Peloton Interactive (PTON) Q3 2023 Earnings Call Transcript

Peloton Interactive (PTON -0.98%)
Q3 2023 Earnings Call
May 04, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Peloton Interactive third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After a few brief opening remarks, we will be immediately going into our Q&A session. [Operator instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker, Peter Stabler, head of investor relations. Please go ahead, sir.

Peter Stabler -- Head of Investor Relations

Thank you, Sheree. Good morning and welcome to Peloton's fiscal third quarter conference call. Joining today's call, our CEO, Barry McCarthy; and CFO, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities law.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our investor relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

I'll now turn the call over to the operator for our first question.

Questions & Answers:

Operator

Thank you. One moment for our first question, and that will come from the line of Doug Anmuth with JPMorgan. Your line is open.

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Thanks so much for taking the questions. I just wanted to ask Barry, if you could talk more about the upcoming changes in brand positioning and just a little bit more about what you think is misunderstood around the brand, the products, and how people use them. And how those changes in brand positioning can help drive growth going forward. And then also perhaps Liz, if you could just talk about the potential, I know that the Dish settlement will weigh on free cash flow in  4Q.

Can you just update us on your path to positive free cash flow ex that settlement? Thank you.

Barry McCarthy -- Chief Executive Officer

Good morning, Doug, thanks everybody for making time to join us this morning. I'm not going to say too much about the brand repositioning. I want everybody to experience it along with the consumers at the same time. In the letter, I spoke about the fact that we're primarily known as a bike company, but the behaviors of our members extend well beyond that into many different categories of exercise.

And a large percentage of folks use no hardware at all. We've done a very good job of communicating that to prospective members and we're looking to improve upon that. I think the advertising can be more inclusive than it has been historically. And then lastly, of course, we have been promising to be introduced the App.

That moment is soon to be upon us and that will receive considerable focus in the marketing relaunch as well.

Liz Coddington -- Chief Financial Officer

And Doug, to address your question about free cash flow, as Barry mentioned in the shareholder letter, the Dish settlement, and related expenses associated with that settlement will put pressure on our free cash flow in Q4. So if you exclude those items, we actually are pretty close within striking distance of achieving a free cash flow breakeven. And we are very -- the progress that we've made is very positive, continues to be positive.

Operator

Thank you. One moment for our next question, and that will come from the line of Ron Josey with Citi. Your line is open.

Ron Josey -- Citi -- Analyst

Great. Thanks for taking the question. Barry, I wanted to ask about Fast and Peloton and PCR given both I think accounted for about three-quarters of new subs this quarter. And so talk to us a little bit more just how these products are going, how you're going to market with these products, and how they're being differentiated relative to the full membership.

Understood there's nuances in between, and then Liz, I think this quarter's guidance calls for a little bit of a decline in subs, just a seasonally slower quarter. We'd love to hear more insights in terms of what you're seeing there as well. Thank you very much.

Barry McCarthy -- Chief Executive Officer

Let's take that guidance piece and talk about Fast and then refurbish bikes from a marketing perspective, we're doing nothing to basically support those products. So people are finding them on their own. In some instances, there's a banner across the top of the home page, which steers you toward one or the other. For the most part, you have to discover Fast by clicking down a couple of layers on the web.

So think of it mostly as an organic pull-through. Liz, do you want to talk about the guidance piece?

Liz Coddington -- Chief Financial Officer

Sure, yeah, so Ron, you alluded to the fact that we are guiding down on Connected Fitness subs for Q4. A few comments on that, so the fourth quarter is seasonally our toughest or rather our least efficient quarter for us to grow subscribers. Even with our best-in-class retention, we need a base level of growth additions to offset our terms, which while still quite low also tends to be seasonally highest in Q4. Also important to understand that we are committed to growing our subscribers efficiently.

