Peloton Interactive Inc

NASDAQ:PTON

Earnings Call Analysis

Peloton's Q1 2024 Earnings: Strategy and Growth

In Q1 2024, Peloton anticipates revenue growth acceleration in Q2 and Q3 with improved gross margins in the latter half, due to well-established growth initiatives such as reintroducing Tread+ and expanding app subscriptions. The partnership with Lululemon is live, contributing roughly $10 million revenue in Q2. Year-over-year engagement increased by 6%, reflecting successful content strategies and personalization. Inventory and cash flow are normalizing, with no further inventory write-offs expected. Upcoming promotional activities are designed more strategically, leveraging digital and social media. While FAS model impacts gross margins, on a unit basis, excluding promotions, all product skews are double-digit gross margin positive. Q1 included a one-time $15 million impairment related to POP but steps are in place for better reserve management and potential POP sale. The full year forecast remains cautiously optimistic with conservative growth expectations.

Increasing Gross Margins amidst Launch Uncertainty

The company is targeting higher gross margins in the latter half of the year, driven by a mix shift from hardware to subscription sales and the reintroduction of Tread+. Nonetheless, there is a level of uncertainty incorporated in this guidance due to the newness of the launch and the unpredictability of the second half's performance.

Subscription Engagement Rises Despite Non-Seasonal Factors

Engagement among all access subscribers saw a 6% year-over-year increase, which is attributed to advancements in personalization and the production of content that aligns closely with member preferences, rather than seasonal usage patterns.

Normalization of Inventory Management

The company is entering a normalized inventory position, expecting no further inventory write-offs, better reserve management, and all products aside from the guide to achieve double-digit gross margins. This comes alongside a shift in management approach focused on efficiency and more prudent capital use.

FaaS Impacting Gross Margins Minimally

Fitness as a Service (FaaS) made a minimal sub-10 basis point impact on overall gross margins. Despite a small drag, it has been growing at over 90% year-over-year, which provides another avenue for growth albeit with more complexity in Tread installation.

Marketing Challenges and Opportunities

While successfully attracting large volumes of new users with free offerings, the conversion to paid subscriptions needs improvement. Free trials have seen great success with high engagement, particularly with the Apps+ at a $24 price point. Additionally, new partnerships and brand relaunches have brought in diverse customer demographics, fuelling growth strategies focused on relevance and engagement across new and existing members.

Churn Dynamics across Subscriber Types

Different types of Peloton subscribers exhibit varying churn rates. Traditional all access members have the lowest churn rates, slightly above 1%. Secondary market purchasers churn more, near the 2-2.5% range, and bike rental groups experience churn between 5-6%, influenced by seasonality.

Operational Expense and Gross Margin Improvements

Operational expenses for the fiscal year are projected to decrease compared to the previous year, even with increased investments in marketing. This is in part due to a $150 million reduction in general and administrative spending, driven by savings in areas such as legal and member support services. Gross margins are also expected to improve in line with these changes.

Segmentation and Expansion Strategies

There's a recognition of the early stage of understanding user engagement across different segments. Efforts to cater to new demographics, such as the LatinX community, are underway, ensuring content availability for the diverse user base. Less than 10% of subscribers currently own multiple Peloton hardware, but this is on an upward trend, indicating more cross-platform opportunities.

Future Growth Directions for Flexible Access Service (FaaS)

Management has been cautious with FaaS's growth, attuning its pace to the understanding of unit economics and subscriber churn behavior. The rental business is over 60% incremental, drawing users who may not have joined otherwise. Improvements in buyout rates for rental units are expected to enhance this model's economics and potentially lead to higher growth rates.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Peloton Interactive 1Q '24 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Stabler, Head of Investor Relations.

[Peter Stabler, executive]

Good morning, and welcome to Peloton's First Quarter Fiscal 2024 Conference Call. Joining today's call are CEO, Barry McCarthy; CFO, Liz Coddington; and Chief Marketing Officer, Leslie Berland. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.

For a discussion of the material risks and other important factors that could impact our actual results, please refer to our SEC filings and today's shareholder letter, both of which can be found on our Investor Relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP and non-GAAP financial measures is provided in today's shareholder letter. I'll now turn the call over to Barry McCarthy.

