Peloton CEO Barry McCarthy to step down, company to cut 15% of staff as it looks to refinance debt

Peloton announced Thursday that CEO Barry McCarthy would step down and the company would lay off 15 percent of its staff because it had “no other way to bring our expenses in line with our revenues.”

McCarthy, an ex Spotify And Netflix The executive will become Peloton’s strategic advisor through the end of the year, while company chairperson Karen Boone and director Chris Bruzzo will serve as interim co-CEOs. Boone most recently served as CFO. Maintenance hardware While Bruzzo was a longtime executive. Electronic Arts. Peloton is looking for a permanent CEO.

The company also announced an extensive restructuring plan that will see its global headcount cut by 15 percent, or about 400 employees. It plans to close retail showrooms and make changes to its international sales plan.

The moves are designed to realign Peloton’s cost structure with the current size of its business, it said in a news release. This is expected to reduce annual run rate costs by more than $200 million by the end of fiscal year 2025. About half of those savings will come from reduced payroll, while the rest will come from lower marketing costs, reduced retail store footprint, and reduced IT and software costs, Finance Chief Liz Coddington said.

The departments most affected by the restructuring will be Peloton’s research and development, marketing and international teams, Coddington said.

“This restructuring will position Peloton for sustainable, positive free cash flow, while the company focuses on software, hardware and content innovation, improving its member support experience, and marketing efforts to grow the business.” Investing in improvements will enable them to continue.” said.

Peloton shares rose more than 12 percent in premarket trading but opened lower after the end of the company’s conference call with Wall Street analysts. Shares closed down about 3 percent.

McCarthy took over leadership of Peloton from founder John Foley in February 2022 and has spent the past two years working to restructure the business and return it to growth.

As soon as he took over, he implemented massive layoffs in Peloton’s cost structure, closed some of the company’s flagship showrooms and devised new strategies to increase membership. He oversaw Peloton’s executive team, oversaw its rebrand and created new revenue drivers such as the company’s rental program.

The final round of cuts, affecting 500 employees, was announced in October 2022. McCarthy later said that the restructuring of the company was “complete” and instead pivoted towards “growth”.

“We’re done now,” McCarthy said of the layoffs in November 2022. “No more heads to take out of business.”

Unlike Peloton’s founder, McCarthy focused Peloton’s attention on its app to capture members who can’t afford the company’s pricey bikes or treadmills but are interested in taking its digital classes.

In a letter to staff, McCarthy said the company now needs to implement layoffs again because it won’t be able to generate sustainable free cash flow with its current cost structure. Peloton hasn’t made a profit since December 2020 and can only burn cash so long as it has more than $1 billion in debt on its balance sheet.

“Getting positive [free cash flow] makes Peloton a more attractive borrower, which is important as the company turns its attention to the important task of successfully refinancing its debt,” McCarthy said in the memo.

In a letter to shareholders, the company said it was “mindful” of the timing of the maturities of its debt, which includes the convertible note and the term loan. It said it was working closely with its creditors. JP Morgan And Goldman Sachs On a “refinancing strategy”.

“Overall, our refinancing objectives are to deleverage and extend maturities at an appropriately blended cost of capital,” the company said. “We are encouraged by the support and intrinsic interest from our existing lenders and investors and look forward to sharing more on this topic.”

In a news release, Boone thanked McCarthy for his support.

“Barry joined Peloton during an incredibly challenging time for the business. During his tenure, he has driven the cost of the business to achieve critical milestones of achieving sustainability and positive free cash flow. Permanently reconfiguring the structure lays the foundation for scalable growth,” Boone said.

“With a strong leadership team in place and the company now on solid footing, the board has decided now is the right time to search for Peloton’s next CEO.”

During a conference call with analysts, Boone said Peloton’s board is looking for a leader who can “architect and guide the company’s next phase of growth.”

