The changes are full of surprises, Barry McCarthy said Tuesday, as the veteran finance executive credited with helping Netflix and Spotify get through their difficult early years held his first call with analysts since becoming CEO of Netflix. Platoon.
Three months after the connected fitness company hired him, the biggest surprise had been his cash flow, he said. For some on Wall Street, that was an understatement.
In the quarter ended March 31, nearly $750 million in cash flowed out of the company, up from $200 million a year earlier. The company that had raised more than $1.1 billion in its initial public offering in September 2019 ended the period with less than $880 million in unrestricted cash and cash equivalents.
That, McCarthy admitted, left him “little capitalized” for his size. Peloton had arranged to borrow another $750 million, she said, but the company declined to disclose what interest rate the banks were charging.
The nasty cash flow surprise sent Peloton shares to new lows, cutting its valuation to about half what it had been at the IPO and less than a tenth from where it had peaked in 2020, when investors they bet that a pandemic-era shift from gyms to home fitness would outlast Covid-19.
The crumbling of those hopes in the face of pressure from an activist investor, Blackwells Capital, has already prompted Peloton to remove co-founder John Foley from the CEO’s chair.
It also abandoned a planned $400 million factory 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 that he could be sold to a larger group, despite McCarthy’s insistence that he did not join the company to sell it.
But Tuesday’s results prompted analysts to repeat the questions they had been asking before Foley stepped back: Is Peloton’s long-term view of the size of its potential market realistic, and is it even prudent to pursue a mass-market strategy when you built your brand on the fanatical loyalty of a wealthy but much smaller group of customers?
Chief Financial Officer Jill Woodworth reiterated the belief Foley had articulated at the height of Wall Street’s optimism about the company: that half of the world’s current gym members, or 100 million people, could one day be gym customers. Platoon.
“Sounds like new management, same story,” said Simeon Siegel, an analyst at BMO Capital Markets, a long-term skeptic: “The company recognizes that it needs to change and restructure while maintaining that its long-term opportunity hasn’t changed.”
With just 7 million members at the end of the last quarter, Woodworth acknowledged, “we have to strategize quite significantly to get to that 100 million.”
There are four “drivers” for that evolution, he said: international growth, retail partnerships, expanding the reach of an app that doesn’t require a bike or treadmill, and launching a “fitness-as-a-service” program that allows Users rent Peloton’s hardware and access their classes for a monthly fee.
However, the call McCarthy and Woodworth had with analysts on Tuesday made it clear that there is still significant uncertainty about each of those strategies.
McCarthy said he “wasn’t sure yet” about an international launch, noting Peloton’s “finite” resources and the fact that geographic expansion would cost money in the short term. “The international industry has the potential to drive significant growth, but the more growth it creates early in the process, the more money we lose,” he observed.
It’s too early to talk about potential retail partnerships, he added. Similarly, when asked what value digital app subscriptions would add, he replied that he didn’t know.
The app “could be a kind of premium model. It could be a direct subscription model. I’m still not sure,” he said.
And while he praised early growth in its fitness-as-a-service offering by encouraging Peloton’s belief that such subscriptions could appeal to a “mass-market” audience of low-income customers, he noted that it had only engaged 1,000 units so far.
He was “just in love with the whole thing,” he said of the fitness-as-a-service concept, but acknowledged he wasn’t sure if it would deliver the benefits Peloton expected.
However, McCarthy was more definitive about what was still preventing the company from realizing some of its ambitions. The business had “exploded” from some 700,000 subscribers to millions since the start of the pandemic, he said, but its systems still relied on “original code that was hacked when the business was first organized.”
That was slowing down the speed at which it could do things like try out alternative versions of its fitness-as-a-service offering, he said. “Really? Do we have to wait until the end of June to be able to A/B test on the website? That’s something that would take a day and a half on Netflix, even at first,” she recalled.
Some analysts, such as Baird, also look for analogies with Netflix and Spotify, 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 the business on the belief that demand would never stop,” Siegel said.
McCarthy maintains that he remains optimistic about the way forward, “despite the share price.” However, he has yet to convince holders of those shares, such as Blackwells, which declined to comment on Tuesday.