our media spending to drive demand for hardware sales and new subscriber acquisitions.

The evolution of our go-to-market strategy focuses on developing demand among new growth audiences while also improving short-term conversion efficiency. Notably, women comprise two-thirds of our membership, highlighting an opportunity to engage more men through targeted messaging that emphasizes the benefits of a Peloton membership. An added growth avenue lies in the estimated at-home treadmill market, which is more than twice as large as the stationary bike market.

Recent marketing initiatives appear to be effective. In Q1, hardware sales directed toward men increased by 9% year-over-year, with the tread portfolio witnessing the highest growth. These efforts continue to refine our lifetime value (LTV) to customer acquisition cost (CAC) ratio year-over-year, which improved to 1.9x in Q1, although still slightly below our target of over 2x.

As we continue our push for increased media spending and promotional activities in Q2 for the holiday season, it is essential to recognize that many new customers acquired during this time may not activate their subscriptions until Q3, leading to potential quarterly fluctuations in LTV to CAC.

Beyond our marketing efforts, product innovation is crucial for long-term growth. Recently, we have introduced software updates aimed at increasing member engagement through various workout options, personalization levels, and more social interactivity. We are currently in the early testing phase and look forward to scaling the successful initiatives based on member feedback.

Our strength training offerings also continue to expand. In September, we launched a public beta test for Strength Plus, designed to provide gym-based strength training programs tailored to individual goals. Over 70,000 sign-ups have already shown interest, and we are gaining valuable insights from our feedback group of 5,000 participants.

Another area of strong interest is game-inspired fitness. In Q1, over 10% of active subscribers engaged with our first game-inspired offering, Lanebreak. We are also exploring a second game-inspired experience currently in closed beta, aiming to deliver a competitive workout environment.

Finally, we are testing personalized workout plans based on individual fitness goals to enhance engagement and retention among both new and existing members. As the fitness landscape continues to evolve, Peloton remains dedicated to optimizing its offerings to better serve its community.

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Peloton’s Strong Engagement and Financial Performance in Q1

Peloton is enhancing social interaction among its members, leading to more engagement on its fitness platform. A recent feature launch called Private Teams allows users to share results and compete in challenges, fostering community connections.

Team registration is progressing well, meeting expectations. Early indicators suggest that members of these teams are increasing their workouts and connecting with others through the Find Friends feature faster than before. This demonstrates a positive network effect growing within the community.

In addition to these software updates, Peloton continues to impress its members with high-quality instructor-led fitness content. Engagement results for Q1 were stable compared to the previous year and significantly higher than pre-pandemic levels.

The annual All for One Programming Event showcased popular musicians, including a live performance by Keith Urban. These classes generated over 26,000 live member workouts and attracted more than 900,000 on-demand workouts within the first week of release. To cater to diverse interests, Peloton introduced new programs such as Strength for Soccer, barre, Pilates, yoga, and meditation. They also expanded their treadmill offerings by launching walking boot camps, providing excellent low-impact workout options.

Furthermore, Peloton is focusing on performance athletes by adding more 75-, 90-, and 120-minute classes based on member demand. The success of these initiatives is reflective of the Peloton team’s dedication to innovation while operating under a streamlined cost structure. Now, let’s hear from Liz Coddington, our Chief Financial Officer, for a review of our Q1 financial results.

Liz Coddington — Chief Financial Officer

Thank you, Chris. I will begin by updating you on our cost restructuring plan initiated in May. By the end of Q1, we accomplished all planned payroll changes, which will yield over $100 million in annual savings. We are also realizing benefits from nonpayroll adjustments.

Together with payroll savings, we remain on track to achieve over $200 million in cost savings by the end of fiscal 2025, with some savings occurring faster than expected. We are also cutting back on media spending beyond our restructuring goals to enhance efficiency.

Turning to our Q1 financial results, we ended the quarter with 2.9 million paid connected fitness subscribers, reflecting a net decrease of 81,000 subscribers. This figure exceeded our expectations by 10,000 subscribers, largely due to lower-than-anticipated churn, despite slightly softer new subscriber growth.

