For joining. I'm Curti Nagel. I'm the SMIDCAP Internet Analyst here at B of A. Very pleased to welcome Peter Stern, CEO of Peloton. Thanks for joining today, and really looking forward to the conversation.
Thanks for having me, Curti. I want to just take a moment to acknowledge that today is Global Running Day. If you have not gotten out already, I would encourage you to do it. We are also launching today for the first time outdoor runs from Peloton Studios New York. It will not work for those of you here in San Francisco, but this is something that we pioneered out in London. People love it, and it is just a great way to celebrate this day.
Perfect. I guess the first question I'd like to start with, Peter. Six months on the job, right? In terms of maybe just quickly talking through some of the organizational changes you've already made and kind of what's left to do in getting the full senior manager team kind of up and running.
Yeah. First, I just want to note that, Curti, I stepped into a great team. And I'm really grateful to the leaders that came before me for having recruited people on that team, like we have Liz here in the audience, our CFO. But there were some areas where I felt like we had opportunity to grow. The first change that I made was hiring our Chief Operating Officer, Charlie Kirol. We've actually made great progress on a number of elements on supply chain over the years. Gotten a lot better. We can talk about it some more later at things like logistics. We make equipment as a company. We actually are a manufacturer, and we needed a person who had deep experience in producing consumer electronics that we could scale and we could get those things to be more cost-effective and also be more agile.
Charlie, with his background at places like iRobot and Stanley Black & Decker, and GE, was just the right person for that. Not to mention a Rear Admiral in the Navy Reserves. Incredible leadership characteristics. We also designated Dionne Camp Sanders to be our Chief Commercial Officer. That was in recognition of the fact that so many of our growth vectors are under his purview. Dionne is responsible for everything from international to retail to our inside sales teams to our commercial business, including Precor. A lot of the vectors for growth are under his purview, and we needed to recognize that. We still have some more work to do, but I'm really happy to have Diana Kraus, having joined a couple of weeks ago to help tell the story of the new Peloton. She's just an absolutely fabulous addition to our team.
The next holes that we've got to fill are, one, we need a CIO. We didn't have a Chief Information Officer at the company, so we had multiple tech organizations spread throughout. That resulted in some inefficiencies, some tech debt that I think we can clean up as we get the right leadership. That person is going to focus on automation and bringing AI to everything we do. The Chief Marketing Officer is the last one. That will be my partner in driving growth in the company. Hope to have some good news there soon.
Maybe I'll just follow up on that. Yeah, like you said, new CMO hopefully soon. I guess, how do you think about that shaping the go-forward marketing strategy? You've cut the budget by, I think, 40% kind of year over year. How do you expect to do more with less? How does that differ from the prior strategy? Just, yeah, kind of shaping marketing kind of going forward and driving growth.
Yeah. I think the exercise over the last year or so has basically been trying to find the efficient frontier for us on marketing spend and getting to the point where we feel like we can acquire new members in a way that is really cost-effective. You can see that manifesting in, for example, in the third quarter, our LTV to CAC ratio exceeded two. At this point, on an average basis, we're doing really well. The challenge now is for us to take the sophistication to the next level. The way I think about that is de-averaging. The work now we're starting to do is to basically say, by channel, how do we get to the point where the incremental subscriber acquisition cost of the last marginal customer is less, materially less ideally, but less than the lifetime value of that customer?
That's the level that we should be spending at and no further. Because we take into consideration, of course, the cost of capital. We're doing, I think, what's right by our shareholders in that situation, but we're spending to the right level of growth by channel. That de-averaging is a big part of what we'll be doing in 2026. That equation gets easier as we start to become more effective at both acquisition. Now the cost of acquiring an incremental subscriber will decline, as well as we get better at retaining our members and generating as much revenue and value from them as we can over their lifetimes. That actually eases that equation. You have to, of course, sprinkle a little bit of marketing magic on top of all of that.
We have an opportunity, I think, to tell a new story working between communications and marketing about the brand. That will be the real focus for the next year.