And while we have -- we expect to target a lower LTV to CAC ratio in Q4 than we did in Q3, our Q3 LTV was actually above a two. Our forecast assumes that we will maintain a strong financial discipline and we will not overspend either via media spending or by cutting prices or slashing them to acquire unprofitable subscribers. I also want to point out that we do have some uncertainties in our Q4 guidance. As Barry mentioned, we're in the letter and as we've talked about already on the call, we are relaunching the brand to better communicate our value proposition.

And we do expect that to widen our TAM over time. And we're also reintroducing the app and we don't know the impact that these launches are going to have on our connected fitness sub-growth in Q4. We're cautiously optimistic about that, but we have not baked any of that optimism into our guidance forecast for the quarter.

Barry McCarthy -- Chief Executive Officer

And when you speak about efficiency, we're talking about the long-term value to CAC ratio.

Liz Coddington -- Chief Financial Officer

Yeah, LTV to CAC ratio exactly.

Operator

Thank you. One moment for our next question.  That will come from the line of Justin Post with Bank of America. Your line is open.

Justin Post -- Bank of America Merrill Lynch -- Analyst

Great. Maybe one for Liz and one for Barry. First on, Liz, when you think about the App pricing and the tiering, how do you protect the Connected Fitness price, but also offer a very robust App that people can use on other devices? How do we think about that? And then Barry, maybe a big picture question, added about 120,000 subs this year. I know there's a lot of macro and competitive headwinds and execution with the new team.

How do you think about the right rate of growth for the company on subs? As you look past this year, was this an unusually challenging year and you're optimistic? Or is this kind of the new baseline? How do we think about sub-growth from here? Thank you.

Liz Coddington -- Chief Financial Officer

Do you want me to take the first part of the question first?

Barry McCarthy -- Chief Executive Officer

Sure. Yeah.

Liz Coddington -- Chief Financial Officer

So, Justin, we're not sharing today any details about our new App tiers and the pricing associated with them. But the way to think about it is that they aren't all going to offer the same offering to consumers. So for example, what we offer for Connected Fitness is all of our content on our hardware along with access to the App, you kind of get everything it's all access. The different app tiers will have different amounts of content experiences available to you at different price points.

So that's how we're protecting the all-access membership in that regard.

Barry McCarthy -- Chief Executive Officer

Let me talk about the current environment and then try to share with you how I think about the new baseline, and what some of the vectors for growth would be in a super challenging year. I think since I walked in the door, we've -- in restructurings and devaluations and write down something like 1.7 billion. And so there's been a tremendous amount of effort invested in let's say restructuring the business. You're building the lead team, and the rest of it.

And as a leadership team, we are still finding our rhythm in building relationships and trust all the soft tissue relationships that maintain great. That only happened over time. And so if we manage that process well, we will execute faster and the business will perform better with the passage of time. We said that been my observation, my previous companies here are a couple of aspects, vectors of growth.

There are a couple of aspects of the business that we have been in the process of restructuring and we only just beginning to see glimmers of the benefits of some of the efforts that we've invested. I'm thinking particularly about the commercial and corporate wellness business. We're starting to see some good momentum there. We're starting to see some good momentum in 3P and we know we have a lot of learning to do to become a good partner in a B2B relationship.

But that's showing signs of life international, I think will provide opportunities for growth for us. Also, we introduced some new hardware platforms this past year. Let's take the row by example. Still only has of 4% of unaided brand awareness guide is at 1 %, the App is at 5 %.

I think we have opportunities to improve all of those significantly. Let's take the app by way of example, even before we invested in making it better, the Net Promoter Score is 20 % higher than our next highest-rated product which is Bike Plus, which has been quite successful for us. But only 5 % of people even know it exists, which makes it ten times lower than the Bike. So there's lots of opportunity for us to lean into that and we'll have a full year of a row.

At some point in the future, I anticipate we'll have a second treadmill product that was two years ago roughly that withdrew tread plus from the marketplace. We don't control the timing on that, but we have invested a lot in our relationship with the government and that relationship has dramatically improved since some -- or team have invested time in that with our engineering team. So I think that'll be effective for both new platforms, new businesses, commercial, and international, of course, we have new marketing leadership and we'll be leaning in aggressively to support them as they grow the business. And then lastly, Jenn Connor and her team have really, I think shown signs of great progress for us and turning around our accessories and our apparel business.

