Peloton Interactive (PTON 1.93%) was set to report fiscal second-quarter earnings after hours on Tuesday, according to Wall Street Horizon, and it may be its most closely watched report ever. The report was unexpectedly moved up to before Tuesday's opening bell. Shares plummeted after the first-quarter earnings report in November as results badly missed estimates and it cut full-year guidance. Since then, the company has slashed production, laid off staff, and an activist investor called on the board to fire the CEO and sell the company.
With the stock down more than 80% from its peak a little more than a year ago, investors could desperately use some good news. Peloton already reported preliminary earnings for Q2, but some of the key numbers have yet to be revealed. Here are three things I'm expecting when Peloton delivers its second-quarter results.
1. Average monthly workouts declined sequentially
In its preliminary earnings report, which was released the same day CNBC reported the company was halting production, a statement Peloton later contradicted, the company reported most major metrics such as revenue, adjusted EBITDA, monthly churn, and total connected fitness subscribers, but one number was suspiciously absent.
Peloton declined to reveal the average monthly workouts per member. This isn't a difficult metric to measure and it's one that should be readily available almost as soon as the quarter ends. Average monthly workouts is important because it shows how engaged Peloton's subscriber base actually is. Some investors prefer to use churn as a gauge of engagement, but that number is influenced by financing packages that mean most subscribers are still paying off their equipment, effectively keeping them as subscribers even if they've lost interest in the classes.
Average workouts is a better reflection of actual usage than churn. In the first quarter, average monthly workouts fell to its lowest point since the pandemic started at 16.6. A continued decline would be a bad sign for the company's recovery prospects, and even though seasonality would indicate a recovery in workouts in the holiday quarter, the pandemic reopening and general malaise at the Peloton point to another decline in average workouts.
2. Management will shut down the buyout talk
Activist investor Blackwells Capital called for the company to sell itself two weeks ago, and the stock spiked 20% on Monday on reports that Amazon and Nike were considering making an offer.
However, selling out at this moment when the stock has cratered and the company is struggling to balance between supply and demand would mark a huge defeat for management. Even if an offer came at a large premium, the leadership team would likely feel like they were leaving billions of dollars on the table.
A sale is also unlikely without Foley's agreement as he holds 40% of the voting power. Together, the executive team and board hold 83% of the voting power. They would have to agree that a buyout was in the best interest of the company, and that seems unlikely as it's easy to imagine Peloton being in a better place a year from now. The production woes should eventually resolve themselves, and the difficult pandemic comparisons will fade away in time.
Management didn't respond to Blackwells' letter and has never said it was considering a sale, but an analyst will probably ask them on the earnings call if they are considering a buyout exit. Expect management to dismiss the idea.
3. The company will raise bottom-line guidance for the full year
The company expects a wide adjusted EBITDA loss for the second quarter at $260 million-$270 million, but that was actually better than its earlier guidance of a $325 million-$350 million loss.
While that result should have a positive impact on full-year EBITDA guidance, the company has also made a number of decisions in recent weeks that seem likely to narrow its full-year loss, which it had previously forecast at $425 million-$475 million. In the preliminary earnings report, Foley said, "As we discussed last quarter, we are taking significant corrective actions to improve our profitability outlook and optimize our costs across the company. This includes gross margin improvements, moving to a more variable cost structure, and identifying reductions in our operating expenses as we build a more focused Peloton moving forward."
The cost cuts in headcount and production should help bring the country closer to break-even, and the subscription business, which generates most of its gross profit, still looks solid as its connected fitness subscriber base rose to 2.77 million in the second quarter from 2.49 million in the first quarter, and monthly churn remained low at 0.8%. Since the subscription segment is the greatest determinant for overall profitability, all management has to do is control costs like marketing and production and the company should be able to return to profitability. Management has already indicated it's moving in this direction.
It's impossible to predict how the stock will move, especially given the noise around a potential buyout, but a significant raise on the bottom line would help reassure investors that the worst is over, and that would certainly be welcome news for the fitness stock .