Earnings Call Transcript
PELOTON INTERACTIVE, INC. (PTON)
Earnings Call Transcript - PTON Q3 2021
Operator, Operator
Greetings and welcome to the Peloton Interactive Third Quarter 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterward, there will be a question-and-answer session. This conference is being recorded Thursday, May 6, 2021. And now I would like to turn the conference over to Peter Stabler, Head of Investor Relations. Please go ahead.
Peter Stabler, Head of Investor Relations
Thanks, Scott. Good afternoon, and welcome to Peloton's fiscal third quarter conference call. Joining today's call are John Foley, our Co-Founder and CEO; President, William Lynch; and CFO, Jill Woodworth. 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. As a reminder, our question-and-answer session during today's call is for our covering analysts only. 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 to non-GAAP financial measures is provided in today's shareholder letter. With that, I’ll turn the call over to John.
John Foley, CEO
Thank you, Peter. Good afternoon, everyone. Thank you for joining us today. I want to start by giving you an update on recent events regarding our treadmill products. As a company, we believe strongly in the future of at-home connected fitness. We know we have a responsibility to be an industry leader in product safety. We are a Members First organization, and that means for all of us at Peloton, the safety of our member community comes first. I want to be clear though, Peloton made a mistake in our initial response to the Consumer Product Safety Commission's request that we recall our Tread Plus product. We should have been more open to a productive dialogue with them from the outset. As a Members First organization, promptly stopping the sales of our products while we cooperated more closely with the CPSC was something we should have considered sooner. For that, I apologize. Given our goal of being the largest and safest home fitness brand in the world, yesterday we took an important step initiating voluntary recalls and stop-use directives for our Tread Plus and Tread products in collaboration with the CPSC. That was the right decision at this time. We are working to build and introduce even more safety measures and to help set new industry safety standards for all treadmills. We want to provide a safe, world-class fitness experience for our members who want the convenience and value of working out from home. Specifically, our voluntary recall involves immediately stopping sales of both products in all markets where they were available. We will also postpone the launch of Tread in the U.S., which was previously scheduled for May 27. With regard to the Tread Plus, our work with the CPSC involves building an extra layer of safety features for that product. This will include a digital passcode that will further protect against unauthorized use, a feature that we expect to deploy via an over-the-air software update in the coming days. We will be working hard in the coming weeks and months to develop additional physical hardware to further enhance the safety of Tread Plus. We will, of course, share details as we develop a plan and a timeline for these additional safety features. But bear in mind that hardware features take time to develop, test, and manufacture, and in this case, the CPSC will need to approve our proposed enhancements. With regard to the Tread, which is our new lower-priced treadmill product that features a low-profile traditional belt design, we are also temporarily stopping sales. As a reminder, this product was only available in Canada and the U.K. And as we've stated previously, we have been pleased with the reception and reviews. In addition, a small number of Tread units were made available to select U.S. members over the past few months in a controlled rollout to gain additional insights and feedback on the product ahead of launch. While the new Tread has been well-received, there have been some minor quality issues related to how the tablet console is attached to the Tread. The console, or touchscreen, attaches to the Tread with screws, and in a handful of cases, we've received reports of these screws loosening, causing the console to detach from the unit. We notified the CPSC and the safety regulators in the U.K. and Canada last week about this issue and will be working with them to review our proposed solution. We expect to offer the Tread for sale as soon as the CPSC's full review of the product is completed. While this process typically takes six to eight weeks, it could take longer, so we can't offer an on-sale or revised launch date at this time. In the meantime, we will continue to produce the Tread and Tread content in anticipation of our Tread launch, as well as to support our nearly 900,000 digital subscribers. The passcode we are developing for the Tread Plus will also be released on the Tread by the end of the fourth quarter of fiscal 2021. As the largest home connected fitness brand in the world, we want to be leaders in safety. Our goal is to have the best safety features for treadmill products on the market, the most engaging content from our roster of world-class fitness instructors, and the most innovative software that unites our community. While there will be a short-term financial impact due to the steps we're taking, we are putting and will continue to put our members first. In a moment, Joe will review how these actions are expected to impact our financial outlook for Q4. Now turning to some other recent announcements. On April 1, we officially closed our purchase of Precor. The Precor team adds greatly to our already talented supply chain, manufacturing, and R&D teams. In addition, we expect that Precor will help us significantly grow our commercial opportunity in hospitality, colleges and universities, corporate campuses, and multi-unit residential buildings. To our Precor teammates, a hearty welcome; we're thrilled to have you join us. The integration process with Precor is advancing according to plan, and we look forward to offering you updates in the future as we refine our go-to-market strategy. And to be sure, we continue to expect to produce Peloton products, both bikes and treads, here in the U.S. by the end of this calendar year. We are also excited to share some great new features announced at our virtual homecoming celebration last weekend. As many of you know, homecoming is our annual member community event, with this year's event bringing together over 200,000 Peloton members for a three-day weekend featuring special live classes and community discussions. Newly announced features include a major expansion of Peloton programs, which are guided fitness programs designed to help members stay on track to achieve specific fitness goals with weekly progress reports. We also launched Strive Score, which is a personal, non-competitive metric based on your heart rate. Using a compatible heart rate monitor, Strive Score gives you credit for all the work you do with Peloton, even when you're off the bike or tread, engaged in floor-based exercises. With many members taking scenic rides and runs, we're also very excited to announce a major upgrade to our scenic experiences. And finally, we will be introducing a pause button for our on-demand classes, one of the most member-requested features for years. We know sometimes life's other duties intrude on your workouts, and while maintaining the integrity of the leaderboard, members will soon be able to pause the workout and seamlessly pick up where they left off. Member reception of these announcements has been great, and we're hard at work building more features to motivate and delight our member community. In fact, from a hardware, software, and content standpoint, we've never been more excited about our future roadmap. Fiscal Year 2020 is going to be a year of major innovation for us. Now, I'll hand it over to Jill to review our financial results and updated outlook.
