Right? All right, we got the thumbs up. So welcome, everybody. I'm Ron Josey. I cover the internet sector here at Citi. It's always so exciting to have with me Liz Coddington, Peloton's CFO. I think we all know what Peloton is. In a show of hands, anyone have a Peloton in the room? Yeah, it's a good amount of them. Soon, maybe we'll have a strength app. We'll do more and more. So I think we all know what Peloton is, but maybe the news out of this past quarter was the restructuring of the debt we heard about back in May. We have plans for EBITDA guidance and free cash flow. So a lot to talk about. Liz, welcome.
Maybe to kick things off, you know, I wanna start on maybe not so fun, exciting stuff, but certainly fun for us finance people, just the pivot to profitability. Maybe it's not a pivot, but just the march to that profitability. Tell us more about, you know, the drivers here and maybe before we get into this heavy topic, you've been at Peloton for two years?
Four.
Tell us more about how, you know, it's been. The product only gets better, I'll put it that way.
Yeah. So actually, I'm really excited to talk to you all about our profitability and free cash flow. I know Ron just said maybe that wasn't so such an exciting topic. But we are really proud of the progress that we've made, and that we're actually being able to show that manifest in our financials over the last couple of quarters. But I think what might be helpful is for me to sort of step back and talk about where the business has been, and sort of how we've kind of evolved and made progress that has gotten us to this point, where we're able to deliver, you know, really strong guidance for adjusted EBITDA, and also free cash flow for this fiscal year.
So many of you, as many of you may know, Peloton experienced an outside surge in demand for both our hardware products and our subscription during the COVID-19 pandemic. And now, we are arguably at more than two years past the end of the pandemic at this point, and we do have the benefit of hindsight that allows us to look back. And it strongly suggests that we pulled forward multiple years of demand for our hardware products during COVID, and we may still not be completely past the impact of that demand pull forward. And so, you know, as our sales volumes declined toward the end of COVID, it became very clear that the high fixed cost structure that the company had built in order to support that surge in demand was just not sustainable. And it has taken us a couple of years to really rightsize our cost structure.
when we started to rightsize our cost structure, we looked at key areas like our manufacturing and our supply chain that were high fixed cost areas for us. And we shifted our manufacturing to third-party contract manufacturers, got out of doing manufacturing ourselves. We also optimized our supply chain to be much more variable in nature, and that included things like outsourcing our last mile logistics to third parties. And we reduced our fixed cost base as well. We reduced headcount, we cut OpEx, but the reality is that the decline in our sales was greater than we had anticipated at that time and our cost structure was just not yet rightsized.
And so the pivot that we've made is that we're now focused on being able to deliver profitability and sustainable unit economics, both in our hardware and subscription parts of our business, without requiring growth in the near term to be able to achieve it. And you can see the results of that or that we're making progress towards that, in our bottom line profitability results that we've had the last couple of quarters, as well as our progress on free cash flow. And then you can also see that in the outlook that we provided in our guidance for fiscal 2025. You know, I was kinda stepping back and thinking about our subscriber growth.
If you look at the midpoint of our guidance for fiscal 2025 for our connected fitness paid subscribers, which is a decline year over year, we are expecting that. You compare that to where we were at the end of fiscal 2019, so pre-COVID, the six-year CAGR is over 30%. What that suggests is that even with the demand pull forward that we experienced, over the long term, Peloton has actually delivered strong growth. You know, while we're still very focused on growth in the long term, and it remains very important to us, we are also focused on the things that we can control, which is ensuring that our business is on solid financial footing, so that we can invest in innovation to grow in the future and also deleverage our balance sheet.
How do we do that? So we have to continue to optimize our costs. And you mentioned this, but we announced a $200 million cost savings plan back in May. And we are on track to be able to deliver the full savings by the end of FY 2025. Those cost reductions were needed. They were necessary in order to align our cost structure and rightsize it to the size of our business.
In doing that, we were able to deliver, you know, strong guidance for adjusted EBITDA in fiscal 2025 of $200 million-$250 million, and then also be able to say that we'll be able to deliver meaningful positive free cash flow of at least $75 million. With our guidance, we're saying that we are confident that we're able to do that, even facing contracting top-line revenues in fiscal 2025. With all that focus on profitability, you know, we are still actually able to meaningfully invest in growing the business. We're investing in content, we're investing in product innovation, and we're investing in marketing.
