Good day, and welcome to the Peloton Interactive Q2 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. James Marsh, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Peloton's second quarter fiscal 2025 conference call. Joining today's call are Peloton Chief Executive Officer and President, Peter Stern; and Chief Financial Officer, Liz Coddington. 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 law. 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 discussion of 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 to non-GAAP financial measures is provided in today's shareholder letter. I'll now turn it over to Peloton's Chief Executive Officer and President, Peter Stern.

Thank you, James, and good morning, everyone. Thank you for joining today's call. It is an honor to be here with you. I'd like to start by thanking Karen Boone and Chris Bruzzo for their leadership during the past few months, inclusive of the quarter we're reporting on today. Both have now returned to their focus on Board duties having left Peloton stronger than they found it. And for that, we share our deepest gratitude. For me, the opportunity to lead Peloton is a dream come true. Fitness has been an important part of my life dating back to my childhood when my mother was a fitness instructor. I've personally been a Peloton member since 2016 and like millions of others, I love this category-defining brand. Few companies deliver a product where the more people consume it, the better they feel. That's Peloton. And the wonderful thing is that the healthier our members become, the more likely they are to stick around and recommend us to others, which makes our business stronger too. That's Peloton's virtuous cycle. The Peloton team has made impressive progress over the last few quarters in putting the company on sound financial footing. Nonetheless, we have a tall hill to climb before we can demonstrate the impact of that virtuous cycle on member and revenue growth. So right now, our primary focus is on executing against and delivering our fiscal '25 financial and operating goals while we prepare to climb that tall hill in fiscal '26 and beyond. We'll share more about longer term strategy as the calendar year progresses. But today, I can share my perspective after one month of official duties at Peloton. Achieving the new purpose we've defined for ourselves, empowering people to live fit, strong, long, and happy, means we need to focus on innovation on new products and experiences that lead to even better outcomes for members, presence in more places, so we can meet members wherever they are. More ways to connect members with Peloton and our uniquely supportive community. And last but certainly not least, improved unit economics and a cost structure that's right-sized for our business. Like every Peloton workout, this will be part inspiration, part perspiration. There's a lot of research that shows that engaging in multiple fitness disciplines improves member outcomes. While Peloton is best known for our cycling workouts, we're a leader in strength too. In Q2, over 2 million unique members completed a strength training, boot camp, Pilates, or yoga workout. Strength drove 735 million minutes of workout time in Q2 and in terms of workouts equaled 75% of our total number of cycling workouts. Variety is good not only for our members, but also for our business as it drives higher subscription retention. Churn is 60% lower for subscriptions where members engaged with two or more disciplines per month versus just one. On the cardio side, we continue to elevate Tread, thanks to our marketing efforts, which enabled us to exceed our Tread portfolio sales goals and achieve higher new subscription attach rates on Tread and Tread+ sales year-over-year in Q2. And with the release of our 10K training program in Q2, Peloton now offers training for all major race distances. Already over 300,000 members have trained for a running race with Peloton. We're also seeing the positive impact of innovative new software features like Pace Targets, which offer running instruction with personalized intensity levels rather than treadmill