[W. McCarthy, executive]

Good morning, everyone. Thanks for joining us. In a break with tradition, I invited Leslie Berland to join us knowing that growth is on everyone's mind. And this begins a process whereby in future calls from time to time. You can expect me to invite into the room, other operating executives so that you have an opportunity to gain exposure to them and they have an opportunity to gain exposure to you. And you can hear firsthand from them about different aspects of how the business is being operated. And with that, we'll open the phones to questions, Josh.

[Operator]

[Operator Instructions] Our first question comes from Doug Anmuth with JPMorgan.

[Douglas Anmuth, analyst]

I have 2. Just first, you have a number of different growth initiatives going. Just as you think about your forecast for revenue growth and positive EBITDA and substantial free cash flow in the back half of the fiscal year. Can you just help us rank the 2 to 3 biggest drivers across these various initiatives? And then secondly, how do you think about timing for the lululemon partnership to benefit the business just given access to their large membership base.

[W. McCarthy, executive]

Jump in on the drivers? Do you want to take it? Well, let's see, from my perspective, with respect to the drivers, a couple of things. One is we're going to reintroduce the Tread+ this quarter and began taking preorders and that will be -- if we're successful, that will be a big driver of incremental cash flow and revenue for us. Remember, we have all of that inventory in warehouse already and fully paid for and have set before I walked in the door. So that would be thing one.

Thing 2 is continued success growing app-related subscribers. And I'm sure we'll have more questions about how we're thinking about that opportunity on a go-forward basis. And then we need to continue to have success with the core -- all access membership. But I think our growth projections are reasonably conservative in that regard. So that time thinking about the growth initiatives in terms of lululemon, that's live. And we are benefiting from it as we speak. So actually nothing more to say about the economics of that on a go-forward basis.

[Liz Coddington, executive]

Yes. The one thing I can add on lululemon is that we just started having our content available for the lululemon studio members who have a mirror that actually went live yesterday on November 1. And so as far as receiving the revenue sharing benefit from that agreement that we have with lulu that started effective in November. And we expect roughly to give you a sense of the size for the quarter, roughly about $10 million of revenue for Q2 coming from that subscription revenue for us.

[W. McCarthy, executive]

There is an apparel component to it. It started phenomenally strongly and then an initial launch in Chicago. We drove a tremendous amount of store traffic for them, a huge increase in apparel sales for us. And we'll be working on a more complete integration of that opportunity, and that will be a little slower to develop over time.

[Operator]

Our next question comes from Shweta Khajuria with Evercore ISI.

[Shweta Khajuria, analyst]

Okay. Could you please talk about the promotion environment this year versus last year? And any change in your strategy in terms of running promotions this year, length of time, the depth of promotions. Any comments on that, please? And then the second is, how should we think about your guidance for the quarter and for the full year, puts and takes that are baked into -- or the assumptions that are baked into your guidance? And any potential what impact from these new partnerships are you accounting for in your guidance for the full year?

[W. McCarthy, executive]

Let me say just a brief intro, I'll turn it over to Leslie to talk about our thoughts about the promo environment for the current quarter. And Liz will take the last part of the question. So I think I'm right on a Q-over-Q basis for the quarter completed, we had a higher ASP, and we're less on promotion than we were a year ago. We were higher by 3%, something like that. So -- and so that reflected in the improvement in gross margin on a year-over-year basis and the 31% increase in gross profit that helped deliver in the quarter. You want to talk about that holiday?

[Leslie Berland, executive]

Yes, absolutely. Happy to be on the call. I think we're very excited as we embark on holiday and we always bring exciting value to both our members and new customers as well. I think what's interesting to also mention is how we bring these promotions to life. So we've really learned a lot over the past couple of months, around digital and social media marketing and specifically creator and influencer marketing, which really reframes and contextualizes both this value as well as the promotion. So we're seeing really strong traction in all of our work in this space, and you will absolutely see this come to life during holiday.

The other part I'll mention is you read in the shareholder letter around our partnerships. Much of our partnership work is starting to take form at the exact same time and NBA being an example, Michigan as well. So there's a great sort of coming together of all these initiatives in the next few months.

[Liz Coddington, executive]

Okay. So I'm going to go ahead and take the question about guidance for Q2 and the full year. So our Q2 guidance reflects what I believe to be a balanced view based on the macroeconomic outlook. In fact, that there is some uncertainty around the performance in the holiday season but it does reflect a few things. So I want to call out that it does reflect seasonality of our hardware sales, the fact that Q2 is a heavier hardware sales quarter for us seasonally, given all the holiday promotional activity.

