In its most recent quarter (Q2 of fiscal 2023, which ended Dec. 31), Peloton Interactive (PTON +6.51%) posted revenue of $792.7 million, down 30% year over year, and a net loss of $335.4 million, compared to a net loss of $439.4 million in the prior-year period. While the bottom-line figure was worse than what analysts had hoped for, the sales figure exceeded expectations, and it helped push the stock price more than 25% higher following the news.
While Peloton reported on several metrics of its exercise-equipment-making business, there was one important number that was missing from the struggling fitness innovator's latest earnings report. Here's what was missing from the report and why it's so important to investors' understanding of the health of the business.
NASDAQ: PTON
Key Data Points
Gauging Peloton's user engagement
While the price jump shows that Peloton's latest financial report was well received by investors, they probably missed the fact that the management team no longer reports one key metric: "Average Monthly Workouts per Connected Fitness Subscription." In fact, this was the second straight quarter that the company didn't report this number. And the management team gave no indication during its previous earnings calls that it would stop providing data on workouts.
This number is critical to understanding user engagement, which is important to any subscription-based company's success. Peloton's 3.033 million connected fitness subscribers, up 10% year over year, are those who have purchased a piece of exercise equipment and pay the $44 monthly membership fee (in the U.S.) for access to the workout library. There is no denying the fact that this is the company's bread and butter.
During the depths of the coronavirus pandemic, it was hardly a surprise that with consumers spending more time than ever at home, engagement soared. In the fiscal 2021 third quarter, average monthly workouts per connected fitness subscriber totaled 26, an all-time high for Peloton. Since then, however, it has steadily fallen. In the 2022 fourth quarter (ended June 30, 2022), the last time that leadership reported this figure, this number was 14.8, the lowest it's been in about three years.
On the flip side, if engagement is softening, then we'd expect churn to be on the way up. In the latest quarter, average net monthly connected fitness churn was 1.1%, up from 0.8% in the year-ago period. And it's far greater than the 0.31% churn in Q3 2021. It can't be a coincidence that with the economy reopening following the pandemic, consumer behavior normalizing, and brick-and-mortar gyms popular once again, Peloton has struggled.
Zooming out, what's even more alarming is that Barry McCarthy, the CEO who implemented a turnaround plan from the moment he was hired about a year ago, is praising the company's progress thus far, primarily as it relates to stabilizing the cost structure, getting closer to free cash flow breakeven, and setting the business up to grow again.
A potential problem for Peloton
But for any subscription-based company, it's critical that shareholders have engagement metrics to look at to assess how well the business is doing and how consumers are behaving toward that product or service offering. If Peloton is doing as well as McCarthy claims it is, and it's executing successfully against its turnaround plans so far, why stop providing data on average monthly workouts?
Without it, investors now have no idea how often Peloton customers are using the platform. And it likely indicates that the metric is worsening. If more of Peloton's hardware is sitting around idle and gaining dust, these subscribers are more likely to cancel their memberships and find a way to sell their equipment. And this would indicate a weakening value proposition for customers, not a strengthening one. But again, investors would have no clear idea if this was the case since the metric isn't provided anymore.
If you're a Peloton shareholder, this could be viewed as a major red flag. It's potentially a sign that the brand just isn't resonating as well as it once was with consumers.
