All right, we're gonna go ahead and get started. I'm Doug Anmuth, JP Morgan's Internet analyst. I'm very excited to have with us today Peloton's President and CEO, Barry McCarthy. Peloton provides nearly 7 million members with expert instruction, world-class content, and the fitness industry's leading music library to create impactful and entertaining workout experiences for anyone, anywhere, at any stage in their fitness journey. Peloton content can be accessed via the Peloton Bike+, Tread, Guide, Row, or the Peloton App, and now has multiple membership tiers, which I'm sure Barry will talk to us about. Barry joined as CEO in February of 2022. He was previously CFO of Spotify from 2015 to 2020, and prior to that, CFO of Netflix from 1999 to 2010. He's also been a consultant to TCV and on the boards of a number of companies across the tech sector. Welcome, Barry. Thanks, Doug. All right. kicking off, you're in year two of your tenure as CEO. how do you gauge Peloton's turnaround progress so far? Well, let's see. When I came in my very first communication to investors, I'd say we had three priorities. One was fixed cash flow, which was badly broken. Second was talent density, 'cause talent density is foundational to businesses large and small. The third was to reestablish growth. The good news is that we've made tremendous progress on the cash flow front. Just to put it in perspective, in that first quarter of my tenure as CEO, the business lost $747 million in free cash flow. That is $2 million less than we had in revenue this past quarter. In that quarter, we reported negative cash flow of $55 million, and we reaffirmed that we were on track to get the business cash flow breakeven at the end of the current fiscal year, which will be our Q4, which is the quarter we're currently in. Checkbox on the first priority. Talent density, we have turned over most of the executive team, and there is a lot of terrific talent in the building today. We're executing much faster with greater precision as a result. And because we've been successful in addressing the first 2 priorities for the business, we're able to start focusing on growth, and we called that turning the ship, I think it was 2 quarters ago. The good news is we've stopped talking about the viability of the business, which was very much in question. The question on everybody's mind today, rightly so, is, "Okay, what's the growth gonna be? When are we gonna see it? Where's it coming from? How are you gonna do that?" In terms of the where it's coming from, I think there were four priorities we'd identified. Most of them are new product related, one of which was Fitness as a Service, which we spent a fair amount of time talking about. We went through the last quarter with, I think, 47,000 subs. We saw quarter-over-quarter growth of 70% in that category. We have a related product, which is Certified Pre-Owned. And that also is growing pretty quickly for us. International is an area of growth. We'll be talking more about that in quarters to come. We are launched in the U.K., Germany, Australia, Canada. This past fiscal year, we've mostly focused our efforts on reducing the operating loss in those markets rather than leaning into growth. We've made a tremendous amount of progress doing that. In the upcoming fiscal year, we'll be leaning back into growth, mostly in existing markets, and a few new markets in Western Europe, enabled in part by the relaunch of the digital app. Other areas of growth include corporate wellness and hospitality. Last quarter, we expanded our partnership with Hilton. We're 5,400 locations, in the U.S. and we pushed into Puerto Rico and some other new markets with them. I think that holds a lot of promise for us over the next few years. Yeah. All right. Let's talk more about brand. I thought your comments in the 3Q letter were really interesting just about some of the misperceptions around Peloton. How will you get potential users to really appreciate the breadth of Peloton's offerings? Let me answer it this way. Yesterday, we relaunched the brand. I think this comes on the heels of us having been able to attract a super talented new CMO, Leslie Berland, who joined us from Twitter. I'd like to say thank you, Elon. The feeling inside the company is that we have not done a very good job of helping new users understand what existing members already know. We haven't communicated anything about the passionate engagement of the community. You know, mostly, we've projected this image of we're a product for white suburban housewives who are trying to stay fit for their husbands. Aside from the fact that you could hardly be more tongue-dev, it represents almost nothing about the users on the platform today. If any of you have seen the new ads or when you see the new ads, we actually think it's an authentic representation of who our users actually are and what they actually do on the platform. Mostly, we talk about ourselves even as if we're just a bike company. 