This quarter, our average net monthly churn rate was 1.9%, which was slightly better than predicted. However, it shows a slight increase of about 40 basis points year-on-year. It’s important to note that last year’s churn included a temporary boost from elevated subscription unpauses following our bike seat post recall incident.

We closed the quarter with 582,000 paid app subscriptions, down by 33,000. Remarkably, this result surpassed our expectations by 12,000, attributed to higher subscription additions coupled with improved churn, which stood at 7.1% for the quarter.

In Q1, we also reduced the media budget for promoting paid app subscriptions, all while enhancing app features such as personalized training plans and Private Teams. Future investments in media will depend on positive signals indicating we can grow app subscribers effectively.

Our total revenue for the first quarter reached $586 million, which included $160 million from connected fitness products and $426 million from subscriptions. Revenue from connected fitness products saw a 12% decline compared to the previous year, mainly due to decreases in hardware demand. On the other hand, subscription revenue rose by 3% year-on-year, boosted by content licensing deals with partners like lululemon and Google Fitbit.

Overall, our total revenue beat expectations, surpassing the $560 million to $580 million guidance primarily driven by better-than-anticipated subscription revenue growth. For context, Q1 is typically a slower season for hardware sales, resulting in a revenue mix of 27% from connected fitness products and 73% from subscriptions.

We recorded a total gross profit of $304 million in Q1, reflecting a year-over-year increase of 6%. Our total gross margin stood at 51.8%, exceeding our expectations due to an improved product mix with higher-margin products like Precor and bike rentals, along with lower warehousing costs.

Connected fitness product gross margin reached 9.2%, up by 600 basis points year-over-year. Meanwhile, subscription gross margin stayed stable at 67.8%, reflecting a 40 basis points year-on-year growth.

Total operating expenses, which included restructuring costs, amounted to $291 million, a substantial year-over-year reduction of 30%. We are ahead of our targets for cost savings across all expense categories, with general and administrative expenses down to $120 million—21% lower compared to last year—due to reduced payroll and professional service fees.

Sales and marketing expenses dropped significantly by 44% to $82 million due to lower media spending. As noted, we reduced our Q1 media budget by 57% year-on-year, though we are increasing spending this quarter in preparation for the holidays. Our expectation for Q2’s media spend is a further decline but less severe than Q1.

Research and development expenses fell by 26% to $59 million, primarily due to payroll cuts and reduced product development costs.

In this quarter, we recognized $8 million in impairment and restructuring expenses, of which $5 million was non-cash. Non-cash charges were largely related to asset write-downs from exiting retail locations, while cash charges from exit activities amounted to $3 million.

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Peloton Posts Strong Q1 Results Amid Leadership Transition

In its first quarter, Peloton experienced a mixed bag of financial outcomes, marked by $0.5 million in lower severance costs that helped offset disposal and professional fees. Additionally, the company acknowledged $24 million from supplier settlements linked to a first-quarter dispute resolution.

Adjusted EBITDA Surges Above Expectations

The company’s adjusted EBITDA for Q1 reached $116 million, exceeding the top of its guidance by $56 million and improving by $107 million compared to the previous year. This boost included around $15 million in timing savings within the fiscal year. Free cash flow generated was $11 million, marking the third consecutive quarter of positive figures, leaving Peloton with $722 million in unrestricted cash and cash equivalents by the end of the quarter.

Q2 Guidance Reflects Subscriber Trends

Looking ahead, Peloton anticipates a decline in paid connected fitness subscriptions, forecasting a range of 2.84 million to 2.86 million subscribers for Q2 FY ’25. This estimation represents a sequential decrease of about 50,000 subscribers at the midpoint. However, the company expects to see slight improvement in its average net monthly paid connected fitness churn rate during the same period.

Projected Revenue Gains and Margin Adjustments

For Q2 FY ’25, ending paid app subscriptions are expected to be between 560,000 and 580,000, reflecting a 12,000 subscriber fall at the midpoint. Revenue is projected to increase by $64 million sequentially, with guidance set between $640 million and $660 million. Total gross margin for the quarter is anticipated to drop by approximately 534 basis points to 46.5%, mainly due to a seasonal shift towards connected fitness product sales during the holiday sales period.