speed. Nearly 60% of our members who take instructor-led running workouts on our Tread products are using Pace Targets, and our members' running paces are improving as a result. Another way to improve our business is to meet members in more places, for example, at the gym. In December, we launched Strength+, a new app offering non-class strength training programs with audio guidance from expert coaches and a custom workout generator. In Q2, it reached over 220,000 monthly active users, the vast majority of whom were existing All-Access Members. Third-party retail enables us to meet new members in places where they already shop. Our new seasonal partner with Costco in the U.S. drove more Bike+ unit sales than any other third-party retail partner, enabling us to meet many new members at a retailer they trust. And we remain focused on meeting more new members across the globe. We are encouraged by the performance of international hardware sales in Q2 alongside our continued growth in paid connected fitness subscriptions from international markets. Turning to the connections between Peloton's members with the company and with each other. As you may know, Peloton is named after the pack of cyclists who ride closely together to reduce their collective resistance. So we are focused on deepening the connections our 6 million members have with each other and with Peloton. In September, we launched teams, which enables members to share workouts and compete in challenges. 70,000 teams have been created since launch. Then in November, we hosted the 11th annual Thanksgiving Day Turkey Burn for over 50,000 workouts together live. This year's Turkey Burn also brought the feast: our first Thanksgiving live Strength class which became the largest live Strength class in Peloton's history. One of the best ways to measure the strength of our members' connection to Peloton is through member satisfaction and retention. In Q2, we made meaningful improvements in member happiness with Net Promoter Scores improving across all our Bike and Tread products to over 70. As someone who has spent many years in consumer check and services businesses, I can tell you that this level of member satisfaction puts us in truly rarefied air. Part of the reason for this was improvements in the responsiveness and quality of our member support. Our member support satisfaction score was 4.3 on a scale of 1 to 5, up from 4.2 last quarter and meaningfully higher than the 3.1 in Q2 of fiscal '24. From a retention standpoint, we continue to benefit from exceptionally low churn rates with average net monthly paid connected fitness subscription churn of 1.4% in Q2. Liz will discuss our second quarter financials in more detail but I want to take a moment to highlight unit economics and rightsizing our costs because both of these are foundational for us to address before we can return to growth. During this important holiday quarter, we achieved a 12.9% Connected Fitness Products gross margin, reaching double digits for the first time in over 3 years by selling a favorable mix of premium-priced products and demonstrating real discipline by aligning our discounts with the margins of our products. On the cost side, the team has made great progress. We are on track to exceed $200 million of run rate cost savings by the end of fiscal '25, which was the target announced in our May '24 restructuring plan, as well as additional operating expense efficiencies including reduced media spend. The progress made so far shows in our profitability; we achieved meaningful improvements in Q2. Both adjusted EBITDA and free cash flow increased roughly $140 million year-over-year. This enabled us to make meaningful progress deleveraging our balance sheet with net debt decreasing over $280 million or 30% year-over-year. All this is to say that while we are working on our long-term growth strategy for fiscal '26 and beyond, our financial goals for fiscal '25 and continued discipline toward improving gross margins, reducing operating costs, and deleveraging our balance sheet are and will remain top priorities for me. Now I'll turn it over to Liz to discuss our Q2 results.