Understood. So Liz and Mike, you're kind of really interesting, maybe a transition point for Peloton, right? Like past year and a half or so, huge focus on margins, cleaned up the balance sheet pretty dramatically. Now, as we're kind of talking about getting back to a growth plan. So I guess in terms of your philosophy on balancing the margins and all the earnings and growth, what is it? Can you do both, I guess?
Yeah, we can. I'm quite confident that we can do both. It's just going to take a little bit of time to get sort of all the way to where we want to get to. Let me tell you a little bit about the journey. The journey that we're going to be on is one where we visualize a P&L for a company. We're going to be migrating up the P&L, moving toward growth in each of the elements that we care about on that P&L. The team's already made just phenomenal progress, for example, on the free cash flow part of the P&L. Having generated $211 million year to date as the end of Q3, basically talking about landing in the vicinity of a quarter billion dollars of free cash flow, that's tremendous progress.
You look at things like adjusted EBITDA, having moved that to give or take $335 million of adjusted EBITDA. That's up compared with the prior 12 months by $435 million. You can start to see the bottom of the P&L starting to take shape and telling, I think, a really compelling growth strategy story. The next steps will be moving to operating income as we continue to get more efficient and spending on the things that absolutely matter, that drive our differentiation, but not so much on the things that are basically what you might call table stakes or keeping the lights on. As we go from there, the next big moment will be revenue.
We will start to see the revenue declines moderate, I think, over time as we begin to deliver more innovation, more reasons for both existing and new members to buy into the hardware that we offer, as well as for us to do things like start to move the needle on customer lifetime with some of the initiatives that we are delivering to improve the member experience. The last frontier will be turning the member subscription growth to positive. I think that happens as we deliver on the full array of initiatives that we are working on to reach new members through new channels, as well as to materially improve the churn rate of the members that we have.
Maybe kind of following up on that, right? We alluded to some of this stuff in terms of the growth strategy. We'll get kind of a plan, at least the first kind of parts of a plan in the next coming months. I guess, could we talk about just in terms of just what that growth algorithm is going to look like, at least kind of a holistic or high level? I have a couple of follow-ups on that.
Yeah. I mean, the growth algorithm for the company, that part's pretty straightforward. It's average revenue per member times number of members times lifetime of a member. If you multiply that out, that's basically the top line value that we can create. Now, the hard part is how do you actually move the needle on those things? I'll unpack it a little bit. On the average revenue per member, that's basically a matter of the value that we're delivering to the member. The way that they'll measure that is in terms of both the results they anticipate getting from us, as well as the results they actually achieve by being a Peloton member, which is why improving member outcomes is the first part of our strategy. It's the area that we're focusing really heavily on from an innovation standpoint.
Again, not here today to announce the future product roadmap of the company. I think we'll do that a few weeks after the fourth quarter earnings, because I think I'd like to separate in time. We'll do earnings. We'll tell the growth story with even more specificity and give you a sense of what to expect in 2026. A few weeks after that, leading into the holidays, that's the moment, I think, to tell that innovation story in a more consumer media-oriented way. That investment in innovation is going to be the first part that drives average revenue per member. The second piece is driving up the number of members. The way we do that is with this strategy that I call meet members everywhere.
There are so many ways that we can expand on the number of members we have, whether it's our retail presence. We have been in a period of contracting our retail presence. If you went back a few years, a couple of years, we had over 100 retail stores, first-party stores as a company. We're now down to 10 of those. I'm really feeling encouraged about the work that we've done in our micro store. We're going to start to scale that sort of thing back up. You can sort of see that we're at the mid-year of our first-party retail presence. You add to that the work that we can do on third-party retail, both physical and online. We've had, I think, really great success with Amazon, for example, as a channel.
We measure incremental sales, and they do generate real incremental sales for us. Retail is one of these vectors for meeting members everywhere. There are a lot more, though. Things like getting into gyms, more gyms, right? Because we're an at-home company, but we're really lucky that we own Precor. We actually have one of the largest commercial gym equipment companies out there with tremendous credibility with gym operators. They have what it takes to service the Peloton equipment that we put out there also. To put Peloton content on those devices, I think, is just some natural synergy that's just waiting for us to achieve. Great way to meet people and have them experience Peloton in that kind of setting. Look at hospitality. I think there is, hopefully, many of you are staying in hotels where you have access to Peloton equipment.