38% of users last quarter didn't use Peloton hardware in their workouts. 62% of them did, were engaged on the platform, but not on a bike. If you were to go to our gym, we have a pretty nice gym at Peloton, big surprise. You looked at one of the screens on, one of our Treads or one of our Rows, as well as one of our Bikes, the visual imagery you see scrolling across the screen is someone on a Bike. Like, that's just ludicrous. If you're on a Tread, why would you see somebody on a Bike? If you're on a Row, why would you see somebody on a Bike? It's we need to change the vocabulary that we use than the way we sort of, you know, experience ourselves and kind of get beyond the historical success of the franchise, which was based on the bike and become more representative of the behaviors we see on the platform today. Okay, great. The New Brand, the ad efforts, they also tie to the Digital app, and a tiered pricing strategy. Yeah. which you rolled out yesterday. Yeah, yeah. Maybe you can talk about your goals for the digital product, whether you think about it as on-ramp to hardware or strong standalone product or, you know, or somewhere in between those two. The strength of the franchise is the content. That is the user experience. Yeah, the... Look, the bike is terrific. It's the first stationary bike I've ever been on that kind of felt like a road bike. That was a big accomplishment, and I don't mean to diminish it. Isn't the reason that people are passionate about the brand? They're passionate about the brand because of the content. There are many things that have been broken about the business that still remain to be fixed, none of them relate to the content. Do I wanna sell hardware or do I want people to be engaged in the content? I want them be engaged in the content. I want them to subscribe. If you wanna consume the content on our platform, that'll be a terrific experience and more power to you. If you bought somebody else's hardware, I'd be delighted to have you engage in our content. The integration won't be quite as good. The user experience won't be quite as compelling. If you want a piece of the Magic Kingdom, I'd be delighted to sell it to you. If you can afford a Mercedes-Benz, great. We're your Mercedes-Benz. If all you can afford is a Ford, we'd be delighted to sell you part of what we do as well, and that'll be the content. You'll experience it on some kind of a mobile device. It could be your iPad while you're sitting on a NordicTrack treadmill or Bike and, you know, you can sync it via Bluetooth to our content. Go for it. How do I think broadly about the digital opportunity? I think of it as TAM expanding. Yeah, it's an asset-light model, and yeah, the growth margins would be compelling, but it's mostly about allowing users to consume the content wherever they are, whenever it's convenient for them. If you wanna take our content into a gym and do a strength workout or stretch or meditate or ride a bike or walk on a treadmill, we're delighted to have you do that. From our perspective, that's a much better business model than us trying to negotiate with Equinox, even if they didn't own SoulCycle or any, you know, or any other health club. Whether it's in your home, whether you're outdoor exercising and you know you wanna do a running workout with Matt Wilpers, with, you know, on a mobile device, or if you wanna use it in the health club, all that can be enabled by digitally on a mobile device. The magic we're selling is the content. How big of a part of the revenue acceleration and just the growth story in your view is digital? I guess when we think about. It's about 8% of sub-revenue today. You know, obviously much less of total revenue. Where, where could digital go as a part of the business? I think in comparison to the All-Access membership, Like 21%, something like that, if I'm doing the math correctly. I think we finished last quarter with 3.1 million All-Access members and off the top of my head, 850 something, 840, 850 thousand App members. If we can get it to somewhere between 27%-30% of the total, I think that'd be fantastic you know, over the foreseeable future. I can see my finance team and my IR team freaking out at the moment. I don't know. If we had 4 million All-Access members, 1.5 million, something like that would be like a double. What's the foreseeable future? I don't know, 4 or 5 years. I'm speaking about my aspiration for the business. look, we are just relaunching the digital app. Mm-hmm. We'll see whether there's good, better, best, you know, on-ramp using a free service that intentionally frustrates users, but gives them a taste of what it would be like to upgrade to various paid tiers of service, the most expensive of which unlocks for you our content on a hardware platform. Okay, great. Let's shift gears a little bit, talk about Fitness as a Service and then also Certified refurb. Mm-hmm. Those drove almost a quarter of hardware sales in 3Q, up from 