AGM 2020

Dec 9, 2020

Good afternoon, and welcome to the Peloton Interactive, Inc. 2020 Annual Meeting of Stockholders. I would now like to turn the conference over to John Foley. Mr. Foley, please go ahead. Thank you. Good afternoon, everyone. Welcome and thanks for joining us for our 2020 Annual Meeting of Stockholders, our first annual meeting as a public company. I'm John Foley, Chief Executive Officer and Chairman of Peloton. I will act as the Chairman of this annual meeting and now call the meeting to order. We are excited to be hosting our annual meeting virtually with our stockholders attending via our web meeting portal. Through this online portal, we believe we are able to increase stockholder participation and safely reach a greater number of our stockholders without needing to meet in person, especially in light of the ongoing coronavirus pandemic. In addition to myself, the other directors and executive officers of Peloton present by remote access are Eric Blatchford, Lead Independent Director and Chairperson of our Compensation Committee Karen Boone, Director and Chairperson of our Audit Committee John Callahan, a Director Howard Draft, a Director Jay Hoag, a Director Pamela Thomas Graham, Director and Chairperson of the Nominating Governance and Corporate Responsibility Committee William Lynch, Director and President Jill Woodworth, Chief Financial Officer Mariana Garavaglia, Chief Business Operations Officer Hisao Cushi, Co Founder, Chief Legal Officer and Secretary Tom Cortesi, Co Founder, Chief Operating Officer and Head of Product Development. I would also like to introduce a few others in attendance by remote access today. David Alpego, Martin Lee and David Schuldenfrei of Ernst and Young, our independent registered public accounting firm are in attendance and will be available during the question and answer session to respond to appropriate questions. For Woods, a broad Broadridge Financial Solutions, Inc. Is here and will act as Inspector of Elections for this meeting and tabulate results of the voting. With those introductions, I would now like to turn things over to Isao Kushi, who will be acting as Secretary of this Annual Meeting and lead us through the formal matters of business that we have on the agenda for today. I will then lead a general question and answer session at the end of the meeting. Thanks, John. Welcome, everybody. I am advised by the Inspector of Election that over a majority of the voting power of our outstanding shares of common stock entitled to vote at this meeting is present or represented by proxy here today and that a quorum is therefore present. We will describe the proposals to be voted on in a moment. The meeting agenda and the rules of conduct and procedures are on the virtual meeting website. To assure an orderly meeting, we ask that all participants abide by these rules. Polls are now open for voting. Voting is by proxy and electronic ballot. Any stockholder who has not voted or wishes to change their vote may do so by clicking on the vote button on the webcast portal and following the instructions there. Stockholders who have sent in proxies or previously voted via the Internet or by phone and who do not wish to change their vote, do not need to take any further action. Their votes will be counted automatically. We expect to close the polls a few minutes after the presentation of matters to be voted on at today's meeting and a question and answer session specific to the formal matters of business on the agenda. As noted in the rules of conduct and procedures, stockholders are limited to 2 questions each during today's meeting. While we may not be able to answer every question, we will do our best to respond to as many as possible in the time permitted. Please note that stockholders who want to ask a question may do so by inputting their question in writing where indicated on the webcast portal for this meeting. Only stockholders will be permitted to present questions and you must have signed in using your 16 digit control number to do so. This meeting is being recorded. However, no one attending via the webcast is permitted to use any audio recording device. Let me now turn to the formal business of this meeting. Christopher Woods has executed the oath of Inspector of Election. The proposals to be considered are described in our proxy statement dated October 22, 2020, and I will review these in a few minutes. First, I will report on the notice for this meeting. Our Board of Directors fixed October 12, 2020 at the record date for determining the stockholders entitled to vote at this meeting. I present to this meeting an affidavit of Broadridge Financial Services attesting that a notice of Internet availability of proxy materials was mailed on or about October 12, 2020 to all of Peloton's stockholders of record determined as of the close of business on the record date. The affidavit will be incorporated into the minutes of this meeting. I have a list of the stockholders entitled to vote at this meeting, which is available for inspection by any stockholder present or by any proxy holder representing a stockholder and which will be filed with records of this meeting. The list of stockholders shows that as of the record date, there were 254,874,986 shares of our Class A common stock and 36,284,586 shares of our Class B common stock outstanding and entitled to vote at this meeting, with each share of Class A common stock entitled to 1 vote and each share of Class B common stock entitled to 20 votes. As previously mentioned, the Inspector of Election has advised that over a majority of the voting power of our shares of outstanding common stock entitled to vote at this meeting is present or represented by proxy here today and that a quorum