Yearly Outlook and Strategic Focus

For the full fiscal year, Peloton’s guidance maintains a range for paid connected fitness subscriptions of 2.68 million to 2.75 million, acknowledging a modest rise in average net monthly churn from previous years. Meanwhile, the forecast for paid app subscriptions has been adjusted down to 550,000 to 600,000. This change is attributed to the decision to limit app media spending while enhancing product development for a better user experience.

Improving Financial Health and Future Initiatives

Peloton remains committed to key financial metrics including total revenue, gross margin, and adjusted EBITDA. The company has kept total revenue guidance steady at $2.4 billion to $2.5 billion, with total gross margin unchanged at 49%. However, they have raised their adjusted EBITDA target by $40 million to a range of $240 million to $290 million, driven by expected cost-saving measures.

Leadership Transition and Future Growth

Chris Bruzzo, Interim Co-CEO, acknowledged the strides made by Peloton since the announcement of a leadership change. Peter Stern will step in as the new CEO and President in January, with Bruzzo transitioning out effective November 1. Following his departure, Bruzzo expressed confidence in the organization and its ongoing initiatives aimed at achieving profitability through cost optimization and improved engagement.

Investor Q&A Session Highlights

During the Q&A session, Simeon Siegel of BMO Capital Markets commended the team on their recent progress and questioned the anticipated strategic approach under the new CEO. Karen Boone, interim co-CEO, emphasized the importance of balancing profitability and growth in their ongoing strategy.

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New Leadership Marks a Transformative Chapter Ahead for the Company

Leadership Transition to Focus on Growth and Profitability

As the search for our next CEO concludes, Peter emerges as the ideal candidate for this pivotal moment. With a solid background in strategy, he is recognized for his ability to execute plans effectively while driving innovation and growth. Recently, we undertook significant steps to improve our financial situation, including refinancing our debt in May. This move has stabilized our balance sheet, enabling us to better manage upcoming financial commitments. Liz has highlighted our initiatives to restructure by lowering inventory levels, which positions us to enhance profitability and generate the cash necessary for reducing debt.

Currently, we are navigating through an uncertain macroeconomic climate and a challenging consumer landscape influenced by various factors including recent weather events and political elections. Therefore, we are focusing on aspects within our control. Under Peter’s leadership, we plan to avoid unprofitable growth pursuits while maintaining a disciplined approach to our expenditures across our profit and loss statements. We are optimizing our marketing investments to improve unit revenue on a product and channel level. Although our spending on growth initiatives remains limited, innovation continues to be vital for us.

We are committed to allocating resources for product development and marketing, especially leading into the upcoming holiday season. Peter’s expertise will be critical as we navigate this strategy, ensuring that his incentives align with our profitability and growth objectives. He embraces a growth mindset; however, we anticipate a brief period where he evaluates past strategies for effective decision-making going forward. His approach will allow us to recalibrate our investments to enhance growth.

As we move forward in aligning our strategies, I am optimistic that Peter will lead us back to growth, particularly in the health and wellness sector, which we believe has great potential. His research will help solidify our direction in tackling new endeavors.

Chris Bruzzo — Interim Co-Chief Executive Officer

Karen and I have been highly involved in the process of transitioning to Peter’s leadership, and we are confident he embodies the right mix of growth focus and balance.

Simeon Siegel — Analyst

It’s clear that optimism is a prevailing sentiment here. I’d like to quickly pivot to Liz regarding the recent inventory growth.

Liz Coddington — Chief Financial Officer

Indeed, this quarter marks a slight growth in inventory levels for the first time in a considerable period. This increase is largely seasonal, aimed at preparing for the holiday buying surge, and we anticipate a favorable inventory position for the full year. Our supply chain team has worked diligently with our manufacturing partners to enhance efficiency and lessen production rates, which allows us to better manage inventory going forward. Overall, while there is a slight uptick this quarter, we foresee our inventory levels decreasing as the fiscal year progresses.

Simeon Siegel — Analyst

Thank you, and best wishes for a successful holiday season!

Karen Boone — Interim Co-Chief Executive Officer

Thank you.

Operator

Thank you. Let’s take our next question from Curt Nagle with Bank of America. Please go ahead.