Thanks, Peter. We are pleased with our second quarter results as we exceeded our guidance on key metrics and continued to make meaningful progress improving unit economics and profitability. We also made progress on our objectives by improving LTV to CAC year-over-year and elevating Tread with target audiences. We ended the quarter with 2.88 million paid connected fitness subscriptions reflecting a net decrease of 21,000 in the quarter. This exceeded the high end of our guidance range by 19,000 subscriptions. Outperformance was driven by favorable net churn partially offset by lower growth additions. Average net monthly paid connected fitness subscription churn was 1.4%. This reflects a 50 basis point improvement quarter-over-quarter, exceeding internal expectations for seasonally lower churn in Q2. Net churn was positively impacted by lower-than-expected subscription cancellations, lower subscription pauses, and higher reactivation. Reactivation performance was positively impacted by marketing efforts targeting churned subscriptions. Q2 net churn of 1.4% also reflects an increase of 20 basis points year-over-year as the benefit from higher reactivation was offset by two main factors. First, in Q2 fiscal 2024, we had a one-time benefit from fewer net pauses as a result of a shift towards shorter pause length options. Second, we continue to see a slight headwind to churn as a result of subscription mix shift towards the secondary market, which has a higher churn profile than subscriptions that purchase their hardware directly from us or our channel partners. Favorable churn was partially offset by lower gross additions due to slightly lower hardware unit sales, a higher mix of Tread portfolio sales, which have lower new subscription attachment rates than our Bike products, and longer delivery times for Tread+ units that delayed subscription activations until Q3. Secondary market activations were in line with internal expectations and represented roughly 40% of total gross additions in the quarter. We ended the second quarter with 579,000 paid app subscriptions inclusive of Strength+ subscriptions, reflecting a net decrease of 4,000 in the quarter. This result exceeded the midpoint of our guidance range by 9,000. Total revenue was $674 million in the second quarter, comprising $253 million of product revenue, a decrease of $66 million or $21 million year-over-year and $421 million of subscription revenue, a decrease of $4 million or 1% year-over-year. Total revenue was $14 million above the high end of our $640 million to $660 million guidance range due to higher-than-expected revenue from both segments. The holiday season is a critical period for Connected Fitness products revenue as Q2 has historically represented 40% of annual hardware unit sales. Connected Fitness products revenue exceeded expectations from higher-than-expected premium-priced hardware sales, predominantly Tread and Tread+, partly offset by slight underperformance in overall unit sales. Due to higher-than-expected Tread+ sales, we faced inventory constraints that temporarily led to longer delivery times, delaying some Tread+ deliveries and associated connected fitness product revenue recognition to the third quarter. We also observed higher-than-expected sales for our low-priced refurbished bike. Offsetting the higher sales of our Tread and refurbished Bike products, we observed lower sales from the midrange price point, specifically the original Bike. Subscription revenue was higher than expected as a result of higher paid Connected Fitness subscriptions. Seasonally higher hardware sales in the second quarter reflected in the revenue mix of 38% Connected Fitness products revenue and 62% subscription revenue. From a sales channel perspective, third-party retail sales were lower than we expected in Q2, which we believe was partly due to our decision to offer lower promotional discounts on the original Bike compared to last year in accordance with our effort to increase hardware margins. Our holiday performance reflects the continued progress we've made in evolving our marketing strategy. In November, we launched our Find Your Power marketing campaign featuring JJ and T.J. Watt. This campaign targeted men and highlighted Tread and Strength products with media directed at live sports. This campaign resonated well with men. In Q2, 42% of Connected Fitness subscription gross additions were men, a 280 basis point increase quarter-over-quarter and a 240 basis point increase year-over-year. In addition to advertising more towards men, our marketing efforts were also focused on demonstrating the full value of the Peloton membership through better education of our extensive offerings. Among the Latino and core female audiences exposed to our holiday campaign, we observed a lift in awareness of non-cycling modalities like walking, running, yoga, and high-intensity interval training. We also saw an increased audience that we consider likely to use Peloton which is a leading indicator of future intent to purchase. Alongside reaching this and introducing additional discipline to our numbers, we continue to make progress on improving our marketing efficiency which we measure from the lens of our LTV to CAC ratio. While our LTV to CAC remains in the range of 1x to 2x, we have made progress year-over-year toward our target of reaching at least 2x and ideally closer to 3x. Our Q2 LTV to CAC was roughly 15% higher than Q2 fiscal 2024. Total gross profit was $318 million in Q2, an increase of $19 million or 6% year-over-year. Total gross margin was 47.2%, 70 basis points above our guidance due to favorable Connected Fitness product gross margin and favorable subscription gross margin, partially offset by revenue mix shift within our Connected Fitness products segment. Connected Fitness gross margin was 12.9%, up 860 basis points year-over-year, primarily driven by a mix shift towards higher-margin products, lower warehousing and transportation related