is therefore present. We are therefore authorized to transact business at this meeting. Now I'll present the matters to be voted upon. As stated in the notice of this annual meeting and our proxy statement, the first item of business is to elect the 3 Class 1 nominees, each of whom is currently serving as a Director in Class 1 to be elected as a Class 1 Director for a 3 year term expiring at the 2023 Annual Meeting of Stockholders and until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal. The Director nominees are Eric Blatchford, Howard Draft and Pamela Thomas Graham. No other director nominees have been properly submitted for election pursuant to our bylaws or the Securities and Exchange Commission rules. Therefore, no other nominations may be accepted. The Board of Directors recommends a vote for the election of each of the nominated directors. As Secretary of this Annual Meeting and on behalf of the Board of Directors, I move for the election of each of the nominated directors, which motion is seconded by proxy. The second item of business is to ratify the appointment of Ernst and Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2021. The Board of Directors recommends a vote for the ratification of the appointment of Ernst and Young LLP. As Secretary of this annual meeting and on behalf of the Board of Directors, I move for approval of this proposal, which motion is seconded by proxy. The 3rd item of business is to make a non binding advisory vote on the frequency of future advisory votes on the compensation program for Peloton's named executive officers. Under this proposal, our stockholders may cast a non binding advisory vote on whether they would prefer to vote on the compensation program for our named executive officers every year, every 2 years or every 3 years. The Board of Directors recommends a vote to hold future non binding advisory votes on the compensation program for Peloton's named executive officers every 3 years. As Secretary of this Annual Meeting and on behalf of the Board of Directors, I move for approval of the option of a vote every 3 years of this non binding proposal, which motion is seconded by proxy. That concludes the discussion of the proposals. We will now address any questions that stockholders may have submitted that are relevant to the proposals. Please note that we will address other questions after the formal matters of business. If you have not already submitted a question related to the proposals and wish to do so, please enter your question now through the webcast portal. As noted earlier, stockholders are limited to 2 questions each during the meeting. Though we may not be able to answer every single question, we will do our best to respond to as many as possible in the time permitted. We will now pause briefly to allow stockholders to submit questions related to the proposals. Proposals and as such, we will not be addressing those questions. We will now conclude this question and answer session and return for other questions after the formal business of the meeting. As noted earlier, the voting today is by proxy and electronic ballot. Any stockholder who has not voted or wishes to change his or her vote may do so by clicking the vote button on the webcast portal and following the instructions there. Stockholders who have sent in proxies or previously voted via the Internet or by phone and who do not wish to change their vote do not need to take further action. Their votes will be counted automatically. We expect to leave the polls open for approximately 1 minute to allow anyone who chooses to vote here to cast ballots. That time begins now. Now that everyone has had the opportunity to vote, I declare the polls for the 2020 Annual Meeting of Stockholders of Peloton Interactive, Inc. Closed. We now have preliminary voting results. Directors elected to proposal 1 are elected by a plurality of the votes of the shares of capital stock present in person or represented by proxy at the meeting and entitled to vote on the election of directors, which means that the 3 nominees receiving the highest number of affirmative votes will be elected to the Board of Directors. Based on the results as tabulated by the Inspector of Election, Eric Blatchford, Howard Draft and Pamela Thomas Graham are the 3 nominees on the ballot who received the highest number of affirmative votes cast, and therefore each nominee has been elected to the Board of Directors. The vote required to approve proposal 2 is the affirmative vote of the holders of majority of the voting power of the shares of capital stock entitled to vote on Proposal 2 that are present in person or represented by proxy at the meeting and are voted for or against the matter. Based on the results tabulated by the Inspector of Election, the proposal to ratify the appointment of Ernst and Young LLP has been approved by a majority of the votes cast. The vote required to approve 1 of the 3 options presented in proposal 3 is a plurality of the voting power of the shares of capital stock present in person or represented by proxy at this meeting and entitled to vote on Proposal 3. Based on results as tabulated by the Inspector of Election, the proposal to hold future advisory votes on the compensation program for Peloton's named executive officers every 3 years has been approved by the highest number of votes cast. There are no other formal items of business before this meeting. Final results of the vote will be recorded as stated in the minutes of this meeting and also filed with the Securities and Exchange Commission on a Form 8 ks within 4 business days. As there is no further business to come before the meeting, this concludes the formal meeting and it is adjourned. I would now like to introduce Peter