I think the apparel business in particular can be significantly more meaningful than it has been and I'm excited about some of the initiatives that she's pursuing that we haven't discussed publicly that will unlock some growth opportunities there. So sorry to be so long-winded, but that's kind of how I'm thinking about the new baseline and the vectors of growth.

Operator

Thank you. One moment for our next question, and that will come from the line of Edward Yruma with Piper Sandler. Your line is open.

Edward Yruma -- Piper Sandler -- Analyst

Hey, good morning. Thanks for taking the question. I guess the first one broader question, I know you guys called out Amazon as being a success story. I wanted to understand if you had any more context behind the remainder of 3P, particularly physical retail like a Dick.

And then just to clarify a point on the relaunched App, will connected fitness devices have the option for a more a la carte subscription option? Or is that to remain the all-access membership? Thank you.

Barry McCarthy -- Chief Executive Officer

It will remain an access membership unless Liz is to comment on Dick in 3P.

Liz Coddington -- Chief Financial Officer

Yeah, sure. I think the way to think about this is it's still very much a new partnership and new relationship for us. Recall that we only launched that partnership back in November. So we've only got a couple of quarters under our belt with sticks.

And as very commented, you know, it's also about us learning how to be a good wholesale partner to a retail business that is more traditional brick and mortar. That's not where our business has come from. We've been mostly lead-centric in how we sell and how we deliver to our consumers. So we're still working through with Dick's how -- on how to be a good partner to them and how to leverage their channel so that we can both be even more successful.

Operator

Thank you. One moment for our next question, that will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Eric Sheridan -- Goldman Sachs -- Analyst

Thanks so much for taking the questions. First, you talked a lot about the commercial opportunity via the hospitality industry in the letter and you obviously got the Hilton partnership. Can we talk a little bit about what you think that means in terms of a driver for either the connected fitness subscriber funnel and or bringing additional people into the digital app that maybe would utilize your hardware in a more nomadic sort of business travel type sense through partnerships like that. Just want to understand how you think about that as a stimulant to multiple different parts of the business.

And then, in terms of the guidance, you gave one quarter forward, one to understand a little bit of some of the puts and takes in the gross margin guidance. So we could better understand how some of the headwinds and tailwinds might evolve, not just in Q4, but as we roll forward into the next fiscal year. Thanks so much.

Barry McCarthy -- Chief Executive Officer

[Inaudible] I'll talk about the business funnel and hospitality and, ask Liz to talk about the gross margin put in calls in the guidance. Really, I don't have too much to say about hospitality except that it's been a fruitful source of consumer demand for us. Enormously productive historically, we anticipate that that will continue on a go-forward basis. And so we like the hospitality business for two reasons.

One is profitable in its own right and two, it's a good source of future growth for us because as you say, it helps keep the funnel.

Liz Coddington -- Chief Financial Officer

I'll take the question about puts and takes for our Q4 margin. So first, just to remind that our overall gross margin is actually expected to go up quarter over quarter to 41% versus the 36% that we had in Q3. And the main driver of that is the shift toward subscription revenue from hardware revenue because we do expect our hardware sales to be lower in Q4 versus Q3. Our guidance does assume some expected pressure on Connected Fitness gross margins versus a seasonally weaker quarter for Connected Hardware sales.

We're also expecting some weaker sales and margin outlooks for Precor as we continue to revamp that business. And then we do have about 200 basis points of impact on the overall gross margin included in our guidance from anticipated one-time items. That mainly impacts the Connected Fitness segment.

Operator

Thank you. One moment for our next question. And that will come from the line of Aneesha Sherman with Bernstein. Your line is open.