It's also a quarter where we expect to see surprisingly an improvement and maybe not surprisingly, improvement in our Connected Fitness gross margin. And some of the reasons for that, and our overall gross margin is coming down seasonally as you would expect, but Connected Fitness is actually going to be up in part because of fixed cost leverage that we expect to have from the higher Connected Fitness unit sales.

And we also expect a slight mix shift away from our bike rental relative to Q1 because we expect our rental take rates to be a little lower, driven by the fact that we will have the high promotional activity in the quarter. And then in addition to that, that is offset by some holiday promotional activities. But net-net, we expect it to be slightly higher. Our adjusted EBITDA guidance reflects the fact that we will have seasonal marketing spend to support the holiday season.

It's important to understand that, that media spend actually supports growth in both Q2 as well as Q3. So the timing of that is reflected in the adjusted EBITDA guidance.

Now you had asked about partnerships. The way that we are thinking about these partnerships is they are just getting started. So there's not really an implicit benefit baked into our guidance for subscribers directly as a result of a lot of these partnerships in Q2.

The one thing that I called out earlier about lululemon would be the exception to that and so we will -- as we build out these partnerships and the structures take to take -- start to take shape and we gain more traction, we'll be incorporating more of that into perhaps future quarters of guidance.

Now for the full year, I want to call out a couple of things. Our back half of the year forecast reflects the fact that we expect to see revenue growth acceleration in Q2 and Q3. If you also look at our gross margin that we're targeting for the full year, that also reflects the fact that our Q3 and Q4 gross margins are expected to be higher, and a lot of that is driven by the fact that in addition to the mix shift between subscription and hardware sales, we do expect to see some benefit, as Barry called out earlier from the reintroduction of Tread+. But I do want to call out that we -- that is a new launch for us. There is some uncertainty baked into our guidance around it and the performance of the second half of the year.

[Operator]

Our next question comes from Ron Josey with Citi.

[Ronald Josey, analyst]

I wanted to ask a little bit more about engagement trends as Barry in the letter, you talked about an increase in monthly subscription engagement in the quarter and members engaging with longer classes. Do you think that has to do with more of a seasonal usage pattern? Or just Peloton's strategy of being everywhere -- anywhere and everywhere and with longer and more types of class that are coming out. And curious how you use this trend of greater engagement to just improve overall brand. And with Leslie here, maybe you can help us a little bit more just about brand perception and what we're doing to increase that over time.

[W. McCarthy, executive]

Well, the 6% increase in engagement amongst the all access subscribers is year-over-year. So it's not a seasonal trend. And Liz, correct me if I'm wrong, I think it's 12% year-over-year for app engagement as well. So I think it reflects some progress on personalization of continued great execution by Jen Cotter and her content team. And the preferences of the members. So if we're programming our class as well, and if more people are taking longer classes, it's because they're choosing to and we're producing enough of them and enabling them to discover them on the platform in a way that better serves their interest.

[Liz Coddington, executive]

I do want to correct one thing really quick. The 6% includes both the Connected Fitness and the app subscribers total for app for engagement.

[Operator]

Our next question comes from Aneesha Sherman with Bernstein.

[Aneesha Sherman, analyst]

Two questions for me, please. The first one is on inventory. So as you're continuing to clear inventory, what is the normalized level of hardware gross margins you think the business can get to? I know you've talked about double-digit underlying margins. Does that view change now with the growth of FaaS in the mix? And then I have a quick question on Pop. You took an impairment of $31 million. Can you give us an update on the work being done on that and what you're expecting as the outcome? Are you still expecting a sale?

[Liz Coddington, executive]

So I can take the question on Pop first. In the quarter, we actually took an impairment of only $15 million in this particular quarter. So we are still looking to sell Pop. We are talking to a variety of interested parties, and we hope to have -- hope to be able to sell it soon, but we are still working on that.

On the other question, which was related to inventory and normalized hardware gross margins. We do expect to see -- so we are moving into a more normalized inventory position. We've been purchasing inventory as we prepare for the holiday season. And I did want to comment about the fact that in Q1, it was a use of cash. And in Q2 to Q4, we expect to have a bit of a tailwind on inventory. But by the end of the year, we expect to be pretty normalized with regards to inventory and the seasonal cash flow that the business is accustom to or has been historically accustom to.

