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Peloton Earnings Report Highlights Warning Signs

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Demand trends look weak heading into the holiday season.

Peloton (PTON -4.12%) isn't expecting a strong finish to 2021. The company recently shocked investors with a report that included weakening sales and engagement metrics.

In this video clip from "Beat & Raise," recorded on Nov. 5 , Fool.com contributors Brian Withers and Toby Bordelon discuss the highlights from the company's latest earnings report, along with some warning signs about the business.

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Brian Withers: Peloton crashed into the wall.

Toby Bordelon: Yeah. What can you say, Brian? It could've been a better quarter for sure. When we look at that, I've seen better looking stock charts than that one right there. You see that massive dip? I didn't check at the end of the day.

At one point the stock was off 35%. Today, it was off 25% after hours in the report, and it just got worse when trading opened.

Revenue was up six percent, but that was a miss, it was a pretty big miss actually. Earnings per share, also a miss. Here's the thing, you look at that revenue, that's a six percent increase from year-over-year. But this is actually the second sequential quarter of falling revenue, not slowing revenue, actually decreasing revenue for two quarters in a row now.

People don't like that. Revenue was actually down 36% from Q3, 2021 to two quarters ago. It went across the one billion mark for the first time, and everyone was happy about that, and that's as good as it's gotten so far. It's not all bad news. There's a little bit of snark on the slide, I will admit that, but that's just the mood I was in. It did get some revenue growth year-over-year, so OK that's good.

You know how we were talking about that order backlog problem they had earlier in the pandemic, I feel like that's not an issue anymore for better or for worse. Legit, good news subscriptions are still going. Connected fitness subscriptions grew 87%. Digital subs up 74%. They now have 6.2 million members.

The connected fitness subscription, they're still growing sequentially. They have more connected fitness subscriptions now than in the last quarter.

They're still doing good in that direction. Connected fitness churn 0.82% and the 12 month retention rate is 92%. That's still pretty good.

The connected fitness gross margins are almost 67%, which is great. That's the world we want to be in, connected fitness, the subscriptions because there's really good margins there. They do have a net loss, stock-based comp went up because sure, why not?

Negative operating cash flow. They guided lower. This is a big thing. They guided lower for their Q2. This is their Q1. What is Q2? Q2, Brian, is a holiday season.

They guided a lot lower than people were expecting for that. That outlook you see there is for the full year, which is also lower, but in the upcoming holiday season, they're saying $1.1-1.2 billion in revenue, people were expecting a lot more than that.

That will still be, I think, good relative to where we are now. Margin is going to inch up a little bit. It's not great. The other thing we've got is engagement is going down, engagement is falling. Quarterly workouts fell for the second consecutive quarter. Average monthly workouts per subscription are at their lowest level since Q2 2020. Their Q2 2020 was the 2019 holiday quarter pre-pandemic.

Now, monthly workouts per sub below that level, that's not great. That's really not great in terms of engagement. Let's see if there's some more bright news, the revenue mix. The product revenue was down 16 percent, but the subscription revenue almost double.

Their subscription revenue is now 38% of revenue for the quarter. I'd love to get that over 50%, but I want to get there with increasing subscription revenue, not falling product revenue. That's the world we're in right now, so that's not great.

I think what we're seeing this quarter, the bottom line here, is that there were some warning signs from the last quarter and those look like trends now, not just warning signs. They're still not making money.

They've lowered their prices. Remember they lowered their price last quarter they had that 20% decrease on the lower price spikes. They're lowering their prices. They're still not making money. It's not great. We have been talking about this.

We talked about Peloton, what happens when we came out of the pandemic? What happens to connected fitness when people leave their houses? I think we're starting to see some of that now. I want to see the new products, Brian, where are my new products?

Withers: You want the roller, don't you?

Bordelon: I want the roller. I might want to mirror clone. I might want a shrink machine. I want to completely Pelotonize my living room, if I were so inclined. We need our new products, we need some new products, so I think they started getting these growth rates back up in terms of the equipment sales, and to keep people connected. If you have one product, it's easier to maybe stop.

If you got three products, you're going to want to keep that Peloton subscription. Even if you lose interest in the bike for a few months, you go to your treadmill, you go to your weight machine, whatever. If you can get some lock-in with multiple products, I think that's better plus it let's them maybe attack that gym market if they have multiple products to offer people, like a big package. We'll see what they do, but yeah, not a happy day for shareholders.

Withers: Yeah, this one to me, it's similar to Intuitive Surgical, the and blade model where you sell an expensive machine and then you get subscription revenues on the backend. But the math is hard because they're still selling machines and still getting adoption.

If you lose one bike sale, say at a $2,000 pop, that's like 17 premium subscriptions or 51 just regular subscriptions that you have without the equipment, so if you lose one bike sale in the quarter, there's a lot you have to make up, but I do like you said, subscription revenues are growing, and it's growing as a bigger part of the whole, I'm kind of surprised that Peloton had a tough quarter. It'll be interesting to see what management does to kind of turn things around.

Bordelon: ProShopGuy says, Peloton has got a big problem of growing inventory, look for great prices this Christmas season, we don't want great prices this Christmas if we're shareholders, that's the problem. We want high prices.

I don't think we're going to get that, but you know, Brian, one of the tracks on ABBA's new album released today, I still believe in you, [laughs] I feel like that could be Peloton's theme song for the quarter. I feel like they can get couple of workouts, a couple of programs around the ABBA theme and maybe maybe pick up some excitement there. We'll see what they do.

Withers: Yeah, I mean, there's still a lot of things, this is a founder-led company. They're trying to make it in a new space with a new business model and it's tougher shareholders to see this kind of loss in their portfolio and not get worried.

But there's still a lot of things that are going well for this company. It'd be just interesting to see how they deal with it.

Toby Bordelon has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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