Aneesha Sherman -- AllianceBernstein -- Analyst

Thank you and a nice quarter. My question is about opex, So about a year ago, you were talking about -- or maybe your predecessors, we're talking about 2 billion in opex being the kind of watermark you're tracking toward that at this point and you brought down the cost basis quite significantly on an underlying basis. Are you at the tail end of the opex improvement and cost-cutting stage? Are you looking at this as kind of being the steady-state level or are you looking for more improvement in the next year or so?

Barry McCarthy -- Chief Executive Officer

Yes.

Liz Coddington -- Chief Financial Officer

Yes. So going back to the restructuring plan that we outlined about a year ago, we don't have a perfect apples-to-apples comparison to that because we had a number of additional actions that have been taken since we set those targets. But if you actually exclude restructuring, impairments, reserves, and settlements, our opex is down over $550 million on a trailing 12-month basis as of Q3. To note, that does include the fourth quarter, which still had fairly elevated opex, namely in G&A, sales, and marketing.

On the COG side, we've had significant volume-based dependencies when it comes to determining the cost savings there and while our volume has come down, we've continued to make significant progress in optimizing our cost of goods sold over the past year. Our cost structure now reflects the impact of the restructuring actions that we took to outsource our last mile delivery x at our own manufacturing and really effectively shift our high fixed cost business model to a much more variable cost model from a structure perspective we are in much better shape. We do see some further opportunities to optimize the cost of goods sold, particularly in the middle mile and we're going to be working on that over the coming quarters. With regard to opex overall, we have made great progress, we're not finished, and we're going to continue to optimize.

But the big step function improvements are likely not to happen. It's going to be more about identifying improvements as we go, things like reducing our professional services spend, and addressing our tech debt, which should drive some efficiencies. There may be some efficiencies in member support. We're going to continue to look at lowering our real estate costs over time.

So those are some of the areas where you'll continue to see further optimizations over the coming quarters.

Barry McCarthy -- Chief Executive Officer

I would add that --

Aneesha Sherman -- AllianceBernstein -- Analyst

Thank you -- sorry, go ahead.

Barry McCarthy -- Chief Executive Officer

On a go-forward basis, I think there's an opportunity for us to take several categories where there are tens of millions of dollars of savings to be had as opposed to hundreds of millions of dollars of savings. So things related to IT infrastructure and we've mentioned the middle mile and this past year we had a lot of suppliers' payments by way of settling out inventory commitments and things that are now in the after this quarter will be in completely in the air for us.

Aneesha Sherman -- AllianceBernstein -- Analyst

Thank you so much and if I can ask a quick follow-up for Liz, on your comment about Q4, can you reconcile your comments about seasonality and lower subs versus your guidance of only a modest increase in churn? Is it just about expecting lower gross ads?

Liz Coddington -- Chief Financial Officer

So seasonally it's both, right? So it's lower gross additions in the quarter expected because of the lower efficiency to go out and acquire them in the quarter as well as a seasonal uptick in churn that we see, we've seen every year.

Barry McCarthy -- Chief Executive Officer

So if we were to relax the constraint we've imposed on marketing spending. If we relaxed the free cash flow goal that we've set for ourselves, you could absolutely grow faster, but we're not prepared to make that trade-off at the moment and so it is kind of it is what it is.

Liz Coddington -- Chief Financial Officer

Sorry, I was going to say the focus is on LTV to CAC and making sure that while we're willing to go lower than we were at in Q3, it has to be relatively efficient.

Barry McCarthy -- Chief Executive Officer

First priority is free cash flow, second priority is growth.

Operator

Thank you. One moment for our next question, that will come from the line of Shweta Khajuria with Evercore ISI. Your line is open.

Shweta Khajuria -- Evercore ISI -- Analyst

Thanks a lot for taking my questions. Liz, could you please remind us what promotions you ran in the quarter and what your expectations are for the upcoming quarter and for maybe upcoming quarters? And then, in addition to maybe perhaps talking about just the overall demand environment? And then the other follow-up question I have is on free cash flow. So excluding the settlement costs, you are a striking distance from breakeven. Could you please help us just remind us outside of growth that you expect coming in for the next year, what are the key levers and how should we be thinking about working capital for the next fiscal year? Thanks a lot.