Now in terms of gross margin, we are seeing some benefit on the fact that we are moving into that more normalized inventory position. We don't expect to have any more write-offs of inventory. We'll be able to better manage our reserves. And then we do have on a unit economic basics is excluding promotions, all of our SKUs are a double-digit gross margin positive aside from the guide.

[Aneesha Sherman, analyst]

Okay. Can you talk about how the impact of FaaS might change the normalized gross margins going forward?

[Liz Coddington, executive]

Yes. So let me -- so a little bit about FaaS. So -- from the -- in terms of the impact on gross margin in Q1, FaaS was less than 10 basis points impact on our overall gross margin. So relative to the size of FaaS compared to the overall size of our business, it's a bit of a drag, but not a huge drag on gross margin. The reason that FaaS impacts our gross margin is because of -- mainly because of the fact when people join FaaS, they pay a fee for the delivery and we are cost to deliver that hardware is more expensive than the actual delivery charge that we charge to the customer. And so as we grow that part of the business, you see that impact to gross margin in the first month of the FaaS subscription.

[Operator]

Our next question comes from Eric Sheridan with Goldman Sachs.

[Eric Sheridan, analyst]

Maybe 2, if I could. In terms of FaaS, has there anything you've learned so far on the subscription side that we might see you extend out subscription options into other connected fitness hardware products over time? I'm thinking around elements of relaunching Tread and trying to come back to market with that with maybe a new messaging. That will be number one. And then I just want to make sure we understand the messages on the app strategy and what you're seeing. In terms of applying marketing dollars and ROI, how would you characterize the success you've had in terms of the free tier of the application layer versus the paid tier and elements of all the conversion funnel continues to sort of evolve for the application strategy.

[W. McCarthy, executive]

Let me jump in on FaaS. I'll say a few words about app strategy and then ask Leslie to join. I think it's unlikely that we will extend FaaS, at least the treads and treadmills because that installation is more complex than bike. Is it possible that we might extend it to row possibly, but it's still quite early in the life cycle of that product. And I think we have more to learn before we would consider doing that.

So I think the -- and then lastly, I would say their -- we have our hands full with the growth opportunity that FaaS currently presents at 90-plus percent year-over-year. And having just opened up Germany where it -- right out of the box, very small numbers, but right out of the box growing really fast, -- much faster than we were forecasting. So there is plenty for us to chew on, on FaaS with just the current business model. I think is the macro point. As it relates to the app strategy, the marketing team was enormously successful in driving huge volumes into free.

We were not successful at seeing conversion of those free into the paid funnel, which is why we pivoted in the quarter back to focusing on the paid app and the on-ramp there is free trial. And there, we have had terrific success. And we're seeing higher price points than we were forecasting significantly higher take rates of the Apps+ so at $24 then we were -- and we were expecting a heavier mix of $12.99.

[Leslie Berland, executive]

Yes. And I'll just jump in a little bit to provide context on the strategy and some of the interesting data points that we saw. So again, the goal including this app is to energize our core member base and to attract new and underpenetrated demographics that have historically not been, as I said, as penetrated for Peloton. And app gave us an amazing opportunity in the pre-app message gave us an amazing opportunity when we rebranded the company and relaunch the brand. What we saw to Barry's point was, obviously, a massive volume of downloads.

And what's interesting about that tied to the objective is we brought in new demographics. So we brought in lots of people who represented what we would consider our core member base but you saw a movement and significant uptick both in free and paid for demos, including men, Gen Z plus and others. So these are the areas, and again, going back to our partnerships, where you will see us continuing to invest and to drive relevance and engagement, both on our current members that represent those demographics, but also new for growth.

[Operator]

Our next question comes from Lauren Schenk with Morgan Stanley.

[Nathaniel Feather, analyst]

This is Nathan Feather on for Lauren. I guess, can you give us an update on how rental churn has progressed? And are you seeing that decline as we anticipated a few months ago? And then how should we think about the range of outcomes you're now considering for the kind of steady state of churn there?

[W. McCarthy, executive]

The question.

[Leslie Berland, executive]

I can answer the first part of your question, Nathan, but we missed kind of the last part of your question about a little bit garbled, if you wouldn't mind repeating that.

[Nathaniel Feather, analyst]

Yes. Just how should we think about the new range of outcomes to the steady state of churn rate kind of over the long term?