Stabler, our Head of Investor Relations, who will be joined by John Foley, our Chairman of the Board and Chief Executive Officer, to conduct a question and answer session. If you are a stockholder and entered your 16 digit control number when you entered the meeting, you may submit a question at any time on the virtual meeting website. Thank you. Thank you, Asau. We appreciate the questions stockholders have submitted, and we will try to answer all of them subject to practical time constraints. As stated in the rules of conduct and procedures, each stockholder is limited to 2 questions. And if multiple questions are submitted on the same subject, we will consolidate them for a single response. Each question should be succinct and cover only one topic. If you have any remaining questions when we conclude today, you may contact us via email at investoronepeletom.com. The proposal number 3 and it follows, what factors put us in favor of revisiting executive compensation every 3 years? Hassad, do you want to take that one? Sorry, I was on mute. Could you repeat that question? Yes. The question is as follows, Hissal. What factors put us in favor of revisiting executive compensation every 3 years? My bad. So, Mariana can also feel that. Sure. I'm happy to take that. So, as described on Page 31 of our proxy statement, our Board of Directors believe that holding a vote every 3 years is the most appropriate option because first, it enables our stockholders to provide us with input regarding the compensation of our named executive officers on a more informed and thoughtful manner based on long term analysis of our compensation program. And second, it avoids placing too much emphasis on the results or actions of a single year and instead allows our stockholders to make a more meaningful evaluation of our performance compared to our compensation practices over a longer period of time. Our second question relates to the supply chain challenges that have been mentioned frequently on our earnings calls. Could you give us a sense of when the supply chain challenges resolved? Sure thing. William, do you want to take that? Sure. Thanks for the thoughtful question. Obviously, there's been a lot of attention around the supply chain. And as we noted in the Q1 earnings call, with the growth in demand of our products, we've seen an increased strain on the supply chain and that's during a time when obviously due to the pandemic it's been operationally challenging. And so what we said was we anticipated the bike plus in particular would continue to see longer OTDs and that would be through the holiday and into Q3 and that continues to be the case. And then we saw some improvement in bike and I think we mentioned on Q1 it would be around 39 days and that continues to be the case. If you go to our website you'll see 4 to 6 weeks. And so the team we're very proud of the team's efforts to ramp supply and production. We mentioned some of the investments we're making. We are opening new factories, the Xinyi factory, which is largely complete and we'll start producing both bikes and treads in the new year. We'll give us about 1,500,000 connected fitness units annually in terms of run rate. And then we've added capacity on the delivery side. We're now at 47 warehouses across the globe. And in terms of the number of field ops delivery units, we've added hundreds of vans and hundreds of field ops personnel. So we're scaling and we feel we'll get through it. And but we don't expect that to occur in this holiday. We expect that to start to abate in Q3. And again, we'd like to thank our teams for all the work they've done to support this kind of growth. It's worth mentioning, just to give that growth in context in Q1, we're talking about what we said in the last 18 months, in 24 months, the business has grown 6.8x. And so, while we recognize we need to do better and we're investing to do better, it's also worth noting this team has supported what's incredible growth and really unprecedented. And real quick, for the uninitiated or the investors on the call, shareholders on the call who aren't familiar with our fiscal year when Williams Q3, our Q3 starts in January of a couple of weeks. We're on a fiscal year that starts July 1. So thank you, William. Our next question relates to customer service. Could you please give us a sense of what's being done to improve the customer service experience for members today? I'll take that quickly and William feel free to jump in. Our customer service is incredible. Our customer service team is incredible. We are not meeting the service bar though. So it is a good question. We are aware that we're not where we want to be. But I think it goes back to William's answer around our increased capacity in the supply chain, increased delivery flexibility. And over the last 90 days, we've been hurt, in particular with a few natural disasters, including the pandemic and forest fires and hurricanes. And that has required us to reschedule deliveries. A lot of the anxiousness that you hear in social or that we're hearing from frustrated members, which is by far a minority of our members. The vast majority of our members have incredible delivery experiences and incredible service experiences, but we are hearing from the folks that aren't getting that high level of service. And it's generally related to a reschedule of a delivery, which is obviously very frustrating when you've been waiting 6 or 8 weeks for your biker and then it gets rescheduled. But a lot of them are COVID related. We've made incredible steps in the last couple of months and couple of weeks to get back on the right side with all of our members and we're very encouraged with that effort. The next question concerns competition. How will Peloton