Liz Coddington -- Chief Financial Officer

I think there were a bunch of questions in there. We'll start with the question on promotions. So what promotions did we have in Q3? So if you recall, we went into the Q3 with a promotion in January related to a kind of getting into fitness in the new year that ended. I don't have the exact dates of the promotion, but that went for part of January.

And then we did have a promotion, we did have some referral rewards promotions. We also had a -- which is basically if someone refers someone to Peloton, they get a -- that person gets a discount. And then the person who does the referral gets a credit for apparel purchases. And we also did a spring promotion in March that had discounts on hardware purchases and bundles as well as a promotion on our refurb products.

And we also offered a financing promotion where we would offer free financing or 0% financing for all of the term lengths for a period of time. In Q4, we do have some promotional activity planned, but Mother's Day, which actually launches today, is our Mother's Day promo. So that will be starting today. With regard to free cash flow and the question about working capital, so just for Q3, to give you a sense, we did have a cash tailwind from inventory.

It was about to the tune of about $100 million net of any supplier settlements that we had in the quarter. We are nearing the tail end of those supplier settlements. We only have about 3 million left that will incur in Q4. For Q4, we also expect inventory to be a bit of a tailwind and source of cash, but it will be materially lower than what we observed in Q3.

Again, in part because of the fact that we won't be selling less hardware in Q3 -- or in Q4 versus Q3 And then, we're not really providing much perspective on FY '24 yet. But as we move into FY '24, we expect the tailwind from inventory to continue to moderate over time because we will need to continue to -- we will need to produce connected fitness hardware inventory for specific SKUs.

Barry McCarthy -- Chief Executive Officer

I would say. About the demand environment, uncertainty. We've seen consumers respond very favorably to promotional activity in the current environment, maybe even more so than historically. There's certainly no exuberance in the marketplace, but it's not frozen either, so it's kind of a mixed bag and we're definitely uncertain about what's next in terms of the economic environment.

The recession is a soft landing. What happens with jobs, How uncertain are people? It seems like household incomes who had money still have money, they're able to spend. But then there's everybody else and then there's a lot of uncertainty.

Liz Coddington -- Chief Financial Officer

And while there's certainly uncertainty, when we do our demand forecasting, we incorporate the latest trends that we see into our bottoms-up forecasts. And so we believe our guidance contemplates some of that macroeconomic headwind that may be -- that we may be observed even though it's hard to explicitly identify what they are.

Barry McCarthy -- Chief Executive Officer

But we -- since we have no explicit assumption around what's going to happen in Washington around the debt limit and then a blast radius associated with an inability of Congress to resolve that with the President just by way of example. So assuming the world continues on as we know it today. We'll see.

Operator

Thank you. One moment for our next question, that will come from the line of Andrew Boone with JMP Securities. Your line is open.

Andrew Boone -- JMP Securities -- Analyst

Hi, Good morning, and thanks so much for taking my question. Barry, I wanted to ask now that we're a year into the price increase, just philosophically how you are thinking about subscription price increases going forward given your time in Netflix, it felt like there was a steady cadence there. Does that relate to Peloton?

Barry McCarthy -- Chief Executive Officer

I don't think so, for the longest time Netflix's strategy was actually to reduce price and grow share and it was only after they became dominant on a global basis. Did they extract a premium from the marketplace associated with the share, so left to my own devices, I would be lowering prices, not raising prices. I think it's a very effective way to drive a virtuous cycle of increased engagement and increased word of mouth, lower marketing expenses. You can increase value by making trade-offs against gross margin and I would like for us to be able to do that.

But I don't foresee that being possible given the financial constraints. Of the business, we will see as Liz commented, increasing gross margins that are a function of structural shifts in the business for instance, and that relates to the rate of growth in the subscription business versus the hardware business. So by way of example, last quarter subscription revenue exceeded hardware revenue by 30 million. This quarter it exceeded by 100 million, and it's growing significantly faster.