costs, and a reduction in inventory reserves. Subscription gross margin was 67.9%, up 60 basis points year-over-year. Total operating expenses, including restructuring and impairment expenses, were $364 million in the second quarter, a $122 million or 25% reduction year-over-year reflecting the progress we've made thus far toward rightsizing our cost structure. We are tracking ahead of our cost savings targets for fiscal 2025. Sales and marketing expense was $153 million, a decrease of $78 million or 34% year-over-year, primarily from a 38% decrease in advertising and market spend and lower personnel-related expenses. General and administrative expense was $131 million, a decrease of $29 million or 18% year-over-year, primarily driven by a decrease in settlement costs, professional services fees, and personnel-related expenses. Research and development expenses were $60 million, $20 million or 25% year-over-year primarily driven by lower employee benefit and contractor expenses. In Q2, we recognized $20 million of impairment and restructuring expenses, of which $17 million was non-cash. The non-cash charges were primarily related to asset write-downs in relation to retail showroom exits. The cash charges consisted of $3 million of severance and other exit and disposal costs as we continue executing on our restructuring efforts. Adjusted EBITDA was $58 million in the second quarter, which was $28 million above the high end of our guidance range and a $140 million improvement year-over-year. We generated $106 million of free cash flow in the second quarter, an improvement of $95 million quarter-over-quarter and $143 million year-over-year and our fourth consecutive quarter of positive free cash flow. We ended the quarter with $829 million in unrestricted cash and cash equivalents, an increase of $107 million quarter-over-quarter. We continue to make progress towards deleveraging our balance sheet as net debt reduced $281 million or 30% year-over-year. Overall, our second quarter performance reflects our continued progress in re-architecting our cost structure while maintaining our leadership position within the Connected Fitness category. It also reflects the strength of our high retention, high gross margin subscription business. Next, I'd like to provide context on our financial outlook for the third quarter and full year fiscal 2025. Following our outperformance in Q2 relative to our previous guidance, we are raising our full year fiscal 2025 guidance midpoint across our key metrics, including ending paid connected fitness subscriptions, total revenue, total gross margin, and adjusted EBITDA. We are prioritizing these metrics along with delivering free cash flow. We are raising our full year fiscal 2025 guidance for paid Connected Fitness subscriptions by 55,000 at the midpoint to a narrower range of 2.75 million to 2.79 million. This increase reflects our expectations for lower net churn due to the continued favorability across subscription cancellations, pauses, and reactivations, partly offset by our expectations for lower growth additions due to lower hardware sales and a mix shift into Tread products, which have lower new subscription attachment rates than our Bike products. Our guidance for fiscal 2025 ending paid Connected Fitness subscriptions of 2.85 million to 2.87 million reflects our expectations for seasonally lower hardware sales trends following the holiday season, and for our average net monthly paid Connected Fitness subscription churn rate to remain relatively in line with the second quarter. Our full year fiscal 2025 guidance range for paid app subscriptions of 550,000 to 600,000 remains unchanged. Our outlook for third quarter fiscal 2025 ending paid app subscriptions is 560,000 to 580,000. Our full year fiscal 2025 outlook for total revenue of $2.43 billion to $2.48 billion reflects a now lower range and an increase of $5 million at the midpoint. This reflects our expectations for favorable subscription revenue from higher paid Connected Fitness subscriptions and favorable Connected Fitness products revenue from higher Tread portfolio sales, partly offset by lower Bike portfolio sales. Q3 revenue guidance of $605 million to $625 million reflects our expectations for seasonally lower hardware sales compared to the second quarter. We are increasing our full year fiscal 2025 outlook for total gross margin to 50% reflecting a 100 basis point increase from prior guidance from expected favorability in Connected Fitness Product segment gross margin and higher subscription segment gross margin as well as a slight revenue mix shift toward our subscription segment. Our third quarter total gross margin guidance of 50% reflects an expected sequential increase in gross margin of 280 basis points as a result of the seasonal mix shift toward our subscription segment in the third quarter. We are raising our full year fiscal 2025 guidance for adjusted EBITDA by $60 million, a range of $300 million to $350 million, which reflects our expectations for continued improvements in profitability largely due to gross margin expansion and continued operating cost savings. Our third quarter adjusted EBITDA guidance of $70 million to $85 million reflects a sequential increase of $19 million at the midpoint, mainly due to seasonally lower sales and marketing expenses following the holiday season. We are also raising our fiscal 2025 free cash flow target to at least $200 million, an increase of $75 million from our previous target. This reflects faster-than-expected improvement in operating expense reduction, a higher degree of confidence in full year hardware sales performance following the holiday season, and inventory-related net working capital efficiencies. We expect to continue making meaningful progress in deleveraging our balance sheet through fiscal 2025 and beyond. Before we open for Q&A, I'd like to hand it back to Peter to talk about what makes Peloton so special and gives us such optimism for the future.

