Last week, Peloton (NASDAQ:PTON) reported fiscal fourth-quarter earnings results that blew away all expectations, as the ongoing COVID-19 pandemic has created a surge in demand for home exercise solutions. Revenue skyrocketed 172% to $607.1 million, crushing both the consensus estimate of $580 million and the company's own guidance. Connected Fitness subscribers more than doubled to 1.09 million, and Digital memberships more than tripled to nearly 320,000.

That all led to the company's first profitable quarter, with Peloton posting net income of $89.1 million, or $0.27 per share. However, management acknowledged on the conference call with analysts that Peloton is struggling to keep up with demand, but that's a very good problem to have.

Woman running on Peloton's new Tread model in a furnished living room

Peloton's new Tread. Image source: Peloton.

Manufacturing is key

Like the rest of the us, Peloton wasn't prepared for how COVID-19 would change the world. The fitness tech company has been scrambling to expand manufacturing capacity at third-party contract manufacturers and its in-house manufacturing operations. Peloton had acquired Tonic, one of its bike manufacturers, a little less than a year ago as part of a vertical integration strategy.

Peloton exited the fiscal fourth quarter with a significant backlog of Bikes that had been ordered but not yet delivered. That amounted to around $230 million in deferred revenue associated with those products that were in transit, according to CFO Jill Woodworth, which also provides visibility into the coming quarter. "Given where we are in the quarter, plus our significant backlog of Bike deliveries, we have a solid view of our first-quarter results," Woodworth said.

CEO John Foley also noted that the company had to balance the trade-offs with how it allocated capacity. Peloton recently introduced a new Tread that's more affordable, but it also needed to ramp Bike production. Foley commented, "While we had hoped to launch our new Tread more quickly and in greater supply, we had to make some tough decisions regarding supply chain resource allocation due to the surge in demand we've been experiencing for our Bike."

Woodworth also acknowledged that Connected Fitness subscriber growth started to slow near the end of the quarter, but that was largely due to ongoing supply constraints as opposed to a lack of demand. The finance chief also said that the resurgence in coronavirus cases over the summer contributed to another spike in demand:

However, the unexpected increase in COVID-19 cases in many states starting in late June had sustained the imbalance of supply and demand in many geographies for us. This has made it challenging to meaningfully reduce our order to delivery time frames in the US. While we have materially increased our production capacity in recent months and continue to grow our manufacturing capabilities, we do not expect to return to normalized order to delivery windows in the U.S. prior to the end of Q2 fiscal '21.

Peloton's financial performance for the rest of 2020 will hinge on its ability to ramp production in order to satisfy demand. The good news is that the company is "comfortable that we're in a position to meet the holiday demand on Bike and Tread," according to exec William Lynch.