[Liz Coddington, executive]

I can take this one. So in terms of churn for our rental subscription model for FaaS, we actually in Q4, we talked about the fact that we had an uptick in churn with regard to the seatpost we call and we saw that with FaaS as well. But we have seen it come down substantially from the high in Q4, roughly by 100 basis points. But it is still higher than our all access regular number of churn.

Now your other question, I think, was about just churn in general. And what we did see, if you remember, we did see an uptick in churn with regard to the bike's seat posts with the increase in [indiscernible] numbers. We are seeing -- we saw our churn come down as people are unpausing and then also with regard to seasonality, and we expect to see our churn rates come down in Q2 and Q3 as well.

[W. McCarthy, executive]

Spend a minute and talk about the changing mix of the subbase rejoins and the core all access members and growth in rental so that as the mix changes over time, people can.

[Liz Coddington, executive]

So overall, we do see slightly different -- we see different churn rates for these different types of Peloton subscribers. So we've got our regular all access members who purchased new hardware from us. And we've got the bike rental model for our rental subscribers. And then we have a third group, which is secondary market, which is people who decide to buy their hardware from someone else on a marketplace that we are not facilitating that sale. And it's generally -- it's used to hardware. So for our regular all access member base, we see the lowest churn rate in the low -- it obviously varies a bit seasonally, but it's the lowest, closer to 1 point, I don't have the exact number in front of me for that group.

[W. McCarthy, executive]

[indiscernible].

[Liz Coddington, executive]

This last quarter, yes, probably [ 1.4, 1.5-ish ], a little less. Then we have the secondary market group, which actually has a higher churn rate, they are more in the [ 2, 2.5-ish ] range. And then we have the bike rental group, which is more in the [ 5 to 6-ish ] range over the seasonality of that group.

[W. McCarthy, executive]

Just a minute talking about secondary market. That has grown pretty dramatically. And what's the source? It's Peloton all access member who canceled so they showed up in our churn numbers on average within 6 months, a bike is sold, let's use a bike is sold in the secondary market. Someone purchases that bike and they come to us and become an all-access member.

And so -- as our core business continues to grow, the secondary market is growing even faster. It means that, let's call it, 1.4% churn rate on all access members actually really on a net basis is lower. And it means that [indiscernible], it also means that our average churn rate, the reported average churn rate is going to go up if the secondary market continues to grow faster than the new sales market, even if the individual cohorts are behaving the way they have historically even if the long-term churn for all access members remains steady. And even if the all access -- even if the churn rate for secondary members remains steady. And so you want not to be alarmed if you see it increase gradually because of the mix change. If the cohorts deteriorate, we'll let you know.

[Operator]

Our next question comes from Andrew Boone with JMP Securities.

[Andrew Boone, analyst]

I wanted to ask if there were any callouts on OpEx this quarter. And then as we think about the EBITDA guidance for the rest of the year, it implies a decline in OpEx in the back half. Can you just walk through any OpEx puts and takes that you may have -- and then can we touch on Peloton business. What needs to happen for Peloton business to really move the needle in terms of overall numbers?

[W. McCarthy, executive]

The business piece, do you want to do the first 2?

[Liz Coddington, executive]

So just some comments about OpEx. So we don't provide specific targets for OpEx, but we do expect our OpEx for the year to be below that of fiscal '23, despite the fact that we are investing more year-over-year in marketing so we expect our FY '24 GAAP G&A spending to be roughly $150 million lower than fiscal '23. The largest sources of savings are around legal, member support outside services. And then for R&D, remember the fact we have changed our capitalization policy with regard to R&D. So we are expensing a much larger portion versus in prior years, we capitalized more. If you combine both of those pieces, we expect to be about 10% to 12% on lower year-over-year spend in fiscal '24.

Now for sales and marketing, we do expect to be up year-over-year. That's driven by an increase spend on media, brand and creative. So actually, the marketing that drives subscriber acquisition, we will see that partially offset by lower retail costs as we continue to reduce our showroom footprint over the course of the year. Now you had called out on adjusted EBITDA that our guidance reflects lower OpEx. That's true with regard to marketing spend. What it also reflects, not to be missed is the fact that we do expect improvement in our gross margin as well.

[W. McCarthy, executive]

And with respect to Peloton business, this core belief that talent is foundational to the success of businesses. And we have seen an influx of senior seasoned talent who have management skills and relationships that are important to the future success in that business, and we have begun to see significant new traction in Peloton business and we will be seeing, I think, significant traction this fiscal year in corporate wellness as well, and you should expect to be hearing more about both from us as the year unfolds.

