What happened

Shares of connected-fitness company Peloton Interactive (PTON -2.24%) surged on Wednesday after the company announced financial results for the second quarter of fiscal 2023. In short, the company's business is more resilient than some gave it credit for, and some metrics are improving. And that's why it jumped to its highest price since May 2022. As of 11 a.m. ET, Peloton stock was up 18%.

So what

Peloton CEO Barry McCarthy struck an optimistic tone, saying, "If you've been wondering whether or not Peloton can make an epic comeback, this quarter's results show the changes we're making are working." Specifically, McCarthy was referring to improvements on the company's cash-flow situation.

McCarthy took over at Peloton about one year ago. And in his first three quarters as CEO, the company reported quarterly negative free cash flow (FCF) of $747 million, $412 million, and $246 million. In Q2, Peloton had negative FCF of "just" $94 million, but this included some one-time expenses. Without those, Peloton would have been cash-flow positive.

Behind the improvements to its cash flow, Peloton did well selling exercise equipment in Q2. The company generated quarterly hardware revenue of $381 million, up sharply from hardware revenue of $204 million in the previous quarter.

This hardware revenue is allowing Peloton to reduce its bloated inventory. Q2 inventories fell to $791 million, down from $993 million in the previous quarter, which has been management's goal.

Now what

Peloton's management is counting on revenue from its high-margin subscription streaming service to lead the way to the company's full recovery. And the company has generated almost $824 million in subscription revenue in the first half of fiscal 2023, compared to just $586 million for hardware. So that's good.

However, growth among subscribers appears to have slowed significantly for Peloton. The company ended Q2 with just over 3 million subscribers, up just 2% from the previous quarter. And management only expects about 2% growth next quarter, too. To me, this lackluster growth rate from the very thing that Peloton is prioritizing could prevent it for more market-beating gains in 2023.

That said, shareholders should be encouraged that Peloton's financial situation looks to be stabilizing.