Thanks, Liz. You and the team should be proud of the work you all accomplished in Q2. There are lots of companies that make fitness equipment, dozens of fitness apps, countless trainers, but there is only one Peloton. That's because we combine the best hardware, the best software, and the best human coaches with the world's most supportive community. That's our magic formula. And when we get it right, we are unstoppable. And as I just discussed, winning is about focusing on what matters most: improving outcomes for our members, meeting them in more places, and deepening the connections between them and Peloton as well as with each other. And that will require operational excellence and financial discipline, and attention to the details that raise our performance for members and as a business. This will be hard work. As Jess Sims often says, never easy, always worth it. With the energy, momentum, and excitement I've seen from Peloton team members in the few short weeks since I started, I am more optimistic than ever about the future of Peloton. With that, Liz and I are delighted to answer your questions.

Thank you. Our first question will come from Simeon Siegel with BMO. Your line is open.

Thanks. Hi, everyone. Good morning. Peter, honored to welcome you to the fun that is analyst Q&A. So welcome. I was curious how you're thinking about the path to growth versus the ongoing improvement in profits? I know it's still early days for you, but just curious if you have any thoughts on any timeline you'd want to share in terms of your views as you dig in. And then just as a follow-up, I'm not sure if this is for you or for Liz, but you guys have been doing such a nice job in improving profitability in recent quarters. Could you share any thoughts on continuing that profitability improvement if and when you do decide to start investing for growth?

As you know, I've been at Peloton for just over a month, so I'm not ready to talk about when or the details of how we plan to turn the business back to top line growth. But I can tell you what we're doing to earn the right to grow, share my belief that we will and suggest where to look when we do. So first, we're setting the stage to be able to grow while ensuring we can deliver meaningful adjusted EBITDA and free cash flow by rightsizing our expenses, which are down 25% year-over-year in Q2, improving our equipment gross margins, which are back up to double digits for the first time in years, and increasing our LTV to CAC ratio, which has improved about 15% year-over-year. Doing all this is reducing our net debt and our leverage ratios which means that we'll have the financial capacity that we need to make investments that have strong returns. But I don't want to leave you hanging on the growth question. So I'll just sort of tell you where to look and the levers. We're looking to improve member outcomes through innovation on new products and services. If we get that right, then we have the potential to pull all three levers of growing members, growing revenue per member and increasing member lifetimes. The second is meeting members in more places, which also allows us to pull the levers of growing members and revenue per member. Lastly, deepening the connection that we have with our existing members has the potential to lengthen the lifetimes that we have with our members which are already impressively long. So again, no specifics today, but that's where to look.

Sure. And I'll take the question about the continuing profitability improvement. As you just heard us say a few minutes ago, we did just raise our full year adjusted EBITDA target for FY '25 by $60 million. That reflects continued improvements in profitability that we expect largely due to our gross margin expansion that we talked about as well as continued operating expense savings. We are on track to exceed our $200 million annualized run rate cost savings plan by the end of fiscal '25 that we committed to in our restructuring plan back in May of 2024. We see further opportunities for cost optimizations and we have built a culture of cost discipline into our company. We know that our OpEx as a percent of revenue is still too high overall for the long term and especially that's true within our G&A area. We do see multiple opportunities to optimize it. A couple of examples include things like we still have a lot of tech debt where we're continuing to solve technology gaps inefficiently with manual work. We're going to work to eliminate that. Another example would be reducing our corporate real estate expenses over time as we see opportunities to do that.

Thanks, Simeon. Operator, go ahead with the next question please.

One moment please. And that will come from the line of Shweta Khajuria with Wolfe Research. Your line is open.

Thanks a lot for taking my question. I have two please. Well, so you are starting to make progress on deleveraging. Can you please highlight some of the milestones on your plan, deleveraging plan from here and maybe some of the tangible and intangible benefits of deleveraging? And then the follow-up question is on the tariffs. Do you expect to see any meaningful impact from tariffs, if levied on your P&L?

Thanks, Shweta. I'll start with the question on deleveraging. The increase to our minimum free cash flow target to at least 200 million in fiscal '25 reflects a tremendous improvement of over 200 million year-over-year. If you go back to FY '23, it’s over a 670 million improvement and that improving free cash flow has really enabled us to deleverage. Our reduction in net debt, as we talked about earlier of 285 million or 30% year-over-year in Q2. If you pair that lower net debt with growing trailing adjusted EBITDA, that's helping our reported leverage ratio to decline from 7x in Q1 to 2.7x in Q2. In terms of tangible benefits, the improvement to our leverage ratio has enabled us to achieve a first lien net leverage ratio below 5x, resulting in a 50 basis point step down on our term loan, equating to roughly $5 million of annualized interest expense savings going forward as long as we continue to hit that threshold each quarter. On the intangible side, the improvements we're making to our balance sheet are lowering risk and positioning us well for future sustainable and profitable growth. Over time, we do expect this will lower our cost of capital and give us more optionality around capital allocation.