And, you know, we are optimistic about what we expect those investments to bring to us, in terms of growth in the future. But the key thing that we're doing and the change that we've made is that we aren't relying on the success from those new initiatives in order to deliver our profitability targets in fiscal 2025. And the reason for that is that, you know, the success of them is still highly uncertain at this point, both in terms of the magnitude of what that success might be, as well as the timing of when we may expect to get those initiatives to gain traction and deliver that success. And we're also committed to not spending on marketing until we feel really good about the product market fit coming from those new initiatives and fitness experiences.
That's great. There's a lot to jump off there.
Yeah, a lot there.
There's a lot going on. Maybe one of the key things is the questions we often get is that you talked about sustainable unit economics and hardware. And so gross margins and hardware, I think, have been improving quite a bit over the last couple quarters. And so talk to us just more about that unit economics, how you did achieve that, call it improving gross margins. And I think we talked about getting to double digits, and that there's a big range for double digits, but you know, seeing consistent improvement on hardware gross margins.
Sure. So, one of the key areas of focus for us is ensuring that our unit economics are sustainable. And what that means is our connected fitness gross margins are, you know, are meaningfully positive. And so, some of the changes that we've made is, you know, we've talked about the fact that we are reducing our promotional activity, and that, of course, increases the net price per unit sold, which increases our gross margins. And then, you know, we also have had the benefit in recent quarters of the relaunch of our Tread+, which has a really healthy gross margin to that product as well. So those are some of the ways that we are doing that.
We also have really strong gross margins in our subscription business, roughly 68% in our last couple quarters, and that's a really healthy business for us. It's a big portion of our business, $1.7 billion in annualized revenues. You know, as our business shifts, has shifted over time from being more hardware focused to being more subscription focused, that naturally helps us some with gross margins as well.
Sticking with the cost side for now, and then we'll get into the other side of the business a little bit. The $200 million in cost reductions that we talked about and the $200 million -$250 million guidance on EBITDA, I think we said about half of the cost reductions might have been headcount or about that. So talk to us more about the $200 million, where those dollars are coming from.
Sure. So, of the cost reductions, you know, we did say that roughly, from the $200 million, that about $100 million of that was going to come from headcount, and most of those actions have been taken at this point. We expect to be fully completed with those by the end of this quarter. So starting in Q2, we'll have a full quarter of those reductions. The rest of it is coming from a variety of different areas. One of the big areas is in other areas of marketing, sales and marketing spend, which are not headcount related. So things like spend optimizations in our brand and creative spending, reductions in our retail showroom footprint by closing stores, things like that, things of that nature.
We've also optimized our contractor spending, so that's kind of like headcount, but not. It's, you know, headcount that is not employee based, and then we've also, you know, looked across our cost structure to identify other areas of OpEx savings. But all of these savings have been identified, and so we're just going after to pursue them. There's not a lot of investment that we need to make in order to achieve these savings. Some will take a little time because they deal with things like, for example, our cloud infrastructure costs, and there's a little bit of work to get those done, so we can achieve those savings. But we are on track to be able to deliver them by the end of the fiscal year.
Perfect. And with these savings, with the sustainable unit economics, this shift to profitability, and I hate to call it shift because it's always been the focus, but the refinancing got done.
Yes.
And that was a huge milestone, I feel, in this story of Peloton is back, so to speak. So talk to us about some of the key elements of the refinance, and with that behind us, you know, how does that sort of add to the broader overall story?
Yeah. Great question, so we completed a $1.35 billion holistic refinancing back at the end of May, and we were really pleased with the outcome from that because it was both competitively priced and significantly oversubscribed, which suggests that we had really strong demand from investors. And also, it was a real strong vote and confidence for Peloton's future. So let me break down the components of that $1.35 billion. So we had a $1 billion, five-year term loan with a broad investor base. We also had $350 million in five-year senior convertible notes and a $100 million revolving credit facility that remains undrawn to date.