19% in the December quarter. What are the early learnings here around those two products and especially around FaaS, just given, you know, how big of a priority that is? FaaS is an acronym that stands for Fitness as a Service, and it's a rental program. It's not a sale. You rent from us a hardware platform, could be new, could be Certified Pre-Owned. We're betting that you'll stay long enough for us to earn a economic return on it. Today we think the payback cycle is somewhere between 18 and 19 months. If you stay longer than that, we, you know, make more money. Our research shows us that about 62% of the volume we're doing is incremental. Those are people who come to the platform because they're able to rent and don't have to make a financial commitment upfront. The early demographic profile for those users looks like professional women who value the optionality. They have plenty of household income. They have commitment issues. Given the underlying economics of it makes a lot of sense for us economically to lean into it and continue to pursue it. You know, if you wanna buy, I'd be delighted to sell you a used refurbished platform or something new, but I'm also delighted to rent if over your expected life you're gonna be profitable. We're gonna pursue both. If the incrementality was less than 50%, you know, it would be a suboptimal strategy for us to pursue, and we would kill it. So far it looks very promising. We're gonna continue to lean into it. What's the... What do you think the awareness is of the rental program of Fitness as a Service? And then also Certified Pre-Owned, you know, as well. How much airtime will those get in? They're low. the new set of brands, brand ads? It is single digits. You know, we're moving away from advertising platforms to advertising the brand generally, but the, you know, a tagline at the end of a 30-second ad might relate to one or the other, Fitness as a Service or Certified Pre-Owned or, you know, something else. What's the... I guess, what's the message for how... You know, it's hard to model this business, which you know, because, look, a hardware sale obviously can be an outright sale. It can be a rental. Those look very- Yeah. A lot of moving pieces. A lot of moving pieces. They look very different. Maybe you can just walk through a little bit of the financial impact there, across rental and PCR, the pre-owned product. Let me just jump back for a moment. You mentioned unaided brand awareness. I wanna link this back to our discussion about the Peloton App. The primary challenge on the Peloton App is the unaided brand awareness is 5%. And the Net Promoter Score for it is 20% higher than our next highest rated piece of hardware. Users absolutely love it, and nobody in the room knows it exists. Well, four out of 100 do. That's the challenge, is we need to increase awareness for it in order to be successful. Okay, sorry for the digression. No. I digress. No, not at all. You mentioned that there are many moving pieces in the model intentionally, because one of the learnings at Netflix was that, you win by having lots of dials to turn in order to fine-tune the performance of the business, and you can never be exactly sure which one of those dials you're gonna turn that's gonna drive performance. You're only in trouble when you run out of dials. As long as you're clear about what your strategic priorities are and you're making the right resource allocation decisions, then, it's imperative that you have enough irons in the fire that even in the presence of uncertainty, you can deliver the performance you've committed to. That's the priority. Okay. maybe shift gears, talk about Tread a little bit. install base of treadmills in the U.S. is at least 2x that of bikes. How, how do you get Tread to have a bigger impact across the product portfolio? The most beloved product we've had seems to be a product. Well, I've seen it, but we've never been able to sell it, and that's the Tread+. People who talk to me about Tread+ just go nuts for Tread+. Which was a more expensive, heavier, kind of industrial grade. isn't a belt, it's a slat machine that was subject to recall before I had joined. Our regulatory agency, the CPSC, had just approved a retrofit for the Tread+ that will enable us to bring that back to the marketplace. One of the things that's gonna help accelerate at least awareness of Tread, will be the excitement around the comeback for the Tread+, which I hope will happen in the fall. It hasn't been manufactured for two years, so we need to set up the manufacturing line and whatnot. Thing one. Thing two is we need to get better at installing it. Mm-hmm. That there's kind of less friction and white noise. When we variabilized the cost structure, we eliminated our own installation team. They were pretty good at installing Tread+. The contractors have been less good at installing it, and that's created a lot of friction for users, unfortunately. I think we're now starting to get