[Operator]

Our next question comes from Edward Yruma with Piper Sandler.

[Edward Yruma, analyst]

Two quick ones for me. First, Barry, to go back to the sub commentary. So just so that we're crystal clear, is it your assessment today that the difficulty in conversion or the softness conversion is driven more by the marketing and some of the changes you've hopefully implemented. Or do you think that there are broader kind of price value issues with the paid tier. And then just -- it's been a little while since you guys have updated [indiscernible]. So I'd like to hear kind of how that device is selling and maybe any learnings from that.

[W. McCarthy, executive]

Do you want to do the commentary on conversion for apps, I don't think it's a price value conundrum but...

[Leslie Berland, executive]

Yes. I think that become half of the product team but we have done amazing work continuing to evolve both of the experiences. The 3 app experiences is obviously with a relaunch new for us as a company. We had it prior, but it was more of a steady state. And we've learned a time. We've seen what they're drawn to, what they're not, what these new members are not drawn to, what they're using, what they're not using. And to the point before, we are now strategically shifting to paid and pay trial, so people can really get a taste of everything that Peloton has to offer versus sort of a smaller segment of our content as an example.

So you're going to see us moving in parallel path. We're going to continue with the team, the product teams iterating on the 3 products as we continue to learn and drive traction on our paid as well.

[W. McCarthy, executive]

The perspective that I would contribute is a couple of things. One, I think we've had great success with driving growth in the paid app and at a higher price point than we were expecting. So I think for me, I'm persuaded that the price value proposition is working for consumers. What we weren't successful in doing is finding the right front door for free users and introducing them into the Peloton value proposition. Remember, our app was born as an adjunct to an all access membership for people who already understood what the value proposition was and how to engage with the service. .

And we shifted the focus for the free app of people who have no idea who were, arriving on our front door for the first time based on the marketing message and which brings us to [ Nick Cobler ]. So if you were to ask me, hey, like where do you think the real value add is in the foreseeable future, I would say it's everything e-commerce and everything app because that's the software challenge, that's a discovery challenge, that's a personalization challenge and that's just our ally. So I think there is more opportunity than risk for us. But I believe strongly that the price value proposition is being successful with app.

[Edward Yruma, analyst]

And then on rower really quickly?

[Liz Coddington, executive]

I can take the question on rower. So rower actually is still a relatively small portion of our hardware sales today. But we were pleased to introduce it to the Canadian market last week, I mean, on 10/24. And we also achieved commercial certification of our rower in the U.S. on October 5. So we're excited to be able to bring that to the commercial market. And then in terms of our content for rower, we've recently started a beta test of some gaming content with Orgata, which is exciting for us to be able to test for that platform.

[Operator]

Our next question comes from John Blackledge with TD Cowen.

[John Blackledge, analyst]

Two questions on Tread+, what's the opportunity with the Tread+ relaunch? And is the cost of the Tread+ kind of a limiting factor, given the current macro conditions. And then secondly on the University program, you provided that example for the University of Michigan in the shareholder letter. Just wondering kind of how long does it take for all the facets of the program to get going, selling the hardware in the campus community, getting the rental program going, et cetera? And are there kind of hiring needs at Peloton to address this opportunity?

[W. McCarthy, executive]

Let me talk about Tread+. It could be that in the current economic environment, it will fall flat. But I don't think that's going to be the case of all of the products that I've ever been exposed to at Peloton, the one single product that you couldn't pry out of the dead hands of members is the Tread+. I mean they are absolutely over-the-top, fanatically obsessed about the user experience on the Tread+. I mean, dramatically, exponentially, more emotionally engaged with that product than anything we've ever produced. And frankly, it's kind of that reaction that informs my belief that we're more likely than not to be successful in the reintroduction of that product.

[Leslie Berland, executive]

Yes. And then I'll jump in on Michigan. So thank you for the question and for mentioning sort of the full ecosystem of what we're trying to do with this partnership, it ranges from the student app, which is very obviously relevant to that core base, but also rental on campus the bike itself. And then we have marketing and brand integration, leveraging, including leveraging student athletes. So there's a lot to not do this partnership, but all of the partnership that we're going to be bringing to life, you will start to see in the next couple of weeks, the beginning of the Michigan partnership come to life, and then we will have drumbeat throughout next year at sort of key more relevant moment both for students, but also Alum and FaaS, both on-campus and off-campus as well.