We used the proceeds from that to strategically repurchase roughly $800 million of our 0% convertible notes that are due in February of 2026. We were able to do that at a discount, which was a great outcome for us, although we do still have roughly a little less than $200 million of those convertible notes still outstanding. You know, we viewed the refinancing as a great outcome for the business because it allowed us to achieve our objectives of slightly de-leveraging, pushing out maturities to 2029, and also giving us a little bit more flexibility in our terms. We did that all at a reasonable cost of capital, so we're really pleased with that.
And with that, we also use a term we heard on the call, capital allocation.
Yes.
And so we haven't really talked about this behind us, but with the refi behind us, free cash flow is now ramping. We talked about EBITDA. You know, how do you think about capital allocation going forward?
Yeah. I'm excited to be able to talk about this topic now that we are generating positive free cash flow, so it's a good thing. You know, we believe that we have more cash to operate the business today than we actually need, and we expect to generate a minimum of $75 million in free cash flow in the fiscal year. We have cash on hand now, if we wanted to deal with the $200 million in 0% converts that are still outstanding, but there's no urgency to do that because they are 0% coupon. And so we are starting to evaluate, or we are evaluating our capital allocation strategy now, and we remain focused on de-leveraging.
And aside from, you know, de-risking the business and improving our multiple, there actually is some dollar value to us if we are able to de-leverage. We can achieve a 50 basis point rate step down in our term loan if we're able to reduce our leverage ratio to less than 5x .
That's meaningful.
Yeah.
That's something we'll be looking forward to then.
Us too.
Yeah, that's great. So we've gotten in this last 15 minutes or so, we've talked about stabilizing the business from a profitability perspective, improving EBITDA, cash flow, the balance sheet is stronger, capital allocation is a potential. Let's talk about the other side, to sort of get to that next level, maybe Peloton 3.0 or 4.0 , which is the growth side. And so there's a lot going on, I think, on growth levers overall. And so maybe internally, bigger picture, with the organization now on a profitable cadence, how is-- what is the viewpoint on growth? You just mentioned we're not spending on marketing until we see sustainable results. Talk to us about growth, and we have very specific questions after that, so just high level. Not very, but other specific questions.
In terms of growth, we do remain focused on delivering growth into the business. One of the key focus areas for that, and we are focused on growing our Tread business. And the reason for that is we do see a huge market opportunity there for treadmills. Our estimates are that the at-home treadmill market is more than twice the size of the stationary bike market, and yet today, for us, our treadmill sales are significantly smaller than our bike sales. We also see that the customers that are purchasing our treadmills today, over half of them are existing Peloton members, and so we see a real opportunity to bring in new members through our treadmill offerings.
And a couple of ways that we are pursuing this opportunity strategically for Tread are. Well, there's two kind of key facets to it. One is really around content offerings and product offerings. We are focused on improving those in ways that are catered to walking and running. So some of the things we've recently launched include pace targets. I don't know if anybody has tried those types of workouts. We've also have marathon training programs. We have also expanded our entertainment offerings for people who wanna watch TV or read a book on their Kindle when they're working out. And then we also recently launched something called the Just Guidance feature for Tread. So those are some examples on the product side.
We're evolving our marketing messaging to better associate our brand with running, hiking, and walking, and we're doing that with campaigns that are really focused on driving awareness of Peloton's running offerings, and then also, you know, ideally driving sales of our Tread products as well.
What would you say? So understood, it's Tread is 2x the size of stationary bike market. How could we think about awareness of the Tread business?
Yeah, I mean, so for us, you know, one of the things, Peloton is an iconic brand, right? You know, we're known for our world-class content, our engaging and expert instructors, and also our premium high quality hardware. But I would say that, there are a lot of prospective members that are just not aware of the breadth of what we offer, and that's not just the Tread, but that's really anything beyond being an at-home spin bike company. And so, you know, our Chief Marketing Officer, Lauren, and her team are very focused on evolving our marketing messaging in order to change that.
Perfect. Okay, so that's Tread. And Tread+'s relaunch, so we'll come back to that if there's time. Maybe I wanted to talk about the subscriber base, and then we'll get into like newer products that are coming out here. But that subscriber base has been awfully stable. Churn ticked up here, and maybe that's some of the newer products that are driving it. But just talk to us just how we think about what could reignite growth within subscribers, is the question.