protect the lead that you've built in the connected fitness category against rising competition? Yes. So let me take that. Our biggest advantage, I would say, other than an 8 or 9 year head start against most of these people that are you're hearing about, is that this vertical integration that we do that is very unique and very powerful and very differentiated and it's going to be hard to compete with long term or short term. And the vertical integration is that we make the best hardware in the world between our bikes and treads and tablets on those bikes and treads. Most reviews will say they're the best pieces of hardware from a design and a quality perspective. Understanding that we want our hardware to last for 20 or 30 years in your basement or your home gym, we have a flight to quality. Because of our business model, we put incredible quality into our hardware. We also write, we think by far the best software in the fitness category, that is obviously custom written for our hardware. And in that software, we have a lot of intellectual property that you're seeing we're going to start flexing and making sure that people aren't stealing and running roughshod over what patents have been provided us by the U. S. Government. But we are a software first company and I don't we don't see any other actors in fitness who are as committed to software and come from that and have that in their DNA. 3rd is the content. We firmly believe that content is king. We are the most prolific content manufacturer or creator, producer in fitness. And I will add as part of content or a subset of content, our direct relationships with all of the music, with the music industry, with the major labels and major publishers. And at this point, the vast majority of labels and publishers across the music industry, We have incredible relationships that help us have the best content. In addition, we have the best instructors, we have the most classes, we have the most breadth at this point. So content is going to continue to be a differentiator and it's going to be hard to catch. And then 3rd 4th and 5th, our retail footprint is going to be increasingly important and valuable and a strategic asset in the coming years that most of our would be competitors do not have a direct to consumer model that would include stores and we're very proud of our retail locations. We're very proud our retail folks and the bespoke sales experience that you get when you enter one of these locations. And then 5th, you know about our logistics. William just referenced that we continue to invest in it, grow it. We deliver today the majority of our bikes and treads globally. That includes Germany, that includes the UK and Canada. And we believe that, that bespoke logistics experience is going to allow us to give our members higher quality experiences. And over time, that's going to be a differentiation that's important and valuable. Those are just 5 and all 5 of those things work in concert obviously. And over time, we think that those are going to be pretty important motes. There's a lot more that I could mention, but Peter, I'll let you go to the next question. There's a question about our product roadmap. You mentioned on the last earnings call that new products are coming after the new tread. When do you see that happening and what might those new products look like? Yes. I'll take this one as well. I am obviously as the CEO privy to what these products are. I go to our R and D lab and get to see and experience some of these new platforms. Some of it is new content, new categories just through content. Some of it is new software features and some of it is new hardware platforms. That's probably what this question is getting at. But there's innovation happening across our entire organization all the time. We do have some new platforms on the way. They are going to be up to the Peloton bar of vertically integrated hardware, software content and they're going to be Peloton worthy and very important new releases that we're excited to talk about on this call. We're not going to specifically talk about them, but I can tell you that we have I think Jill Woodworth, our CFO will tell you we're trying to invest close to 5% of our top line into research and development and innovation. And with that, it's going to come a lot of cool stuff out of Tom Cortezi's organization. And we look forward to telling you about those in the coming quarters and coming years. We have a question regarding the trajectory of our business following the resolution of the pandemic? How should we think about how a post COVID world impacts our view of our business opportunity? Yes. So I was actually just on a run yesterday and was thinking about this and it hit me, so I'm glad this question was asked. Pre pandemic, Peloton had a 94 Net Promoter Score, which is when people got a Peloton bike or Peloton Tread, we're so happy about it that they promoted it to their friends. If you're familiar with Net Promoter Score, it's a proxy for how willing you are to tell your friends that you've got to get this product. And we have benefited from an incredible Net Promoter Score well before the COVID pandemic hit. I will also tell you that 35,000,000 American homes had treadmills in them pre pandemic. So when you have 35,000,000 homes and 5,000,000 treadmills sold in the U. S. Every year for decades, That is to say that households wanted to work out at home. There just weren't great experiences. They buy the tread and then it became the cliche dust collector and clothes hanger because it just wasn't fun, it wasn't motivating. You didn't have the community, you didn't have the content, you don't have the programming, you didn't have the music, you didn't have the instruction, you didn't