Also Thursday, Peloton announced its fiscal third-quarter results and fell short of Wall Street expectations on the top and bottom lines. Based on LSEG’s survey of analysts, how the connected fitness company fared compared to Wall Street’s expectations:

• Loss per share: A loss of 45 cents vs. 37 cents is expected.
• Income: $718 million vs. $723 million expected

The company’s net loss for the three-month period ended March 31 was $167.3 million, or 45 cents per share, compared with a loss of $275.9 million, or 79 cents per share, a year earlier.

Sales fell to $718 million, down about 4 percent from $748.9 million a year earlier.

Peloton has made little effort to bring the company back to sales growth. It removed the free membership option from its fitness app, expanded its corporate wellness offering and partnered with mega-brands such as Lululemon to increase membership, but neither measure is sufficient to increase sales.

For the ninth consecutive quarter, Peloton’s revenue declined during the fiscal third quarter, compared to the year-ago period. It hasn’t seen sales increase over the year-ago quarter since December 2021, when the company’s stationary bikes were still in high demand and many people were still back at the gym amid the Covid-19 pandemic. did not come

The business is continuously cash flowing and has not made a net profit since December 2020.

For its current fiscal year, Peloton lowered its outlook for paid connected fitness subscriptions, app subscriptions and revenue. It cut its affiliate fitness subscription outlook by 30,000 members, or 1%, to 2.97 million as it looks toward its current quarter, which is typically its toughest as people weather the season. Exercise less during the spring and summer months.

“Our pad-connected fitness subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations of seasonally lower demand,” the company said.

Peloton now expects app subscriptions to decline by 150,000, or 19%, to 605,000.

“We continue to maintain our disciplined approach to app media spending as we optimize our app tiers, pricing, and paid app subscription acquisition funnel,” the company said.

As a result of the expected decline in its subscription sales, Peloton is now projected to come in with full-year revenue of $2.69 billion, a decline of about $25 million, or 1%. That fell short of expectations for $2.71 billion, according to LSEG.

However, the company raised its full-year outlook for gross margin and adjusted EBITDA. It now expects gross gross margin to increase 50 basis points to 44.5%, and adjusted EBITDA to increase $37 million to negative $13 million.

“The increase was largely driven by the outperformance from Q3, coupled with lower media costs and cost reductions from the restructuring plan announced today,” the company said.

Last February, McCarthy set a goal of returning Peloton to revenue growth within a year. When it failed to reach that milestone, McCarthy pushed back and said he now expects the company to return to growth in June at the end of the current fiscal year.

McCarthy also expected Peloton to reach positive free cash flow by June — a goal the company said it reached early in its third quarter. It’s the first time Peloton has hit that mark in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow but it’s unclear how sustainable that number is.

Last month, CNBC reported that Peloton was not paying its vendors on time, which could temporarily pad its balance sheet. Data from business intelligence firm Credit Safe shows that Peloton’s late payments to vendors increased in December and again in February after improving in January.

The company did not provide specific guidance on what investors can expect with free cash flow in the quarters ahead but said it expects to deliver “modestly positive free cash flow” in its current quarter and fiscal 2025. “Expects.

“While we strongly intend to return the business to growth, with the cost reductions announced today, we are reducing our cost base without requiring significant growth improvements to get us there. Positive free cash flow appears to be the way to go,” Coddington said. conference call. “I also want to make it clear that we have carefully reviewed these cost measures to ensure that we still have the ability to invest in innovation so that the business can grow profitably.”

One of the reasons Peloton has failed to reach positive free cash flow is that it is not selling enough of its hardware, which is expensive to manufacture and that the Covid-19 pandemic is over and people are returning to gyms. have since become less popular.

“Looking at the numbers in more detail, the biggest problem is in the part of the business where Peloton first made its name: exercise equipment. Revenue from connected fitness products fell 13.6 percent from last year. is, a sign that consumers are still cooling off to equipment that is aesthetically and technically pleasing but too expensive,” said Neil Saunders, managing director of Global Data, in a note. “A lot of people who want Peloton equipment are already there and not likely to upgrade anytime soon; the balance of the market is either not interested or needs a lot of persuasion to buy Peloton.” Is.”