Yeah. So I think when it comes to subscribers, we need to think about how we do that and how we acquire subscribers in a profitable way, which is what we are very much focused on. We could spend a bunch of money on marketing today and grow our subscriber base faster and return to growth faster. But we are trying to be much more disciplined in how we do that. So, you know, our guidance for our fiscal 2025 suggests that our subscribers will decline by the end of the year between 230,000 and 300,000 . And some of that, you know, we believe that some of that is due to the macro environment, but it's largely driven by conscious decisions that we are making to ensure that our subscriber acquisition is profitable.
So you've probably heard, I know you've heard, Ron, me talk about LTV to CAC.
Sure.
Yeah, and how we think about that is the framework that we use to evaluate subscriber acquisition. And our target is to be in the 2x-3x range, and over the past couple of years, we've been in more of the 1x-1.5x range in order to maximize our growth potential. But, you know, now we are targeting getting closer and closer to at least a 2x, and I'd like to get us closer to a 3x. And in order to do that, we really have to focus on improving both aspects of the LTV to CAC equation, both the LTV piece and the CAC piece. And so on the LTV side, on the numerator side, there's a number of things that we are focused on there.
The main one has really been around expanding our connected fitness growth margins so that our unit economics are sustainable and profitable. And that is, you know, reducing promotional activity, which may reduce our sales in the near term, but long term should be a benefit to us, and to the business overall because, we are, you know, increasing the net price paid per unit, which improves the hardware gross margins there. And then on the, on the pricing side, we are considering making some changes to specific products in certain markets in order to ensure that all of our products deliver meaningful, positive hardware gross margin across all products, all sales channels, and all markets.
And so that's really important for us to make progress on that more in the near term, to set us up for better growth in the long term. Now, on the CAC front, reducing our sales and marketing costs, it should help us improve our CAC. Ways that we are doing that, we've talked about some of the cost reductions that are part of our $200 million cost reduction plan, including the reductions in brand and creative, which hit sales and marketing, the reduction in our retail showroom footprint. We've also reduced headcount in our international sales and marketing organization in order to have more of a centralized strategy with local execution approach. And then also we're reducing our media spend year over year in order to improve our media efficiency.
When you take all those things together, that improves both the LTV side and the CAC side, moving us towards making progress on our LTV to CAC ratios. As we continue to become more efficient and optimize and reach our targets for LTV to CAC of being above a 2x, that allows us to really pivot and invest more in media to be able to drive incremental subscriber growth in a profitable way. The way you can kind of think about it is we're making sure that we are doing this all, our subscriber acquisition in a much more profitable way and then re-accelerating growth from there.
When you said reducing promotional, call it spend and pricing, I want to dig into that a little bit more. I think this Labor Day, we saw some promotions.
Yes.
So we're not getting rid of promotions. We're just maybe not offering as high of promotions. And talk to us about that sort of threshold and how you balance those two.
Obviously, we're gonna learn and see what works on the promotion front. You know, our goal is to be less promotional, perhaps both in terms of the depth of promotions, and then also the frequency of promotions. If you look back at this last Q4, we didn't really have nearly as much promotional activity as we did a year ago. The promotions that we are doing right now, which is continuing to go on now during Labor Day, are focused on our Tread products, but not our best products.
And so they are more focused and targeted. And you'll see us trying a variety of different things, and we'll learn and see what works. But, you know, again, it's with the overall goal of ensuring that we do have meaningful, positive hardware gross margins.
Right. And as we think about the cadence of the year, typically the holiday season for Q1, the colder months, you see greater demand, and then people are outside and running, and so you maybe don't see as much demand. From a timing perspective, can LTV to CAC really move that quickly to two? Like, is this a-- and I guess bigger picture, is this a one-year event, a three-year event to two, or could you see things really happening in a quarter or two, so that come holiday spend or holiday time when wallets are maybe opened up?
Yeah. You know, I don't have a perfect answer to that question. I mean, I'd love for it to move there as quickly as we can get there.
Right.
There are some structural things like reducing brand and creative and showroom footprint. Those sorts of things should naturally help us make progress relatively quickly, but it is gonna be a bit of a journey, and we're gonna have to see what works, as we optimize, but the great thing is that Lauren and her marketing team have really brought a much stronger discipline to our marketing spending. And we have seen, although we are not to a two yet, significant improvement in our LTV to CAC performance year over year. We saw that in Q4.