I think that is a long-term trend in the business that was flagged I think in last quarter's investor letter and but I don't foresee big structural changes in the gross margin of the subscription business itself or even in the hardware business itself.

Liz Coddington -- Chief Financial Officer

Excluding the restructuring charges.

Barry McCarthy -- Chief Executive Officer

Yeah.

Liz Coddington -- Chief Financial Officer

All the reserves.

Barry McCarthy -- Chief Executive Officer

Yeah. And eventually, that too would be in the rearview mirror.

Andrew Boone -- JMP Securities -- Analyst

And then I just wanted to touch on the underlying new subs that are coming on the platform. Are you guys seeing any change there in terms of income or age or anything else that would be worth highlighting? Thank you so much.

Barry McCarthy -- Chief Executive Officer

No, not so much. With respect to the new marketing campaign, we will be reaching slightly younger, but that's a template and inclusivity play. But no, that changes particularly I have noted previously that staff was bringing in a slightly different demographic. It was slightly more female.

It was a high household income. Interestingly enough, is it professional women who value the optionality that continues to be true, but it's not skewing the macro numbers particularly.

Operator

Thank you. One moment for our next question. And that will come from the line of Mario Lu with Barclays. Your line is open.

Alex Hughes -- Barclays -- Analyst

Great. Thanks, guys. This is Alex Hughes on for Mario. Just had a couple of questions around the Rower product.

Do you have any updates on sales versus your internal expectations for that? And you guys launched the live Rowing classes last quarter. Any update on user traction on that? Or how that's progressing? Thanks.

Barry McCarthy -- Chief Executive Officer

Do you want to talk about health versus expectations?

Liz Coddington -- Chief Financial Officer

We aren't sharing explicitly what our sales are for the Rower, but it is still a new product, and similar to what Barry said, our sales are -- it doesn't have a high unaided awareness yet. So one thing to point out is that our current sales are actually pretty heavily skewed to our existing connected fitness subscribers which is similar to what we saw with our tread when we launched it. And so we are expecting sales to be more creative to sub-growth over time and to continue to build over time as we grow our unaided awareness of the product.

Barry McCarthy -- Chief Executive Officer

Let me add that it received very favorable critical reviews. I think it's made it much more difficult for some of the competitors in that space in particular, so it's grabbed a lot of shares. Liz mentioned that the awareness is still low. I think we have opportunities to work on that.

Frankly, we didn't really know what to expect when we launched the and that -- but the combination of the favorable critical reviews and then the reception from our users has been quite good. It's slightly rated, with the net promoter score slightly below the tread product. So think of it as is on par with bike and tread, which I think for new products is pretty good. I think we have opportunities to continue to improve the content.

But it's a new category for us and I'm confident that we will, but that that's not based on any research by the way, that's just my own assessment and as a user.

Liz Coddington -- Chief Financial Officer

And then I did want to add, it's only available in the US today and we are looking to launch it internationally and into other markets over time.

Operator

Thank you. One moment for our next question, that will come from the line of Deepak Mathivanan with Wolfe Research. Your line is open.

Unknown speaker

Great. Thanks. This is Zach on for Deepak. Just first on marketing, just given the brand relaunch and the App relaunch later this month, how that could affect kind of the typical seasonality of marketing spend this year, over the next couple of quarters kind of relative to periods? And then second, just on fast churn, stepped up a little bit kind of quarter over quarter now at 5%.

Kind of how do we -- obviously it's still early days, but how do we think about the key drivers to kind of bring that down over the long term? And that kind of gives you confidence in the kind of the economics of that model over there over the long term? Thanks.

Barry McCarthy -- Chief Executive Officer

It was in our tag team in terms of seasonality, and marketing expense. Two over two will decline this quarter versus last quarter, but it will be up slightly single-digit percentage is kind of on a year-over-year basis. It was quite low a year ago in Q4. And other than that, I don't expect particularly any big changes in the seasonal pattern and the reason it's up here of course is because of the leaning into the launch of App.

