How Peloton Makes Money

Subscriptions generate the majority of Peloton's profits and are growing fast

Peloton Interactive Inc. (PTON) is a fitness company that provides an interactive fitness platform. It offers connected exercise equipment, including stationary bikes, treadmills, free weights, related fitness accessories, and branded apparel. Its equipment connects to the company's online interactive platform, enabling users to engage in live or on-demand fitness classes and track a range of fitness metrics. Peloton generates revenue through the sale of its fitness products and through subscription fees for membership to its digital interactive platform.

Peloton operates in a highly competitive environment in which it competes with fitness clubs as well as companies that offer in-studio fitness classes, at-home fitness equipment, and health and wellness apps. Some of its main competitors include Life Fitness, Equinox Group's SoulCycle, NordicTrack, Echelon, and Bowflex.

Key Takeaways

  • Peloton offers an interactive fitness platform that includes connected fitness equipment and live and on-demand fitness classes.
  • Peloton's Connected Fitness Products segment currently generates most of the company's revenue, but its Subscription segment is more profitable and growing fast.
  • The company announced a major business restructuring in February 2022 that includes plans to reduce its global workforce and scale back its manufacturing footprint.
  • Barry McCarthy was named Peloton's new CEO and president on Feb. 8, 2022, replacing John Foley, who was named the company's new executive chair.

Peloton's Financials

On Feb. 8, 2022, Peloton announced financial results for Q2 of its 2022 fiscal year (FY), the three-month period ending Dec. 31, 2021. The company reported a net loss of $439.4 million, a significant deterioration compared to the net income of $63.6 million posted in the year-ago quarter. Revenue for the quarter rose 6.5% year-over-year (YOY) to $1.1 billion. Peloton's cost of revenue and operating expenses rose at a much faster pace than its revenue, weighing on the company's earnings and contributing to the net loss. The company's gross profit, which serves as a profitability metric for its individual business segments, fell 34.0% to $280.2 million.

Peloton said that its revenue growth in its fiscal second quarter was primarily driven by higher subscription revenue as well as contributions from Precor, a global commercial fitness equipment provider with a large manufacturing presence within the U.S. that the company acquired in April 2021. Those positive revenue contributions were partly offset by a decline in sales of the company's connected fitness products. However, this quarter's connected fitness product sales figures faced a difficult comparison against strong sales in the year-ago quarter. Peloton said that it ended the quarter with approximately 2.8 million connected fitness subscriptions, reflecting a growth of 66% YOY.

Peloton's Business Segments

Peloton has two reportable business segments: Connected Fitness Products and Subscription. It provides a breakdown of revenue and gross profit for each of these segments.

Connected Fitness Products

The Connected Fitness Products segment generates revenue from sales of Peloton's various connected fitness products, including its stationary bikes, treadmills, and free weights. It also derives revenue from related fitness accessories and branded apparel, delivery and installation services, and extended warranty agreements. The segment's revenue fell 8.5% YOY to $796.4 million in Q2 FY 2022. Gross profit sank 83.4% compared to the year-ago quarter to $51.0 million. The Connected Fitness Products segment's revenue and gross profit comprise about 70% and 18% of Peloton's total revenue and total gross profit, respectively.

Subscription

The Subscription segment primarily generates revenue from monthly subscription fees to Peloton's online interactive fitness platform, which offers live and on-demand fitness classes and allows users to track various fitness metrics over time. Revenue for the segment rose 73.3% YOY to $337.5 million in Q2 FY 2022. Gross profit grew 95.1% compared to the year-ago quarter to $229.3 million. Subscription revenue accounts for about 30% of companywide revenue while Subscription gross profit comprises about 82% of Peloton's total gross profit.

Peloton's Recent Developments

On Feb. 8, 2022, Peloton made a number of major announcements concerning a significant restructuring of its business in order to position the company for long-term growth and a clear path to generating consistent profits. The company said that John Foley would be stepping down from his position as chief executive officer (CEO) and would become the company's new executive chair. Barry McCarthy, who has held senior management roles at Spotify and Netflix, was named Peloton's new CEO and president, effective Feb. 9, 2022. The CEO change was one among other announced executive leadership transitions and changes to the board of directors.

Furthermore, Peloton announced that it would be reducing its global workforce by approximately 2,800 positions. The company said that corporate positions would be reduced by about 20%. Peloton also said it would reduce its manufacturing and delivery footprints and cut back its planned capital expenditures in 2022 by approximately $150 million.

Article Sources
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  2. Peloton Interactive Inc. "Form 10-Q for the quarterly period ended December 31, 2021," Page 58. Accessed Feb. 9, 2022.

  3. Peloton Interactive Inc. "Form 10-Q for the quarterly period ended December 31, 2021," Pages 10—13. Accessed Feb. 9, 2022.

  4. Peloton Interactive Inc. "Form 10-Q for the quarterly period ended December 31, 2021," Page 46. Accessed Feb. 9, 2022.

  5. Peloton Interactive Inc. "Form 8-K for Feb. 8, 2022," Page 3 (PDF). Accessed Feb. 9, 2022.

  6. Peloton Interactive Inc. "Form 10-Q for the quarterly period ended December 31, 2021," Page 6. Accessed Feb. 9, 2022.

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  8. Peloton Interactive Inc. "Q2 2022 Shareholder Letter," Pages 8 & 9. Accessed Feb. 9, 2022.

  9. Peloton Interactive Inc. "Form 10-Q for the quarterly period ended December 31, 2021," Page 23. Accessed Feb. 9, 2022.

  10. Peloton Interactive Inc. "PELOTON ANNOUNCES APPOINTMENT OF NEW DIRECTORS TO THE BOARD." Accessed Feb. 9, 2022.

  11. Peloton Interactive Inc. "PELOTON ANNOUNCES LEADERSHIP TRANSITIONS TO POSITION PELOTON FOR SUSTAINABLE GROWTH, PROFITABILITY, AND LONG-TERM SUCCESS." Accessed Feb. 9, 2022.

  12. Peloton Interactive Inc. "PELOTON ANNOUNCES COMPREHENSIVE PROGRAM TO REDUCE COSTS AND DRIVE GROWTH, PROFITABILITY, AND FREE CASH FLOW." Accessed Feb. 9, 2022.

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