That improvement, because less promotions this past quarter.
Exactly. And then also the reductions in the brand and creative spending and some of the things that were related to our cost reduction plan.
That's great. And so let's, let's dive into maybe some of the newer sales channels that I think are interesting. Secondary market, there's the rental, there's certified refurbished, there's 3P retail. Let's, let's dig into maybe. And we have fifteen minutes, so we can't get into all of them, but secondary market specifically, would love your thoughts. Have you been surprised at how strong that market is and any sort of difference in LTV of the subscriber, subscribers that buy on the secondary market?
Yeah, so the secondary market is a really interesting channel for us, because it operates independently from us, right? It's basically when a member, either a churned member or a member for whatever reason, chooses to sell their used predominantly bikes to another prospective member, and none of that transaction happens through us. It all happens independently on the secondary market. You know, since we had that surge in demand during COVID, even at our low churn rates, the volume of used bike inventory available has increased over time, and as a result of that, the price, the average price paid for these used bikes has decreased just based on laws of supply and demand, and so that's actually really great for price-conscious customers who want to join Peloton, but for whatever reason, aren't able to purchase hardware directly from us.
And so we're pleased that that market is there, and we want to support it. It has become a significant mix of our gross additions over time, and that's one of the reasons why we recently launched, at the time of earnings, a used equipment activation fee for members who are joining us through the secondary market. And the reason that we did that is because that allows us to be able to really invest in improving their experience for those members when they join. So that's that channel is important to us, and we are investing in it. It does have a slightly higher churn rate than our than those who purchase directly from us. But it is still attractive, and those customers still have a strong LTV.
What do you get for the new activation fee? $95, right?
Correct.
U.S. dollars. And to improve the user experience, so that's-- Tell us more about what you get for this.
Right. So, one of the things that members get with that fee is we created our Peloton history summary, so that when you're buying a used bike from someone, you can actually get a history almost like a Carfax report for Peloton, where you can see how much that equipment has been used, a variety of things about the equipment to help you in your purchasing decision. You also get discounts on things like workout mats and cycling shoes and that nature, to help you get your experience off to a good start. Also, a free virtual bike fitting, that you can have.
That's--
That also help you get set up for a great start with a Peloton Bike.
Were we able to test this ahead of time, or this? We sort of had to. It's hard to test.
Yeah, it really is--
You can't really do that, right?
We just launched it. But we are. You know, it seems to be going well so far.
Okay. Let's shift to some of the other ones. Rental, we've talked about for several years now. It's been a great way to sort of get newer demographics onto the platform. I think we heard churn actually improved this quarter. So tell us about rental demographic, or just how the rental channel is going overall, how you view it as one of the newer, call it, growth initiatives.
Yeah. So, the bike rental program is actually the highest incremental channel that we have for acquiring customers. It's typically had over 60% of the members who join us from the bike through bike rental. Our research suggests that they are incremental and would not have joined Peloton if that offering had not been there. That being said, it is a higher churn for us. And so, one of the things we recently did is we actually stopped offering bike rental for our original Bike. And the reason that we had to do that is that the program worked really well when we had a lot of refurbished inventory available to support that program.
But the unit economics were not attractive enough for us to be able to fulfill the bike rental for just the original Bike with new inventory. And so in line with our focus on ensuring that we have sustainable unit economics across our business, we had to cease offering bike rental for the original Bike. That being said, we do still offer it for Bike+. The unit economics are still quite attractive for us for Bike+, with either refurbished or new inventory, and we plan on offering it for the foreseeable future.
I'm sorry, so understood, we, it's for Bike+. Do you think original Bike comes back, or we have to figure out inventory first?
You know, so our refurbished inventory, the way that we get most of our refurbished inventory back to Peloton, is because of the fact that we have a 30-day home trial program.
Yeah.
Right? And that is really an important part of our acquisition strategy. And even though our return rates are quite low, you know, we do get, over time, a decent amount of refurbished inventory back for us. But we also offer refurbished sale which I think is probably where y ou're gonna wanna go next. And the economics of selling a refurbished bike are better for us than offering a refurbished Bike through rental. And so when we had to make a choice between having enough inventory to support both of those programs, we went for the refurbished, being able to offer refurbished sales. Another reason why we like refurbished sales better is that the churn rate for members who join us through refurbished sales of either the Bike or the Bike+ have that same low churn rate that members do when they buy new bikes from us.
