Peloton CEO says he’s surprised how deep some of the problems are at the company

Barry McCarthy, Spotify’s chief financial officer, attends the annual Allen & Company Sun Valley Conference, July 11, 2018 in Sun Valley, Idaho.

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When Barry McCarthy showed up to run peloton About three months ago, he was surprised to learn how disruptive the supply chain is and how quickly the company’s cash coffers are shrinking.

“The nature of the transitions is that they are full of surprises,” McCarthy told analysts Tuesday during his first post-earnings conference call with Peloton.

After researching the business, the CEO said he learned that Peloton was “weaker in every way in the supply chain” than he had expected. The biggest surprise over the previous quarter, he said, was the cash flow and how bleak it was.

after previous Netflix And spotify The CEO also said he was also surprised by Peloton’s ability to “quickly tackle” the cash flow situation without weakening existing shareholders while still sufficiently raising the company’s capital. Another bright spot McCarthy noticed was that he found more talent within Peloton headquarters than he thought he’d discover.

McCarthy’s comments on Wall Street on Tuesday were incredibly risky, given the drop in Peloton’s share price and waning confidence among investors that the business can be successful in a post-pandemic world.

The CEO’s address to shareholders on Tuesday came with Disappointing results for the three-month period ended March 31 The outlook is grim for the current quarter, which ends June 30 and marks the end of Peloton’s fiscal year. McCarthy was quick to identify areas in which the previous Peloton administration had not been very successful, while laying the groundwork for his turnaround blueprint.

At least for now, investors are focusing more on the current poor state of things. Peloton shares plunged to an all-time low Tuesday morning, bringing the company’s market valuation down to around $4 billion. It was hitting $50 billion near the start of last year.

However, McCarthy ended the phone call by telling Wall Street he was “very optimistic” about the company’s path forward, “regardless of the stock price.”

“I don’t mean to sound tough,” he said, “but I hope that one day we’ll look back on this call as one of the important turning points in the business.”

Shift in priorities

On McCarthy’s checklist:

  • Break into outside retailers by selling Peloton products through other companies
  • Raising awareness of the company’s digital app, which can be an option for people who don’t want to stick to a bike or tread machine
  • International Expansion
  • Introducing beta testing on a larger scale where customers pay a fixed price to rent a Peloton stationary bike and access live and on-demand workout classes

“We need to be good at hardware, but being good at hardware isn’t nearly enough,” he said on the call. This calls for a shift in investment priorities for business.

It is also, and importantly, intended to return the business to positive free cash flow in the upcoming fiscal year.

newly Cash injection from JPMorgan and Goldman Sachs It should allow it to do so despite any economic headwinds, McCarthy said. According to McCarthy’s letter, Peloton ended the fourth quarter with “low capital” with $879 million in unrestricted cash and cash equivalents.

It is likely that many investors will pause until they can see signs of greater progress. Some also worry that Peloton could lose a small part of its current subscriber base – which has proven loyal during the pandemic – if they change too much and too soon.

Arpine Kocharyan, an analyst at UBS, said he expects Peloton investors to be more concerned in the short term about the company’s ability to maintain its cash flow and liquidity. Kocharian said in a note to clients that Peloton’s strategy under McCarthy’s leadership is to focus more on subscriber net present value, as opposed to prior focus on hardware earnings.

Other analysts question whether McCarthy’s strategy is really different from that of former Peloton CEO and co-founder John Foley.

Peloton enjoyed success under Foley, who led the maker of connected fitness equipment during the height of the pandemic. But it has also faced challenges as consumer demand has begun to wane but costs are still increasing and Peloton has invested in things, like additional manufacturing centers, that it no longer needs.

“The company continues to suggest their words that they know they need to change the situation,” said Simeon Siegel, an analyst at BMO Capital Markets. “However, they cling to the idea that their growth story is their North Star.”

“If the company is going to simply sell its existing stock and focus on embracing its existing loyalists, there has to be a reasonable path to profitability,” he added. “The problem is that the story is clouded with the belief that they are entitled to grow as much as they want and fast.”

McCarthy reiterated on Tuesday that Peloton’s goal is to one day have 100 million members, a goal Foley mode in 2020.

“I know digital apps already with over 100 million people that focus on fitness. And in my whole life I can’t think why, given our early success in this category, we can’t be one of those digital apps.”

Peloton had 7 million subscribers as of March 31.