This is a must-have amenity for hotels of a certain type. We need to get to the stage where every hotel operator agrees with that. International is another one of these vectors for meeting members everywhere. Our penetration in international markets where we operate, U.K., Germany, Austria, Australia, even Canada, is a fraction of the penetration that we had in the U.S. There is real opportunity there. Last, but absolutely not least on this list, is get back in the zeitgeist online. There was a period where Peloton was basically uttered in any breath when people talked about fitness. I feel like we have made tremendous progress, even over the last few months, in terms of awareness, in the belief in members and non-members alike that we are a leader, not just in cycling, but in running, in walking, in strength.
Getting back into the zeitgeist and taking advantage of our incredible instructors as ambassadors for the company, along with activating our millions of members, will help us meet members everywhere. The last piece, but not least, and I realized, Curti, I'm giving you sort of the full version of this, but is member lifetime. Because if we can keep the members we have for longer, that's the best thing. First of all, it means that we're treating them right. It also means that we don't actually have to spend the money to acquire a member to replace that member. We are investing quite a lot right now, more time as opposed to money, and just bringing the right expertise in making sure that we nail every aspect of the member service experience. Because we should not be foot faulting with our valued members and losing them unnecessarily.
We're also beginning to, I think, really hit our stride in some things like teams. We know that being connected to others is one of those things that motivates people to stay with a fitness regimen. And so investing in these community features, I think over time will start to show up in increased usage and decreased churn.
I guess just to follow up, one thing we did not mention or talk about, and very common question I get is how to think about pricing, particularly for the connected subs. Your predecessor was wary, I think, of potentially raising prices. Just I think the idea was maybe this hurts gross ads. How does your thinking differ, or does it differ?
I don't know exactly what Barry's thinking was about this, but what I do know is that we're at a really different time right now. When Barry joined, we weren't that far off having done a price increase on our subscription business. I think the last time that was done was in April of 2022. Where we sit right now, in June of 2025, it's been more than three years since we've made any kind of adjustment on that. I'm not here to say what we would or we wouldn't do, but what I will tell you is a little bit about how we think about it, because I've said on multiple occasions that it's something that we think a lot about. For us, the question is, are we delivering not just sufficient value to our members?
Are we delivering value in excess of what we're charging? Is the value increasing over time? I think on all of those, the answer is absolutely yes. You can look at, for example, where we are from a programming standpoint. We're now, I think, somewhere over 50,000 classes that are available on our platform. We've been introducing new types of classes, whether it's rowing classes or kettlebell classes more recently in response to demand from our members. We've been adding all sorts of other features, like our entertainment portal now. We just a couple of weeks ago launched YouTube in there, and it's already driving something like 14% of the entertainment consumption on our platform and driven up the entertainment usage there. I talked a little bit earlier about teams.
The work that we're doing on community features is something that we're getting great feedback from our members on. We launched a Strength Plus app that's just bundled into your all-access membership. We know if we listen to the CDC and their recommendations about what an adult needs in order to be healthy, they need to do 75 minutes of vigorous cardio activity a week or 150 minutes of moderate cardio activity a week, and they should be doing two strength training sessions a week. Those things are equally important. The work that we did, for example, with Strength Plus is to make sure that we can provide a full fitness diet, so to speak, for our members.
I can keep going on this, but I think the key point is we've got, I think, a great value proposition for our members that just keeps on getting better.
Maybe just kind of dovetailing on that point about potential tailwinds about a greater focus on health, right? In the U.S., it seems like it could be a pretty interesting opportunity, maybe more specifically the fit act, which would allow people more seamlessly to use health accounts spend for things like Peloton and gyms and whatever. It's a new reconciliation bill. I guess if it's not in a law, how do you see that as a potential growth driver for, I guess, a member?