So refurbished has very similar to first-time buyers?
Exactly.
That makes a lot of sense. And that's via channel directly on One Peloton?
Yes, you can buy them directly on our website.
Speaking about channels, 3P, that was a big deal with Amazon and DICK'S and several others. Tell us more about that. I think we heard on the call some change in it could change in terms maybe with some of these partners?
Necessarily change in terms, but, so first of all, our third-party retail part, our third-party retail channels are intended to reach incremental audiences. That's why we have them. If you think about Amazon, they have a very broad reach in terms of the audience that they serve. And then with third parties like DICK'S Sporting Goods, the great thing about DICK'S is that it provides a retail showroom for us to showcase our hardware so that people can come in and see and touch and feel our products alongside other fitness offerings. Now, over the couple years that we've been partnering with third parties, we have had some learnings on how to optimize these channels to drive higher incrementality.
One of the key learnings that we have, that is now working well for us, is to really lean into key promotional moments for those third parties that don't cannibalize our first-party sales. A great example of that is Amazon Prime Day, being a really good example of that. Our third-party retail channels are also important because they offer an efficient way for us to expand internationally. Our business in Austria is completely served both in terms of retail and distribution by third parties. And actually, just this week, we announced that we will be moving our German business exclusively to third-party retail and distribution with two partners, Amazon and Fitshop.
Hmm. Trying new ways. That's great. And Austria, 3P completely, lessons learned, going well? Allowed you to get into Germany has been one of, I think, one of the earlier international markets in terms of content for Peloton, so.
Yeah, and we are not backing away from the German market in any way.
Right.
We're just trying to make our operations internationally more efficient and more sustainable, in line with all the things that I've been talking about earlier about making sure that we can have efficient unit economics and drive profitability. We saw success with Austria. We're moving Germany there as well, and then that sets us up in the future to potentially be able to expand into other markets via third parties, as we get really good at working with them.
Perfect. So we've covered a lot of topics here from, of course, the cost side, the refi, but now into growth. Other modes of growth, and Liz, you sort of, you highlighted it, folks can do more on the actual hardware itself, the entertainment. You can read, you can watch. How has engagement trended overall on Peloton now that you can? And gamification is another thing, that there's many more things you can do on the Bike and the Tread than you could in the past.
Yeah. So our engagement remains quite strong. It is down slightly. Year over year, it was down slightly year over year in Q4, and we measure that in terms of average workouts per subscriber per month. But if you look back to where we were pre-COVID, we are still up tremendously in terms of engagement. You know, one area that I didn't really get a chance to talk about that I think is really important is some of the innovation that we are doing on the software front that is able to, that we hope and we expect will help us drive more engagement, both on our hardware as well as, through our app. So, we actually have some things that we just announced as early as this week, that we're really excited about.
So some of you may have seen that we announced a public-facing beta for what we are calling our Strength+ app. And what that is, it's an app that is focused on workout programs that are more for a gym setting, and it offers audio guidance, expert coaching. We have some prepackaged workout programs that our instructors developed. And then it also has something called a workout generator, which is interesting.
What it does is it lets you pick what type of equipment you have access to, so if you have access to dumbbells or whether you have access to, like, all the machines in a gym or, you know, some combination of the two, what areas of your body you wanna focus on. Do you wanna do upper body? Do you wanna do core? Do you wanna do lower body, glutes and legs? Like, whatever you wanna focus on. And then also how much time you have available to do a workout, and it will generate a customized workout just for you, which is great. I do wanna point out, I wanna plug our Strength+ app. Any one of you can sign up for the beta, and you don't even have to be a Peloton member to be able to do it.
The only thing that you have to do is be based in the U.S. and have access to an iPhone. So we're really excited about testing and learning about that as another way to drive engagement, especially for the portion of our members who, you know, may want to work out in the gym and use Peloton as part of their workout. Another feature that we actually just launched, I think it might have been yesterday, is something called Private Teams, and what Private Teams - and that is available on the Peloton app. And what Private Teams is, is it's a feature that is intended to really enhance and build our community on the Peloton platform beyond just the high fives that you can do on the leaderboard today.