Unknown Speaker — Bank of America Merrill Lynch — Analyst

Congratulations on a strong quarter. This is Kemunto stepping in for Curt Nagle. Notably, churn levels are consistent with typical seasonal trends. What are your projections for the rest of the year in comparison to last year’s figures?

Liz Coddington — Chief Financial Officer

To provide clarity, our business continues to demonstrate strong subscriber retention alongside low churn rates. In Q1, our average monthly churn rate was 1.9%, which is on par with the previous quarter, exhibiting an increase of 40 basis points year-over-year. We anticipated this rise due to factors such as diminished retention rates among both first and third-party subscribers and shifts toward secondary market subscribers, who generally have lower retention. Additionally, a prior one-time benefit contributed to churn rates last year, further complicating year-over-year comparisons.

Moving forward into Q2, we expect some seasonal improvement in churn rates compared to Q1, although it is likely to be less pronounced than the previous year’s quarter-over-quarter growth. This is primarily due to the same retention challenges we face and shifts in our subscription mix.

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Peloton Focuses on Sustainable Growth Amidst Strategic Changes

Positive Subscriber Trends and Future Potential

Peloton’s subscriber numbers continue to rise year after year, largely due to growth from the secondary market. The company anticipates churn will remain below 2% for fiscal 2025. However, Peloton’s forecasts do not account for possible increases in subscriber retention resulting from software innovations discussed earlier. These innovations could improve member engagement and retention, though the timing and impact remain uncertain.

Insight from Bank of America Merrill Lynch Analyst

Unknown Speaker – Bank of America Merrill Lynch – Analyst

Great. Thank you.

Liz Coddington – Chief Financial Officer

Thank you.

Operator

Thank you. One moment for our next question, and that will come from the line of Brian Nagel with Oppenheimer. Your line is open.

Brian Nagel – Analyst

Hi, good morning. Congratulations on the business and the CEO announcement. My first question is about the balance sheet. You mentioned that 2025 is expected to be a year of deleveraging.

Could you provide more detail? The business seems more stable financially now and is generating cash flow. What specific steps are you taking to address the remaining debt on the balance sheet?

Liz Coddington – Chief Financial Officer

Yes, this is Liz. I’ll start. Karen mentioned earlier that we derisked our balance sheet with the refinancing in May, allowing us to focus on long-term deleveraging.

We are pleased to discuss our positive free cash flow and an increase in our minimum free cash flow target. We are also being disciplined with our investments to promote sustainable and profitable future growth. The free cash flow we generate presents opportunities for significant deleveraging while improving our adjusted EBITDA. By doing so, we naturally decrease our debt. As our leverage ratio drops below 5, we could see real interest cost savings from rate reductions, and there is potential to convert our 2029 5.5% convertible notes. Overall, our balance sheet is in a stronger position than before, allowing us to strategically reduce gross debt moving forward. However, we do not have a specific capital allocation strategy to share at this time.

Brian Nagel – Analyst

That’s very helpful. Go ahead, sorry.

Chris Bruzzo – Interim Co-Chief Executive Officer

Did you have a follow-up question?

Brian Nagel – Analyst

I did. Thank you for that. My follow-up is about the growth potential for Peloton. You have maintained a strong core customer base and low churn rates. Looking ahead, where do you see new customer demands and opportunities for expansion?

Chris Bruzzo – Interim Co-Chief Executive Officer

That’s a great question, Brian. Our marketing focus has shifted to identify specific target demographics efficiently. For example, we have recently targeted men, a market segment where we’ve seen a growing interest. Currently, two-thirds of our members are women, so we’re adjusting our messaging and advertising, including campaigns during NFL games.

We are also excited about the response to these campaigns, particularly the increase in demand for our tread and tread plus products among men. This approach not only diversifies our reach but ensures we connect with potential customers effectively.

In November, we plan to hold member gratitude events, further engaging our loyal customer base and encouraging them to invite friends and family into the Peloton experience.

Brian Nagel – Analyst

Very helpful. I appreciate it. Thank you.

Chris Bruzzo – Interim Co-Chief Executive Officer

Thank you.

James Milton Marsh – Senior Vice President, Head of Investor Relations

Operator, can we have the next question, please?