Yeah. I mean, I love the fit act. By the way, it's spelled PHIT. It's currently passed the house, as you noted. It's now up to the Senate. I really hope that they do the right thing here, because let me explain what the fit act is. It allows consumers to be able to apply their HSA, health savings account, or FSA, the flexible spending account dollars toward, among other things, fitness subscriptions. I think about $500 a year for individuals, $1,000 for a family, or for filing jointly for a fitness subscription. Why do I think this is great? Because what we know is that fitness is probably some of the best medicine that you can give someone. It has been demonstrated, whether we're talking about cardiovascular disease, whether we're talking about metabolic dysfunction.
In many cases, when we talk about things like issues with mental health, exercise is more effective in most cases than any drugs that are out there and a lot more cost-effective. If we can give people an opportunity to put the money against that kind of investment in themselves, as opposed to waiting until somebody gets sick, where the costs are much, much higher for the government, we are talking about something that's great for the American population. It's great for the government. What this would do is then allow consumers to basically use before-tax income to pay for the subscription as opposed to after-tax income. From a policy standpoint, I love the fit act, and I hope that Congress follows through with it.
Yesterday, announcement that we launched a new marketplace, Repowered, for used inventory or used hardware. Maybe tell us a little bit more about this effort and how, I guess, important the resale market for hardware is to Peloton.
Yeah. I mean, there's already a really robust secondhand market for Peloton equipment. I think in the last quarter, something like 45% of our new members came from secondhand equipment. It is not for, I think, a lot of people. It is sort of a little uncomfortable. You have to go on a place, let's say, like Facebook marketplace, and interact with a stranger, and then somebody has to come to your house, and/or you have to go to someone's house you do not know to get the equipment. We just want to create a more streamlined, customer-friendly way for sellers to be able to get rid of equipment. If for whatever reason they fell off the horse and they are just not able to continue taking advantage of that equipment, that is doing nobody any good.
It's not generating subscription revenue for us, first of all, but it's also if they're not using and helping that person stay fit. I would rather get it in the hands of someone who will love and use that equipment. It's great for our business, by the way, also. I mean, I know this is an investor conference, so I'll just focus on that. All things being equal, I would be delighted to have a new member come from a piece of equipment that we didn't have to spend a dollar of capital on, then one that we do have to spend the money on. From an environmental standpoint, getting that equipment back into somebody's home that will enjoy it is terrific. We build the equipment to last. The other thing I'll note about this secondary market is it's phenomenal from a price-tiering standpoint.
There was a period before I joined where the company was looking at, should we make sort of like a bargain-basement version of our bike? Of course, we would never compromise at Peloton on the fundamental quality, but you have to make some trade-offs in that situation. What I think the team quite wisely realized is that consumers can solve this problem for us. We can get a product out there. I do not know what the average selling price of those is, but I think it is somewhere in the $600-$700 range. That is a great product. It is the product that we sold for 2x that price at some point in the past. They are actually solving that tiering problem for us, and we did not have to make those compromises on the product.
Great value. You do not have to think of margin either.
Yeah. The buyers can, one of the options for the buyers will be to actually have it shipped to them so they don't have to go into somebody else's house.
Make it seamless and, yeah, unlock already an important market. Let's spend maybe just kind of the last five, six minutes on the margins and the cash flow. Again, it's been a great area of success for you. Maybe just starting with OpEx, right? I mean, you're taking out $100 million over the past few years. You've hinted at more sort of pockets for optimization, but I guess kind of going to the next fiscal year, should we assume another plan to be announced and kind of where do you see the biggest opportunities for takeout? You mentioned the tech debt as one. Where else could we see them? Could you elaborate on those points?
Yeah. Let me elaborate by starting with the last point. We talked about tech debt, but tech debt sounds, it's just a convenient business term. I want to give you a sense of what do I actually mean when I talk about tech debt. I'll give you a couple of examples of this. We actually have, I think, a best-in-class partnership with a company called Kinaxis for our inventory management system, but we actually haven't implemented the whole thing and tied it into all of our inventory management systems. Right now, every quarter, at the end of the quarter, we have to shut down our warehouses for three days and manually count every single thing we own. That's an example of tech debt.