In terms of churn from my Netflix experience, I would say it's all about the user experience. Sorry, I may be more clear, we reported average churn, average churn as a function of the average life of the user base. If you're pumping in a lot of new subs, they're going to churn at a higher rate than subs who have been with your service for a long period of time, like say, 12 months. I've seen that in every subscription business that I've been a part of and I've been a part of three of them now.

Churn declines over time and in my last two businesses, it was asymptotic at 12 months, we see something similar here. So when growth accelerates, churn picks up slightly. When growth slows down, the average reported churn ticked down. So to really understand what's happening with churn, you need that you need to actually see the cohorts and see how over time the churn curve is, is the slope changing? Is it shifting in parallel like what is happening? And that's how you drive increases in lifetime value.

So having said that how do you bend the shape of the churn curve? You do that with engagement largely and you do that by controlling the quality of the subscribers that you acquire. And so let me start there, that's all about the responsibility for that rests with marketing. And if you can generally judge how valuable the customer is going to be based on their retention very early in their life. And so you just have to self-regulate and acquire subs from sources that are going to meet your expectations in terms of churn.

In terms of engagement, let's say the last three quarters we've seen pretty good improvement about five percentage points in the base of customers that say who are engaged with all access products. The key of course is for Jenn Connor and her team to continue to make great content. But that all by itself is not sufficient. If we make great content.

But you can't find it when you hop on your bike or tread, you might as well not exist. And so the product team, the engineering team needs to be great at driving personalization and we have made that an investment priority when I walked in the door, I think we're making a lot of good progress there. We're also introducing some new categories of content like lane break where we're seeing really off-the-charts kind of engagement and with a slightly more male on a much younger demo. So we need to continue to do the same thing with power zones by the way.

So we need to continue to lean into those use cases, lean into personalization, sorry to be so long-winded.

Liz Coddington -- Chief Financial Officer

I wanted to add just a couple of quick things. First of all, for Fast, I do want to comment that we are still within that 18 to 20-month payback period that we have been targeting even with the slight uptick in churn that we've seen and then those comments about sales and marketing. So our sales and marketing overall expense is actually down, expected to be down year over year in Q4, but our media spend is expected to be up. So the overall sales and marketing function itself, which includes things like brand and creative and headcount and all those things is down year over year.

But we're spending a bit more on media to your point around the brand relaunch in the App.

Barry McCarthy -- Chief Executive Officer

So Fast is a great example of how it is you can make trade-offs between marketing spend, and churn growth in order to drive more overall profitability in the business of Fast absolutely has a higher churn rate, but the incrementality is in the low 60s. And so even though the lifetime value we estimate to be in round numbers half that of all access members, we're growing so much faster because the Fast we're driving more profit. And so we're willing to take the churn hit because of the increase in enterprise value that results from us deploying that strategy.

Operator

Thank you. One moment for our next question. That will come from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. I do think about the shift to the business model and the relaunch of the App -- or the launch of the App that's coming. How do you see the shape of what the financial profile of the company should look like? Does the cadence quarterly or revenue streams, how do you envision the model on a quantitative basis? Thank you.

Liz Coddington -- Chief Financial Officer

Well, not -- I'm not sure I fully understand the question, but as we've talked about, our business has shifted more toward subscription, relevant relative to connected fitness hardware. So as the App grows as a larger share of our business that will continue to shift and more of our revenue will be coming from subscriptions. And as we know, the gross margin of our subscription business is higher. So that will also continue to help improve our gross margins overall.

And it'll expand the business will continue to grow. We'll be able to get scale, which will mean that our opex as a function of revenue will come down. So it's leading us all in the right direction toward getting to our north star goal, which is to be a bigger business with more subscribers and higher operating income and getting us to operating income break even over time. But structurally, it's really more about that shift that we're continuing to see happen from the mix of connected fitness hardware to subscription.

Now that doesn't mean that some of those Apps subscribers over time will also become Connected Fitness members. But we're going to have to see how that journey evolves and we'll have products available for them, however, they want to join Peloton.