Operator

One moment for our next question, and that will be from Nathan Feather with Morgan Stanley. Your line is open.

Nathan Feather – Analyst

Hey, everyone, thanks for taking my question. It’s encouraging to see progress toward profitability. Looking at your strategy for sustainable growth, what role do you see for physical retail as part of your market approach, especially with the launch at Costco? Are there customers who prefer in-person purchases over online, and how do you plan to enhance performance at owned stores?

Karen Boone – Interim Co-Chief Executive Officer

This is Karen. Regarding retail, we are in the process of closing some underperforming locations. However, we will have stores open this holiday season. Our team has planned engaging events in select stores to enhance brand representation and interact with customers.

We are experimenting with a smaller micro store model in Nashville, which requires lower capital and staff while maintaining a physical presence. Additionally, exploring partnerships with third-party retailers like Costco will help us reach a broader audience. We are also excited about attracting the many people who shop on Amazon.

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Peloton’s International Strategy and Leadership Transition: Key Insights

Understanding Retail Dynamics and International Growth

Peloton is currently rethinking its retail approach, emphasizing a blend of third-party (3P) and first-party (1P) sales. This shift aims to enhance operational efficiency and expand to more customers while maintaining economic viability. The company acknowledges that traditional retail is evolving but remains a vital part of its business.

Strategic International Expansion Amid Defined Constraints

When discussing international growth, Interim Co-CEO Karen Boone highlighted Germany as a success story where Peloton has adopted a fully 3P model. Adjusting pricing was essential to ensure profitability for third-party vendors, thus aligning with Peloton’s economic strategies. Boone mentioned that the company’s investment decisions are not limited by any particular factor but are instead driven by the prioritization of various opportunities.

The company expresses enthusiasm for a centralized, pricing-adjusted go-to-market strategy, indicating that future expansion plans will be evaluated under new leadership.

Thoughtful Market Expansion with Localized Content

Co-CEO Chris Bruzzo remarked that expanding into new international markets will focus on creating relevant local content. The goal is to ensure quality experiences that resonate with each market’s specific needs, thereby reflecting Peloton’s dedication to providing value to its global customers.

Leadership Transition: Peter as a New Vision

Analyst Shweta Khajuria brought attention to the recent appointment of Peter as CEO. Boone enthusiastically noted Peter’s extensive background, aligning with Peloton’s mission. His experience in the technology sector, particularly with Apple, is seen as an asset that will drive innovation and growth. Boone stressed that Peter shares a strong commitment to Peloton’s core values, believing deeply in the company’s commitment to health and wellness.

This leadership change is seen as an opportunity to reinforce Peloton’s trajectory towards returning to growth after establishing a stable base. Both Boone and Bruzzo expressed confidence in Peter’s thoughtful approach to leading the company’s next chapter.

Marketing Strategy: A Shift Towards Discipline

Analyst Andrew Boone inquired about Peloton’s recent decision to reduce marketing expenses. Bruzzo noted that the focus has shifted towards disciplined, effective audience targeting rather than heavy promotions. This adjustment has been instrumental in lowering customer acquisition costs and enhancing overall marketing efficiency. The team, led by Lauren Weinberg, is dedicated to balancing demand creation efforts with effective engagement strategies for existing members.

Future Profit Margins and Growth Leverage

On the topic of connected fitness gross profit margins, Bruzzo acknowledged ongoing improvements but noted the need for continued efforts to reach the company’s goal of achieving a two to three times lifetime value (LTV) to customer acquisition cost (CAC) ratio. With strategic initiatives in place, Peloton aims to bolster its profitability while maintaining a sustainable growth trajectory.

This careful balancing of marketing and growth reflects Peloton’s broader objective of strengthening its foundation in the competitive fitness industry.

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Peloton Eyes Profitable Growth as Holiday Season Approaches

Peloton is actively working on improving its financial metrics, focusing on gross margins and customer acquisition costs as it enters the busy holiday season. Interim CEO Chris Bruzzo emphasized during a recent discussion that the company is intent on making smart investments in future growth while maintaining discipline in spending.