have the social software and gamification and all the sexy stuff that makes the Peloton experience and makes it so sticky. So but even just as a hardware platform, 35,000,000 homes and 35,000,000 people said, I want to try to work out at home. But they didn't because it just wasn't very good, but they wanted it. Now that Peloton is here and now that the experiences at home are incredible, that is not that has nothing to do with COVID. That is a human need of I want to get fit, I want fitness in my life in a consistent way. Every week I want to get 3 or 4 workouts in and I want it to be convenient, I want it to be fun. I want it to be motivating and I want it to be a great value. And all of those things are foundational to what Peloton delivers, always delivered it. We delivered it pre COVID, during COVID and we will deliver it post COVID. We have another question regarding potential future products. Have we thought about going into nutrition or healthy eating for those in our community? Yes, I will say, this is this comes up in the Peloton senior leadership once or twice a year. I am generally a descending voice in the opportunity not the opportunity, there is a big opportunity in health and nutrition. And it's obvious that we could sell into our members something that they would consume or advice or products that in the nutrition space. It is not something we're looking at right now. We have lots to do in the core digital streaming fitness space. We are growing triple digits. We have a very complicated business and we have a lot of exciting new stuff within our existing verticals and in new verticals against exactly what we do, which is software, hardware and content. And we're staying pretty focused against that opportunity for the coming quarters and feels like for the coming years. And our final question concerns our classes. What criteria are used to decide which rides are retained and which get deleted from the platform? Sure. It Sure. It's a combination of things. It's some spanning, practical considerations like music licenses. John talked about competitive advantages and that's certainly another one for us is our relationships with the music labels and publishers. And what will happen is rates will change periodically, especially among the labels where certain rates of a song will change that was included in the class. And so we need to revisit our license as it relates to those songs. And so we'll, from time to time, purge related to music licenses. So that's just a practical consideration. And then our content team also looks at things like popularity of classes and what's getting taken recently. And sometimes they'll make a decision, well, that class is stale for whatever reason, so we're not going to put it up. But in general, what we try to do is we offer the biggest, broadest catalog in fitness. We will continue to do that. As John mentioned, it's a big competitive advantage. And when we delete classes, rest assured, we do it very thoughtfully. We obviously avoid those classes that our members care about and we continue to offer thousands and thousands of classes. And we're only getting more prolific in the classes we offer. John also talked about new content that we're launching as a further innovation. Bar, as an example, which is a new modal, new vertical that we launched with 10 classes earlier this year. That's already had over 500,000 classes taken. And so we're constantly adding to it more classes weekly than we ever have across cycling strength, tread, etcetera. And so it's a great question, but sometimes it's things like idiosyncrasies on license changes and then other times it's, it is, just practical considerations around classes. Somehow our content group deemed stale or just no longer relevant to the catalog. We have one more question that we can fit in here. And that's relating to weight training. Could you talk about weight training in the future machines and hardware products? Yes, sure. As we've noted, we feel like in terms of connected fitness, we created the cardio category with our cycling classes and we've seen the popularity of that. John just emphatically discussed why we think it's the best experience in connected fitness and it's been so transformative to what is now over 3,600,000 members. And then we offer the Tread with Tread Plus, which has been hugely well received and our boot camp classes have certainly been an emphasis and we see those climbing. It should be noted, we're so cardio is foundational for us in a beachhead. We've also said to win Connected Fitness, we're going to win strength. And if you look at the level of investment we've made in strength from a content perspective, it's astounding. In fact, strength was up in terms of engagement classes taken over 500 percent year on year, which is incredible to think about. Our members are rushing to strength workouts floor, barre, yoga, bodyweight, boot camp, those types of classes. In terms of hardware, we have nothing to announce on the call today. John noted a road map that I think all of us on the executive team and the Board are excited about. And rest assured and talked about the amount of resources and R and D that we're investing and Jill's the 5% target. Rest assured strength is one of the strategic areas we feel like we have to win. And across all three of the parameters John talked about, software, content, hardware, we've got a lot of R and D squarely focused on it. As there appear to be no further questions, this officially concludes our meeting. We extend our appreciation to our shareholders as well as our directors and our team members here at Peloton. We look forward to addressing the opportunities ahead. Thank you for your support and please stay safe, Paul. Thanks so much.