our arms around that, but it's been a little bit of a headwind. It's a marketing challenge. Mm-hmm. So... You- We, you know, have a new marketing team. We'll take a slightly different approach. You mentioned, I mean, obviously a bigger product, the slat belt. You know, of course, a more premium type of item. You know, I know it's still early, but is there any chance that you could put this out at a cheaper price point than what it's been in the past? No. Okay. Got it. Well, I mean, let's just think about the economic environment we're in and what's happened to costs over the last, you know, 12 months. We're not re-engineering any of the parts, so it's not like-. The same product. Yeah. I mean, as compared with COVID, the cost of getting it out of Taiwan into the United States has gone down, but everything else has gone up. Mm-hmm. It's not like, you know, we have the benefit of riding an experience curve where we've, you know, dramatically increased the volumes we're shipping and so, you know, our average unit costs are falling because of the experience curve. Just for inflationary reasons alone, and the fact that the, that the BOM is, you know, hasn't changed, it means not likely to cost less. Mm-hmm. Okay. You hit on a little bit the CPSC, but I wanna talk about some of the recent resolutions there. Maybe if you could give us an update on the very recent bike recall and what you're learning there so far? Well, let's see. We've shipped 2,165,000 bikes. 35 seat posts failed. That's a pretty small fraction. The CPSC, who's an agency, a federal agency created in 1972 to protect consumers against death and injury associated with product failures, mandated a recall of the seat posts. That was announced on the 11th, I think. Most at risk are the majority of the 35 breaks occurred for people who were 5'11" or taller and 250 pounds or heavier. Of the 35 breaks, there've been, I think, 12 injuries, the most serious of which was a fractured wrist. Our initial focus has been on shipping replacement seat posts. This is just for the Bike, by the way, not the Bike+. Shipping replacement seat posts to those larger, heavier members who are most at risk. We will have shipped those, all of those by, I think, Wednesday of next week, if I'm recalling correctly. If it's not Wednesday, it's shortly after that. In total, we've had a request for just north of half a million seat posts and which is significantly larger than we were expecting. Well, doesn't matter. It's gonna take us a while to work through all of the requests. Now the CPSC would like all of you, if you have a Bike, to just stop using it until you get a replacement seat post. By the way, you're more likely to become a professional athlete, or to be hit by lightning, or to injure yourself, in your bath, when you're showering after your workout than you are to have a broken seat post. But they would like you to stop. How, how do we think about the financial impact on the, you said the half a million requests that you've gotten. I know you took a reserve in the third quarter, I think almost $8.5 million, you know, certainly with, I guess, some expectation that it could increase. I guess, did you account for that and, you know, leave room in gross margins, let's say, for the June quarter? Well, I think because of the wording of the recall, more people have requested a seat post than we were expecting. There's gonna be a negative impact. I'm uncertain of, you know, what the size of it's gonna be at this point as compared with our financial expectations, probably somewhere in the neighborhood of, I'm gonna give you a broad range, don't freak, $10 million-$20 million of incremental cost, something like that, over time as we, you know, work our way through the backlog of seat posts. You know, hard to know. Okay. All right. Free cash flow. Yeah. Top priority, you highlighted the move toward breakeven. Can you be both free cash flow neutral, you know, and really positive, right, which you're approaching, and then continue to invest in these growth initiatives? Well, absent seat post recalls and absent, you know, IP litigation settlements and the other, you know, white swan events, excuse me, that have been coming over the transom, I think so. We start modeling, you know, says that we can. It kind of depends on the size of the subscription revenue relative to hardware sales. Part of the good news of the comeback of Peloton is that subscription revenue has been growing much faster than hardware sales, and it has a much higher gross margin, and it has different cash flow attributes, all of which are beneficial to the business. Two quarters ago, I think subscription revenue outpaced hardware by $30 million. Last quarter, it outpaced it by $100 million. I think that's gonna continue to widen. The greater the differential, the less pressure on working capital associated with the building of inventory and hardware sales. Last quarter, I think we had a let's call it an inventory