Why don't I jump in for a moment on the tariff part of your question, Shweta, and then I'll pass it back to Liz for a bit more detail. As I'm sure you all know, the questions around tariffs really represent a rapidly moving target. We're closely monitoring it, I'm sure, alongside all of you. The good news here is that no Peloton branded hardware products are subject to the China or if they were to re-emerge from Mexico or Canada. Most of our revenues come from subscriptions. Liz can provide a little more color here.

While the tariffs on imports from Mexico and Canada are currently paused, if all of the tariffs went into effect at the current proposed tariff rates, we would expect to see roughly a 1% impact on our connected fitness products and that's mainly related to Peloton apparel and Precor. That estimate also assumes no mitigation. For China only, our unmitigated impact is well under 1% of connected fitness COGS.

Very helpful. Thanks, Peter. Thanks, Liz.

Thank you. One moment for our next question. And that will come from the line of Curtis Nagle with Bank of America. Your line is open.

Good morning. Thank you. I wanted to focus on the free cash flow, particularly the outperformance in the second quarter and the projected rate for the full year. I'm assuming that's mainly due to the additional flow-through from the higher EBITDA, along with some efficiencies in working capital. Could we start with that as our first question? I also have a follow-up.

Sure. Let me talk a little bit through our free cash flow. Our Q2 free cash flow of 106 million did exceed our internal expectations and some of the benefits that we saw were permanent and some of them are timing. On the timing front, we saw a significant amount of favorability associated with the timing of invoices for music and media vendors that we do expect to pay in Q3. Our outperformance in Q2 adjusted EBITDA also benefited free cash flow, driven by favorable revenue and faster than expected operating expense reductions as we've talked about earlier. I also mentioned that we raised our guidance midpoint for adjusted EBITDA by $60 million, and we expect most of that to flow through free cash flow. We did see a benefit in net working capital from reducing inventory production levels. Previously, when we set guidance last quarter, there was some uncertainty around how much we could optimize production. Our full year guidance or target of at least 200 million of free cash flow reflects those impacted inventory production improvement to net working capital and faster than expected operating expense savings. I do want to point out that the 200 million minimum free cash flow target implies roughly $87 million in free cash flow in the second half of FY '25. That's our minimum expectation. Our goal is to achieve more than this.

Awesome. Good to hear. Peter, maybe a question for you, just churn numbers were certainly encouraging. I guess, just in terms of maybe a little bit more what's driving it? I mean it sounds like it's results of some of these engagement efforts. Maybe you're seeing a leveling off across the sub-base more generally. Just digging into that and then just what's assumed in the guidance, maybe a little more specifically, I think churn is lower. But yes, I'd love to hear your thoughts on that?

Yes, Curtis, thanks for asking. I like to talk about our churn because our subscription business continues to show remarkable consistency and resilience with that exceptionally low average net monthly churn rate of 1.4% for connected fitness subscriptions. So what's going on here? One, like all the subscription businesses I've ever seen, there's a tenure effect here. We have a great deal of long-standing and highly loyal members, and so with the passage of time, that benefits our churn. The second thing is looking at engagements. Peloton is that rare brand that makes you healthier the more you use it. One of our goals is to get more people using our product more and we're pleased to see here some growth in our engagement levels in terms of the average monthly workout time for ending connected fitness subscription, if we look at that on a year-over-year basis. We have a healthy customer base. We've got healthy usage. As I mentioned earlier, we have strong NPS scores and that all adds up to healthy churn. Liz maybe you want to provide a little more color.

I can provide more insight on our outlook. While we don't specifically guide on churn, I can share that we expect our average net monthly paid connected fitness churn rate in Q3 to remain consistent with Q2. For the full year, we anticipate a modest year-over-year increase in our churn rate. As previously mentioned, we're seeing a shift in our subscription mix towards the secondary market, which has a lower retention rate compared to subscriptions where customers buy their hardware directly from us. Additionally, we've talked about the one-time subscription pause benefit in fiscal '24 that won't occur again, and that is presenting a slight challenge for us. However, this is somewhat mitigated by the excellent efforts of our marketing team in reactivating lapsed subscriptions.