[W. McCarthy, executive]

I think the most interesting thing about -- I'm going to ask and answer my own question here. Please bear with me for a minute. As Leslie and I have talked about the sort of the world's reaction to the announcement of Liverpool and Michigan. At one point in the conversation, she turned to me and said, you know -- and particularly after the announcement of the NBA, WNBA. There wasn't a brand in the world that we wanted to partner with wouldn't kill to partner with Peloton now and people have been beating down our door to talk about different ways to work with us.

So I was trying to convey in the letter, some of that enthusiasm and energy, I'm not sure I've succeeded but there is enormous opportunity for us here. The costs, at least so far have been, I would say, modest to quite reasonable. And it opens up a number of potential growth factors for us both to increase in unaided awareness to the opportunities that associated with these great brands and at least in the case of the NBA gives us access to stream content, which helps members discover other stream content on the platform to a degree that we haven't been able to do for ourselves today, thinking about the entertainment section of our content. Anything you want to add to that?

[Leslie Berland, executive]

No, I was going to just say on the entertainment piece, there is a ton of pent-up interest in this area. We've been in beta for quite a while. We have not marketed it even to our members. And so there's a lot of organic trends that we're seeing, especially around trends -- excuse me, around Tread where people just want to consume different types of content as they work out. So it really expands our offering in a really powerful way. And again, goes back to different demographics that we're trying to reach. So certainly, through NBA league pass, we're really excited to bring entertainment and that partnership specifically to life in the next couple of weeks.

[Operator]

Our next question comes from Simeon Siegel with BMO Capital Markets.

[Simeon Siegel, analyst]

Just any color you can share on engagement across the various degree of users? I assume you have some strong power users, maybe periodic users, probably some who don't use that often. So just any help thinking through how you look at your own, how you segment your own engagement for the sub base? And then maybe just what percent of current subscribers currently have multiple pieces of connected equipment? And do you see that as a further opportunity.

[W. McCarthy, executive]

I -- let's see. As many different ways as you can imagine, we segment the user base in terms of engagement both for subscriptions and both for members per subscription. We don't provide any color for it, mostly because [indiscernible] into the business and each question we answer would result in a new question and would end up being like the book give them out of cookie. So one -- thing one. Thing two, I think we're in the very early innings of having a deep understanding of how it is that personalization and the use of AI with personalization can drive the increased user satisfaction and engagement across the membership and across different geographies.

And we really have only just begun and I haven't deep understanding of the power of that from my experience, both at Spotify and Netflix. And there's a lot of open field running, I think, that we have the opportunity to do here. Two, I think there are -- as Leslie's team is successful in drawing in new demographics to the platform, LatinX by way of sample.

There -- it's important that we'd be aligned internally, let's say, by way of example, with respect to our content programming, so that the content we're making can be discovered by and is relevant to the demos that we're driving to the platform, maybe for the first time, right? It wouldn't make any sense or Leslie to suddenly be driving a large proportion of LatinX against the platform if we're not successful in servicing our LatinX relevant programming on the platform, and we have a lot of it. I think they're -- point one.

Point two, I think there are opportunities for us to lean in to some user segments that maybe recently, we've underserved -- we've seen a big growth in our PML population. We have great programming services to them. I think there's an opportunity for us to lean a little heavy, a little heavily -- more heavily performance, which we have done historically but a little less of lately. So it's mostly about overly simplistic say, polishing the apple, but it's mostly about ensuring that we're aligned. And that as we flex the business model, we make the resource allocation decisions we need to make to capitalize on the opportunities we've seen.

[Liz Coddington, executive]

On the question about multiple pieces of hardware. We it's actually a relatively small percentage of our sub base that has more than one piece of Peloton hardware less than 10%, although that is increasing. And as we said before, the vast majority of our bikes go to new subscribers. We see higher overlap with trends, larger percentage of them going to existing relative to bike. And then also with the rower, we see a higher percentage of them going to existing members who have another piece of hardware as well.

[Leslie Berland, executive]

One point I'll just add on the question earlier is around NPS, which continues to remain strong across all of our demos. It's something that we track, obviously, very carefully, especially given the power of word of mouth and referrals for the business.

[W. McCarthy, executive]

The only comment I make about multiple platforms is the more platforms you have in your home, the lower your churn tends to be.

[Operator]

And our last question comes from Youssef Squali with Truist.