Barry McCarthy -- Chief Executive Officer

Building off of -- comments if we're successful in growing the App business, we've become increasingly an asset-light model and it most definitely will change the working capital attributes of the business in a favorable way, not at the risk of sounding like [Inaudible] obvious, and the margins will benefit as a result both the gross margin and the operating margins.

Liz Coddington -- Chief Financial Officer

And remember our north star around growth is LTV to CAC ratio. So we're going to continue to evaluate how we grow our subscriber base in that framework.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it.

Barry McCarthy -- Chief Executive Officer

I would tell you if we're successful in. Deploying an asset-light model, we've probably seen faster growth internationally, it's much easier to launch internationally and add a product than it is to hardware business for sure.

Dana Telsey -- Telsey Advisory Group -- Analyst

And Barry, just following up on international or international growth faster than the US this quarter, what are you seeing internationally and leaning into the hospitality business, How do you see the pace of ads for new hospitality chains joining the platform?

Barry McCarthy -- Chief Executive Officer

I'm going to hold off on answering that, I appreciate the question. I think hospitality for us primarily is as a US-based business and at least for the coming fiscal year and then I think there'll be opportunities for us to build beyond that. And in terms of international growth, I'm thinking primarily of existing markets with a few additional new markets, but it's mostly it's rearchitecting our go-to-market strategy and existing markets with increasingly culturally relevant content that unlocks the growth opportunities of those markets to pursue some co-branding opportunities for us, which is not a strategy that we've deployed, we're going to have an exciting announcement by way of example, over the next couple of quarters in that regard to help accelerate our growth.

Operator

Thank you. One moment for our next question, that will come from the line of Youssef Squali with Truist Securities.

Youssef Squali -- Truist Securities -- Analyst

Great, thank you very much, and good morning all. So, Barry, the Peloton brand was built on just great quality physical products historically as the business moves to an app-centric strategy, asset-light strategy. Can you maybe just speak to the competitive advantages that you are bringing, the moat you're trying to build, and what gives you confidence that you'll be able to maintain the same type of advantage that you've been able to build in the physical world? Thank you.

Barry McCarthy -- Chief Executive Officer

I think both Liz and I will comment here. From my part, I would say we faced many challenges in the past year almost in every aspect of the business except for content. Content is the golden goose that is the bike of great experience from a hardware perspective and better than things that had come before. It absolutely is, but the magic and the glue that binds the community with almost religious fervor among the members is the content and the instructors and so if we're successful in extending that into the App world and if we architect the App in ways that drive personalization so that you can find and engage with all that content in a quick and in a frictionless way.

Then I think we'll do quite well if we don't do those things, we won't.

Liz Coddington -- Chief Financial Officer

Yeah, I mean, I completely agree with your comments there. The one thing that I will add is that it's important for us to continue to innovate the content experience over time. And that is something that we are focused on doing and we'll continue to do that and over time you'll see new forms of content coming from us and that will be something that continues to keep that competitive moat there. And so content is, to your point really our secret sauce at Peloton or golden goose on Peloton.

Youssef Squali -- Truist Securities -- Analyst

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Peter Stabler -- Head of Investor Relations

Doug Anmuth -- JPMorgan Chase and Company -- Analyst

Barry McCarthy -- Chief Executive Officer

Liz Coddington -- Chief Financial Officer

Ron Josey -- Citi -- Analyst

Justin Post -- Bank of America Merrill Lynch -- Analyst

Edward Yruma -- Piper Sandler -- Analyst

Eric Sheridan -- Goldman Sachs -- Analyst

Aneesha Sherman -- AllianceBernstein -- Analyst

Shweta Khajuria -- Evercore ISI -- Analyst

Andrew Boone -- JMP Securities -- Analyst

Alex Hughes -- Barclays -- Analyst

Unknown speaker

Dana Telsey -- Telsey Advisory Group -- Analyst

Youssef Squali -- Truist Securities -- Analyst

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