Got it, helpful. Thank you.

Thanks, Curtis.

One moment for our next question. And that will come from the line of Arpine Kocharyan with UBS. Your line is open.

Hi, thanks for taking my question. Peter, welcome to Peloton. Great to hear you on the call. You talked a lot about improving churn. I was wondering, is it fair to assume that this better than expected churn which is probably not as much of a surprise to you as to us given the efforts you've taken to get there. My question is how should we think about potential price increases in light of improving churn? It seems like you feel better about churn today than you did 3 months ago? First, is that a fair assumption? Second, how should we think about sort of price increases in the subscription business in light of improving churn? Then I have a quick follow-up.

Hi, Arpine. Thanks for the question. We feel good about the churn that we just reported and Liz just talked you through a little bit about how we're thinking about it for the rest of the year. With regard to pricing, to state the obvious, pricing is a powerful lever. With every change up or down, it essentially drops straight to the bottom line. So we're taking a hard look at pricing alongside everything else in our business. As a reminder, in Q1 we took steps to improve our unit economics by raising the price of our rower in North America and we also raised prices for Bike and Bike+ in our international markets. This holiday season, we also improved our hardware unit economics by reducing the number of days that we were on promotion and by structuring our promotional strategy to better align with the margin profile of our products. All of that added up to greater discipline as well as some terrific learning opportunities for us around pricing. I think a question that might be on everybody's mind is around subscription pricing. We know how important subscription pricing is to our members as well as to the performance of the business and we won't take any actions there lightly. Beyond what I've shared so far, that's about all we have to say today, but we'll share more about pricing when we're ready to.

Wonderful. Great. Thank you. Peter, I was wondering if you could share your initial impression of where you see low-hanging fruit in terms of further cost optimization. Do you feel that that’s first in hardware COGS versus more in sort of OpEx and the obvious sort of G&A that you've talked about before in terms of being higher than it's supposed to be? Where do you see that low-hanging fruit as you sort of look at the business with fresh eyes?

Thanks, Arpine. Let's talk a little bit about this before. The important thing for us to note is that we're being very aggressive regarding costs. We are on track to deliver the $200 million in expense savings that we laid out just a few months ago. We also think that there are some opportunities, both in the IT space, as an enabler of reducing manual effort from our employees, as well as in areas such as IT licenses. Liz shared with you the work that we're doing to reduce our corporate real estate expense as well. That does feel like relatively low-hanging fruit, although those savings do take time to materialize due to our contractual commitments. We're planning on achieving those savings, but they'll materialize when it makes sense. In terms of free cash flow, you heard Liz's good news about the $5 million step down in our interest expense—this is real money—and that's low-hanging fruit it might not have felt low hanging a year ago. From where we are right now, that's an immediate benefit that the team has achieved due to their impressive work on deleveraging.

Thank you very much.

Thank you. One moment for our next question. And that will come from the line of Lane Czura with Goldman Sachs. Your line is open.

This is Eric Sheridan from Goldman Sachs. Hi, Peter. I had a quick question on brand versus direct marketing investments and generating demand. How do you think about the mix of those marketing investments over the medium to long term and where there could potentially be a higher return on marketing spend as you think about deploying those growth investments against your platform goals? Thank you.

Thanks, Eric. The fitness category, in particular, is a category where you do have to remind people to get back into the market and do the right thing for themselves. I don't think you can anticipate that this is a business where we're suddenly going to be able to do away with a marketing spend. I think we've demonstrated the ability to do some brand marketing, for example, our Watt Brothers advertising and move the needles that we intended and promised to move, for example, with the increased uptake that we saw of our products by men. That being said, we recognize that brand marketing is more difficult to measure and justify than performance marketing. So what does that mean? With regard to brand marketing, Lauren and our team are being really disciplined about doing things like media mix modeling and holdout areas for us to try to determine the real impact of our brand marketing spend—know which half works versus which half doesn't work so that we can be as efficient as possible with that. Secondly, we are doing as much of our marketing spend in the performance category where it's highly measurable as we possibly can. The good news is that when you look at the sum total of our marketing spend, we're getting more effective and more efficient. Our reduction in marketing spend in Q2 exceeded the reduction in our Connected Fitness sales by a meaningful amount. That also resulted in improvement in our LTV to CAC ratio. Again, not where we want it to be long term, but material progress toward our goal of exceeding a ratio of 2:1. We're getting better and putting in place the tools and the discipline to achieve further improvements. I think you'll see us balance performance and brand marketing in a thoughtful way going forward.