I'm really hopeful that as we look at the latter part of our fiscal year 2026, we'll be in a place where we have to do that sort of thing less frequently. Here's another example of tech debt. Right now, I mean, I think our global member support people are heroes, and the progress that we have made year- over- year in that area is nothing short of remarkable, having moved from the mid-threes in terms of member satisfaction scores to into the mid-fours in a pretty short period of time. Right now, we don't have the tools for our global member support people to actually be able to see what our members are seeing.
If a member calls in with a question or a concern about a piece of their equipment, we basically have to sit on the phone with them and say, "Tell me what you're seeing." That results in less than perfectly accurate diagnosis of the problem, and unfortunately, too often having to send someone out to the customer's home to actually do the diagnosis and then maybe order parts and have a second visit. Tech debt manifests itself in both of those cases in real costs and in some cases, real impact for the member. That's the kind of thing that we're going to be able to fix, those sorts of things. Some tech debt problems take a long time, but we'll be able to fix those things, I think, over the course of FY 2026. That enables us to start to take out more costs.
That along with our G&A is just too high. We've got a project, Liz and Charlie, who I talked about earlier, are leading this to look at our spend on vendors. Our tail spend, I think, is just too high. All of that opens up opportunities for us to be able to just continue to right-size the cost structure to reflect the revenue of the company.
Really, in terms of just thinking about a little higher in the P&L, connected hardware margins, a ton of progress there. As you've sort of alluded to under your new COO, some opportunities for continued gains. Could we see margins get above kind of the mid sort of teens we are now? Would you perhaps use additional efficiencies or gains to reinvest as a customer acquisition tool? How should we think about the connected hardware margins?
Yeah. I mean, there's so many things here that are all kind of connected. The way I, first of all, I just want to take a moment to celebrate the progress that the company has made. Having moved 1,000 basis points in the course of a year on our gross margins on our equipment is really quite an achievement. A lot of that has basically been driven through improvements in things like inventory and logistics. We haven't fundamentally addressed the actual cost structure of the equipment itself. That is not something that you can do overnight because it requires reengineering. It requires evolving the relationships that we have with our key suppliers. Of course, it's impacted by things like tariffs as well. The fact is that there is continued more upside there.
What I would say, though, is I do not really want to guide to that number because I view the gross margins that we have on our equipment as sort of a lever alongside our marketing spend that we will use to basically essentially modulate in order to grow the company. There may be quarters, for example, where we do more on price on our equipment and we will spend relatively less on marketing. There may be quarters where we do the opposite. There is value creation opportunity. How it actually manifests, I think, is a little bit more of an open question.
Understood. Going to the balance sheet, great position at the moment, leverage under two times and falling, plenty of excess cash, free cash flow, as you mentioned, quarter billion this year. How do we think about the optimal amount of cash on the books? I mean, that's the question I get. It seems like you might have too much. In terms of thinking about the debt paydown going forward, thinking about potential for share buybacks, particularly if you read the debt, how should we think about just optimal cash and return and the look of the balance sheet?
I just want to take a moment to appreciate that question. Because a year ago, this company was sort of just in the process, I think, of refinancing the debt. And there were really fundamental questions about the company and our capital structure was really at the heart of those questions. The fact that you're even asking right now that we might have too much cash is just music to my ears. Just at the highest level, I think it's just helpful to understand sort of what the debt stack looks like here. We've got a couple $100 million loan that comes due. It's current right now in February of 2026. We're in no rush to pay it off because it's zero coupon, but come February of 2026, we'll use cash to pay that off. That's the first step.
We've got another $350 million or so that the debt holders have certain rights on, and we'll determine the right way to handle that or if they decide to exercise those rights. The last $1 billion has some penalties associated with prepayment. They're not onerous at this point, but I think there is an opportunity for us to take a look at that $1 billion in the fullness of time, potentially get rated, and then likely after the prepayment penalties are gone, see if there are ways for us to reduce our total cost of capital. We're taking, I think, a very deliberate approach here, but you'll certainly see that $200 million debt cash pay that off within the next year.
Understood. I think we're at time. Peter, really appreciate the thoughts and time here. Yeah, this was a fun discussion.
It was my pleasure.
Thanks so much.