[Youssef Squali, analyst]

All right. Great. 2-parter please. Barry. So in the letter, you talked about 75,000 subs for the fast service by the end of the year. We're having somewhat of a hard problem contextualizing that out of the universe of about 3 million. How is the rental business doing relative to your own expectations? It seems to me that given such a great value proposition, maybe 75,000 is a little number, but I'm not really sure. So I'd love to know how that service is performing to your own expectations. And maybe relative to that, are the unit economics of that service clear enough for you after maybe -- I don't know, to be now for maybe 18 months now that you can maybe leave me a lot more aggressively? Or are the unit economics still kind of coming in to kind of getting clearer, but they're not giving you enough confidence to win very aggressively.

[W. McCarthy, executive]

Youssef, thanks for the question. So I have been cautious in our management of the growth of FaaS and have on and off even in the last quarter taking steps to dampen down some of the growth because I certainly early on was less certain about the future economics of it as we were still learning with the churn characteristics were going to be and having a deeper understanding of what the payback period would look like. I mean, of course, we had early data, but I wasn't confident that the early data would be representative of the market as we sold more units. What is abundantly clear to me is that we have the opportunity to grow it significantly faster than we have, and it's been growing pretty fast.

So if I were to step out of the way, so to speak, it would already be a bigger business than I have allowed it to become. So and we've taken some steps to accelerate the growth we -- not to give too much color. But we took up the forecast by 20 percentage points of growth just by agreeing to change some of the tactics internally. And honestly, we could grow faster. So now in terms of the unit economics, we have a fair amount of control over how we dial the outcome, a couple of factors that can -- that inform us about how to do that, it's one, the mix of certified preowned and new. And then secondly, the mix of Bike and Bike+. And so as we turn those trials, we have a significant opportunity to dial up and down the payback profile and the unit economics. Anything you want to contribute to that?

[Liz Coddington, executive]

Sure. I'd like to contribute. I want to say a couple of things. So our payback period for FaaS, which we've talked about before, being in the roughly 18 to 20-month ranges. We are there today. We're in the 18-month range. Until we see opportunity to improve that by reducing churn rates. And we're looking at ways that we can do that. I want to call out that one program, that one option that we have for people who rent, we find that -- first of all, we find that it's over 60% incremental. That's important to comment. So that means that 60% of the people at least or more would not have joined Peloton if they didn't have this option to rent the Bike without a commitment. And that's true both in the U.S. It's true, we're seeing in Canada. We're seeing it in Germany. That is true for -- it's highly incremental in all of the markets, the fastest participating in today.

[W. McCarthy, executive]

Sorry -- and that's an example where I continue to put my foot on the cap to break from time to time, while we continue to test the validity of the incrementality.

[Liz Coddington, executive]

Yes. And another thing that we have not really leaned in on, but we are going to start to do, which would help the economics of the FaaS program is improving our buyout rate. So today, if you want -- we offer you an opportunity to purchase if you're ready to commit to buy out your Peloton Bike rental but the only way that you can do it is it's a very cumbersome manual process where you have to call our member support to figure out how to do it. And we're about to launch shortly a self-service process to be able to do that. And we're excited about learning how that performs over the holidays, especially because we'll have opportunities for incentives on buyouts over the course of holidays.

Of course, if you think about that, if people try the Bike, they don't want a commitment at first, but then at some point, they're ready to commit, that's great for us because we move them to being a regular all access member down to that different churn curve that we talked about earlier with the much lower churn rate. So there is some opportunity there. Again, that's a learning for us, buyout rate is pretty small today, but we haven't optimized it and we're going to be working on that.

[W. McCarthy, executive]

Now let's imagine a world where it's $500 million worth of rental revenue. So that requires -- that is a different working capital profile than the core business and requires a different capital structure, which is among the reasons that I keep tapping the break to make sure we know exactly what it is we're talking about. If we're going to go flat out to grow this business because I'm fairly confident that if we took all the breaks off -- it would really go. So before you let it loose in the wild, we better know what we're doing, if that makes sense.

[Youssef Squali, analyst]

Yes, that makes total sense. And you think within the next 12 months, we should get to that place where we have enough visibility to let the dogs out?

[W. McCarthy, executive]

Yes.

[Operator]

Thank you. I'd now like to turn the call back over to Peter Stabler for any closing remarks.

[Peter Stabler, executive]

Thanks, everyone, for your time today. We'll talk to you next quarter. Have a good day.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.