Great. Thanks, Eric. Operator, we have time for one more question. And our final question will come from the line of Lee Horowitz with Deutsche Bank. Your line is now open.

Thanks for sneaking me in. Maybe, Peter, we appreciate the growth plans for '26 and beyond are still in the works. Can you maybe talk at a high level as to what you see as the most obvious levers you can pull in order to stabilize sort of the gross addition declines that you've seen worsen to start off the calendar year? And one follow-up to Liz, if I could.

Lee, the most important thing for us to do in the near term is to super serve the members that we have. We've made real progress on that. If you look at the improvement, for example, in our MSAT scores, which year-over-year remember, this is a 5-point scale, have gone up from 3.1 to 4.3. We have a higher target than that going forward. That's a situation where we're doing everything we can to ensure that every new customer, particularly, loves us as much as the ones that we've retained in the past. We're also working hard in the near term to launch new capabilities that add value to our existing members. As I said in the remarks, when we see members engaging in 2 or more disciplines, we have a 60% reduction in our churn rate. We're working really hard to get people to embrace the Strength modality, which based on a lot of research is a terrific addition to a cardio program. These are the lowest-hanging fruits in the next few months for us to retain that customer base that we worked so hard to acquire.

No. The only thing that I would say is, to your point, is about retaining the subscribers that we have and then also for those that are joining us new, making sure that they get off to a really great start and are able to engage because we do know if they engage early, that will predict their subscription for a longer period of time. That would also manifest in lower churn for the subscribers who are joining us as new growth additions.

Really helpful. And maybe one just follow-up on Connected Fitness gross profit, gross margin sort of reaching that double-digit sort of milestone for the first time is a great hurdle to clear, but we think that you still are always away from where you think this can go over time. Any context as to sort of where you see the upper band on Connected Fitness product gross margin and the levers you have there to sort of pull those higher going forward? Thanks so much.

Our improvements in Connected Fitness gross margin are due to multiple dimensions to that. Some of that is mixed into some of our more premium products that do have a higher gross margin and then some of that is also just being more optimized in how we offer discounts. We made some pricing changes as well. We can continue to pull the levers over time. We won't give you a specific target for that, but we know that there is more opportunity to expand them. We expect for the remainder just to clarify, for Q3 and the full year for fiscal '25 to maintain Connected Fitness product gross margins primarily because we are shifting towards those higher-margin products and being really disciplined about our promotions.

Great. Thanks, Liz.

Thank you. I would now like to turn the call over to Mr. Peter Stern for any closing remarks.

Before we end the call, I want to acknowledge that Peloton has a very special base of investors, because many of you are also our enthusiastic members. In addition to being the CEO, I'm also an enthusiastic member. Let me leave you with a few thoughts that bridge the two ways we relate to Peloton. I talked earlier about improving member outcomes. One of the ways we’re doing this is by providing personalized coaching. If you haven't already tried a power zone ride, pace targets on Tread, or the personalized plans feature we released last week, please do so. These are already delivering for our members and they're a taste of the future. If you haven't already tried a Peloton Strength, boot camp, Pilates, or yoga class, there's no time like the present. I also talked about meeting members in more places. There are many ways Peloton shows up in the physical world. One way that I'm excited about this month is in the virtual one. Our appearance in Marvel Studios' Captain America: Brave New World in theaters next Friday. While you wait for that, keep an eye out for some special workouts to help you get fit like a superhero. Finally, I talked about making members for life and the importance of connecting our members with each other. We launched public teams last week, and I'd encourage every one of you to go on our app and join one. If you’re an analyst, please join James' team together, we go long, because we know that being part of a supportive community helps people establish and stay with healthy routines. You have your assignments. Thank you for joining today's call, and I'll see you on the leaderboard.

Thank you all for participating. This concludes today's program. You may now disconnect.