liquidation benefit to cash flow of, on the order of $100 million, I think, in the current quarter. Liz Coddington mentioned that it would be on the order of $70 million. It's gonna decrease over time. If we didn't have it today, the turnaround would've been harder, but we do. I think we're growing into the cash flow attributes of the business nicely. I think the question is longer term, can you continue to actually grow the business and afford the capital cost of building inventory to support new growth? I think because of the balance of... The short answer is, we think so, based on our modeling, but, you know, I guess we'll know when we get there. Now that you've taken out a lot of costs, you know, several hundred million dollars, from OpEx, for example, you know, almost at free cash flow, I guess, how do you think about that 2x to 3x LTV to CAC? Could it be time to, you know, open up a little bit more there, you know, as you focus on growth more? Let's spend a minute talking about the theory behind LTV to CAC, just so we're all on the same page. LTV is lifetime value of a sub, which is basically the net present value of the gross profit associated with an individual subscriber. Gross profit, meaning before marketing spend, before OpEx. Okay. How much should you spend? Question, how much should you spend acquiring a customer? Well, not more than their lifetime value, where lifetime value is defined as the net present value of gross profit dollars from an individual sub. You know from your macroeconomics or your calculus that when marginal cost equals marginal revenue, you've optimized your profit, right? Okay. From an acquisition perspective, as long as I spend up to the marginal lifetime value of a customer acquiring them, I'm optimizing my profit. That's the theory of LTV to CAC, the customer acquisition cost marketing spend, which is total marketing divided by number of new customers in an accounting period. It's the way we ran Spotify, it's the way we ran Netflix. It works super well. We've arbitrarily picked a ratio of 2/ 1 to run our business now. That still affords us the opportunity to spend up to 1/1 on a marginal acquisition, 'cause the average is always gonna be less than the marginal. Would we spend down to 1.2/ 1 on some occasions or up to 3/ 1 some occasions? Sure. You know, the model still works. The higher the LTV to CAC, the more profitable the business is gonna be. As long as your average is less than 1/ 1, then the unit economics of your business work, and as long as the unit economics of your business work, then the macro economics of your business are gonna work. If conversely, if the unit economics don't work, doesn't matter how fast you grow, you're just pumping money out the door and eventually you're gonna face plant. It is the single most important metric in the business. Okay. For 4Q, you guided to gross margins of 41%, suggests a step back on connected fitness gross margin. Can you just talk a little bit about the pressures there? I don't really manage the business at that level. I understand why you're asking from a, from a modeling perspective. Yeah. In, in terms of margins on the hardware business, if we were able to live in somewhere between, I don't know, -7%, +7% in gross margins, yeah, great. 'Cause we're gonna make it up on the, on the subscription. Now, the gross margin in any given quarter is about a couple of things. One is, how much promotional activity are we engaged in? Over holidays, we engage in a lot. Over Mother's Day, we engage in a lot. There are other quarters when, you know, there just isn't a lot going on. Secondly, it's about the mix. Because we have some products like Plus that have, you know, very attractive margins and others like the Bike, you know, which are less. Mm-hmm. Product mix in a given quarter, how many Treads we sell, how many Rows we sell, you know, what's the ratio of Bike to Bike+ is about what's driving small changes in the hardware margins in a particular quarter. That plus, you know, whether it's a quarter in which we're heavily engaged in promotion or not. Okay. All right. We got through a lot. When we're here next year, two years from now, what are we discussing? We're talking about the successful growth of the commercial business. We're talking about growth in international. We're talking about app. Mm-hmm. Would be my guess, principally. We will be talking less about FaaS and Certified Pre-Owned, maybe than we have so far today. Mm-hmm. Got it. Okay. Quick word association. You've done it before. First thing that comes to mind. Fitness as a Service. Nothing. International growth. Fast. Strength. It's strength and fast growing category workouts we have. LTV to CAC. Yeah, 2/1. Digital App. You're gonna be surprised at how much TAM was unlocked by the digital app. Peloton brand. Has skewed younger, and grown digitally. Tread. Tread+. Content. More. Free cash flow. Yep. Fitness anywhere. Yep. All right. Good. Thank you. Thanks, all.