Strategic Changes to Boost Gross Margins

According to Bruzzo, Peloton has initiated pricing changes and reduced promotional activities to enhance its gross margins, making headway in improving these figures during the first quarter. As the company approaches the second quarter, it plans to continue with promotional activities for the holidays, but will remain focused on improving long-term customer lifetime value (LTV).

Part of this strategy includes a cautious approach to customer acquisition costs (CAC). “We must not overspend on acquiring unprofitable customers,” Bruzzo explained, underscoring the shift towards more efficient marketing messages aimed at targeted audiences. Additionally, cost-saving measures such as optimizing advertising expenditures and reducing retail showroom presence will further enhance profitability.

Further Growth in Connected Fitness Margins

Even with these challenges, Peloton believes it can continue to improve its connected fitness gross margins. The company is committed to driving efficiencies in operations, suggesting that there is still significant room for progress. Moreover, the growth of the Precor business segment is expected to positively impact overall margins in connected fitness.

Holiday Plans and Competitive Market Analysis

As the holiday season approaches, Peloton enters with cautious optimism. While there are macroeconomic uncertainties, Bruzzo reassured that the company will maintain strict controls over media spending and promotional strategies, particularly compared to the previous year’s holiday season.

Chief Financial Officer Liz Coddington provided insight into the broader connected fitness market, noting a 2% decline year-over-year during the first quarter for the overall fitness sector. However, gyms are showing signs of recovery, growing by 3% to 4% compared to a more robust growth rate seen in earlier quarters. Despite these trends, Peloton’s importance in the connected fitness market remains pronounced, as the firm prioritizes profitability amidst these shifts.

The Role of Content in Driving Engagement

Addressing a question about content investment, Bruzzo reiterated that content remains central to Peloton’s customer experience. The company plans continued investment and innovation in instructor-led content, with new offerings such as hiking and walking experiences being introduced recently. These moves reflect Peloton’s commitment to enhancing user experience and engagement.

In closing, Coddington added that Peloton is also exploring non-class-based content, aiming to diversify its offerings with entertainment and gaming-inspired fitness experiences. As Peloton navigates the complexities of the current market, its strategic focus on profitability and customer engagement will remain vital.

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Peloton’s Leadership Transition: A Focus on Innovation and Member Engagement

Company Sees Potential Beyond Core Workouts

Peloton is expanding its offerings beyond instructor-led workouts. The company is introducing new modalities and non-class options, which have started to gain traction among subscribers. Engaging content is key: the more subscribers interact with Peloton’s services, the more likely they are to remain loyal customers, a trend the company has observed consistently over time.

Leadership Reflection and Future Transition

Karen Boone — Interim Co-Chief Executive Officer

Thank you, operator. As we wrap up the call, I want to commend Chris Bruzzo for his exceptional leadership over the past six months. He has steered our teams to innovate while maintaining a focus on our members during this time of change. I have been fortunate to partner with him in this interim co-CEO role. Thankfully, he will return to the board, allowing us to leverage his experience going forward. I will continue as interim CEO until year-end, after which Peter will assume full leadership in January.

Both Chris and I are committed to ensuring a smooth transition for Peter, whose wealth of experience will be invaluable. He respects our passionate team members dedicated to delivering top-quality experiences for our members daily. Notably, he brings a growth mindset and eagerness to learn about our business. His fresh perspective will help us pursue sustainable and profitable growth effectively.

Lastly, I’m deeply proud of the Peloton leadership team and all the dedicated individuals who are committed to our mission. Their hard work and determination have positioned us well as we progress into this next chapter under Peter’s leadership. We are truly excited about his arrival.

Thank you, and happy holidays.

Operator

[Operator signoff]

Duration: 0 minutes

Call Participants:

James Milton Marsh — Senior Vice President, Head of Investor Relations

Karen Boone — Interim Co-Chief Executive Officer

Chris Bruzzo — Interim Co-Chief Executive Officer

Liz Coddington — Chief Financial Officer

Simeon Siegel — Analyst

Unknown Speaker — Bank of America Merrill Lynch — Analyst

Brian Nagel — Analyst

James Marsh — Senior Vice President, Head of Investor Relations

Nathan Feather — Analyst

Shweta Khajuria — Analyst

Andrew Boone — Analyst

Brian Smilek — Analyst

Eric Sheridan — Analyst

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