Peloton Interactive (PTON 4.59%), the well-known maker of connected fitness equipment, has been struggling recently, with new CEO Barry McCarthy trying to turn the business around. With revenue falling more the 20% in the most recent quarter, the company is looking for ways to jump-start sales. Peloton recently introduced a new product, its long-rumored rowing machine, with the first deliveries expected by the end of the year. Is Peloton Row the answer to the company's challenges?
Source: Peloton Interactive Media Kit
Peloton's revenue streams
To understand the potential benefits of the new Peloton Row, we need to consider Peloton's two main revenue streams. The company generates product revenue from the sale of its connected fitness products, such as its Bike and Tread, and related accessories. Peloton also generates subscription revenue sale of connected fitness subscriptions. These connected fitness subscriptions provide access to live and on-demand fitness classes, both on the company's connected fitness products and through its stand-alone app.
With prices starting at just under $1,500 for the base model Bike, product sales tend to generate significant revenue for the company. Given the price points, you might think this is where the company wants to focus its efforts – sales of expensive connected fitness equipment. The problem with this type of revenue though, is it is one-time revenue. Once a customer has a bike, they aren't likely to be in the market for a new one. Maybe Peloton convinces them to build out their home gym with a Tread, or a new Row, but, the repeat revenue opportunity here is limited.
The subscription revenue, on the other hand, is where the long-term recurring revenue comes from. At $44 a month for an all-access membershiprequired to access content on one of Peloton's connected fitness products, or $12.99 a month for a stand-alone app subscription, these subscriptions provide consistent, regular revenue for the company. If Peloton can keep subscription churn low, and so far it has , then subscription revenue should eventually become the primary driver of earnings and profits. Indeed, this is what we've seen in the most recent quarter. Even though product revenue fell off a cliff, dropping nearly 60% year over year in the first quarter of fiscal year 2023, subscription revenue continued to grow, increasing 36%.
The Row's ideal customer – someone new
Given the desirability of recurring subscription revenue, a key measure of the Row's success will be whether it ends up driving that subscription revenue higher. That will depend in part on what type of customer the Row appeals to. There are two main types of customers who may decide to purchase a Row – an existing Peloton customer, or a brand-new customer.
If an existing Peloton customer, someone who currently owns a Bike or Tread, buys a Row, Peloton will book product revenue. With a retail price of about $3,200, and potentially more depending on what accessories a customer chooses, this revenue is nothing to sneeze at. I'm sure that Peloton management would love to sell a Row to each of the company's existing customers. The problem is that these sales don't increase subscription revenue. One all-access membership covers all of a customer's Peloton machines. So, while this sale is great, it doesn't increase the high-margin, recurring subscription revenue we're looking for.
It's the second type of customer, the customer who doesn't yet own any Peloton connected fitness products, that the company is going after with the Row. When this customer buys a Row, they're also going to activate a new connected fitness subscription. Peloton isn't just getting that juicy $3,200+ from them, they're also getting an extra $44 a month for as long as they remain a loyal, happy customer. If the Row can attract decent numbers of new customers to the Peloton ecosystem and get them locked into a monthly subscription, the new device will have done its job.
Follow the revenue
While selling a new Row to existing customers is good, what the company needs to do is boost the membership base. Whether or not the Row can help turn around Peloton's fortunes, therefore, will largely depend on whether it can bring in new members and grow recurring revenue. So, over the next few quarters, we'll want to follow Peloton's revenue breakdown closely.
If we see a spike in product revenue, but subscription revenue doesn't grow much, that may be a sign that the primary purchasers of the Row are existing customers, which isn't ideal. This means the Row isn't doing much to grow that important recurring subscription revenue. If, on the other hand, we see higher growth rates in both product revenue and subscription revenue, that may suggest that the Row is attracting new customers and increasing the member base. If the new product can bring in new members and grow those subscription numbers, it will be a success.
And what if we don't see much growth in either revenue category a quarter or two after the Row starts shipping? Well, in that case, shareholders will be hoping that Peloton management has an alternative revenue-boosting plan to roll out in the quest to save the company.