And what Private Teams allows you to do is it allows members to share their workouts with other members and also participate in challenges together with other members, and also with non-members. And the goal there is to drive organic acquisition of subscribers from those non-members who participate, and then also to really drive engagement with the Peloton platform beyond just working out. So that's another one that we hope will help us drive engagement further.
The third one that is interesting is one called Personalized Plans, and what this is is basically it's a routine. It offers routines for members based on their input, what their needs are, and their focus areas are. What it does is it generates weekly workout recommendations for those members, and the goal there is that particularly for new members who may not know where to start, it sort of removes that friction by offering them weekly recommendations on the workouts to try.
Now, that one, we just have done a very small beta test that we launched in mid-August, and we're testing and learning from that, before we're ready to share that one more broadly. But those give you some examples of how we're really trying to help drive engagement.
Right, and this is irrespective of hardware.
Yes.
So but Strength+ app is now live in beta. Anyone can download it?
Well, you have to sign up but then you'll get invited to join the beta.
Yeah. Got it. That's exciting. That's great. Looking forward to using that more. Private Teams, there's nothing better than a high five from celebrities, so this can even be better. And Personalized Plans, that's what I'm trying to get at is all of this is on the software side.
Yes.
You currently have an R&D staff, you know, a tech staff that's already there, so as we think about Peloton going forward, more software improvements like this, you can do more on the bike, you can do more on the entertainment, the reading, the--
Yes, and we're also working on this. This is something that is much more connected to cycling. We are working on a gamified experience that basically is. We're not ready to share it too broadly yet, but there's basically like a cycling experience that you can ride, either do challenges yourself or with others in sort of more of a virtual world type setting, so less of a class-type format. I actually have access to it on my bike. I actually used it this morning. I think it's pretty cool, but we're still working on improving the features and functionality, before we're ready to share that more broadly.
We have about a minute left. I did want one of the questions we get often. I wanna just to highlight or ask you about this, is the churn factor. So churn is ticked up. Do you see it's leveling off at any point or, well, how do we think about leveling off when we think about rental and 3P and certified refurbished and secondary market being drivers of growth? So help us understand about churn.
So our churn for last quarter was roughly 1.9%, which is still quite low, but Q4 tends to be a seasonally high churn quarter for us. And, as we said on the earnings call, we expect that our churn for Q1 is gonna be relatively similar to what we had for Q4. And then we do expect the seasonal kind of dip in churn in Q2 and Q3, and then a slight uptick in Q4. That's just based on our historical seasonal pattern. But on a full year basis, we are projecting that our churn rate will increase slightly, and there's a few reasons why we expect that to happen.
The first one is that we are seeing slightly worse churn rates in our subscribers who are joining us by purchasing our hardware outright. The second one is kind of an interesting one. This last year, we benefited from a higher unpause rate from our subscribers, and the reason we had that is in Q4 of FY 2023, we had the seat post recall, and we had an elevated number of people who paused their subscriptions because they were waiting for their seat posts, and then they unpaused in fiscal 2024, and we got the benefit in churn as a result of them unpausing, and we don't expect that benefit to repeat. And then last but not least, we talked about the secondary market.
Yep.
As the secondary market becomes an increasing share of our subscriber base, and they do have a slightly higher churn rate, that will, you know, naturally create a small headwind to our churn. But I do wanna come back to the point that you were making about engagement. You know, we do see a high correlation between engagement and retention, right? So the more engaged you are, the more likely you are to retain. And I just talked about a whole bunch of initiatives that we have around improving engagement that we hope may result in a benefit to our churn rate over time.
But our guidance and our outlook and all of our, you know, all of our forecasting does not imply any benefit to churn as a result of any of those initiatives, again, because we don't know exactly when it will come about or how it will go or, you know, we may need time to be able to refine things there. So we have not incorporated any insight to churn from that.
In the meantime, profitability is there, free cash flow is knocking on wood there, and so we hope to stabilize that top line. So it's a good way to end it. I think we're in overtime. Liz, thank you very much for the time. Learned a lot, and I appreciate it. Thank you.
Thank you, Ron.