Jill Woodworth, CFO
Thanks, John. I will start with a review of our third quarter results. In Q3, we generated total revenue of $1.262 billion, representing 141% year-over-year growth, exceeding expectations across all geographies. The primary drivers leading to our revenue outperformance versus guidance were significantly higher deliveries than expected, particularly for bike, meaningfully better than expected churn, lower than anticipated financing rates, and strong accessory sales. Last quarter, in order to reduce wait times for our products, we announced substantial incremental investments in expedited shipping of our products from Taiwan. Today, we’re pleased to report that we have made significant progress. Wait times for our original bike are back to pre-pandemic levels of one to three weeks. Wait times for our Bike Plus are also coming down, and we expect to get to the same places for bikes by the end of Q4. We added a record 414,000 net connected fitness subscriptions in the quarter, bringing our end-of-quarter connected fitness membership base to 2.08 million, up 135% year-on-year. Our better-than-anticipated net adds were driven by our expedited shipping investments, which accelerated Bike and Bike Plus deliveries. Net adds were also helped by our low average net monthly connected fitness churn of 0.31%, the best we've seen in six years. Our record low churn is due in large part to the efforts that we all make at Peloton day-in and day-out to drive engagement. In Q3, we averaged 26 monthly workouts per connected fitness subscription versus 17.7 in the year-ago period, an increase of 47% year-over-year. Our remarkable workout growth is being driven by our differentiated world-class instructors and content, the continued introduction of new modalities of fitness, and ongoing software enhancements such as sessions, stacks, classes, and most recently the rollout of our class scheduling features. As a reminder, prior to the COVID-19 pandemic, Q3 historically represented our highest engagement quarter of our fiscal year. So we expect typical seasonal patterns to reemerge as we come out of COVID and enter warmer summer months. As with recent quarters, we saw particularly strong growth when it comes to our strength classes, which again posted the highest year-on-year engagement growth of any of our floor-based modalities. As of March 31, switching gears to digital, we had 891,000 digital subscribers at the end of Q3. We're thrilled with the growth of Peloton digital. We can think of no better way to introduce fitness-minded consumers to the amazing quality, breadth, and depth of our content offering. During the past year, we've dedicated more resources to building a powerful digital to connected fitness upgrade path, and we are currently driving the highest monthly upgrade rates we have ever achieved. Trends suggest our new digital cohorts will likely upgrade to connected fitness memberships at a significantly higher rate than the 10% figure we've discussed in the past. As a testament to this progress, we're now seeing over 20% of our digital subscribers ultimately upgrade to connected fitness, and that number continues to increase. As our digital membership base grows, we expect our improving upgrade rates to become an increasingly large driver of our connected fitness sales. Moving to gross margin, gross margin for the quarter was 35.2%, in line with guidance. Connected fitness product gross margin was 28.4%, and the biggest driver of our margin compression over last year was the outsized one-time shipping investments we discussed last quarter to reduce our order to delivery timeframe. Additionally, we had margin compression due to our September 2020 price reduction of our original bike and a modest impact from a mix shift of sales to our treadmill products. Subscription gross margin was 64.6%, and subscription contribution margin was 68.4% ahead of expectations as we continue to leverage fixed costs associated with content production. Please note that in Q3, we saw a one-time benefit of approximately 350 basis points associated with reserve adjustments and the reclassification of certain costs to operating expenses. Total operating expense as a percent of revenue was 36.3%, compared to 58% in Q3 last year. Our strong sales growth drove significant operating expense leverage in the quarter, and we also benefited from a shift of some marketing investments into Q4. Sales and marketing expense represented 16.5% of total revenue versus the prior year period of 29.5%. We resumed marketing in the second half of the quarter and continue to ramp in Q4, given our improved OTB position. G&A expense was 14.3% of total revenue versus 24.2% in the prior year. We leveraged expenses even while continuing to make significant investments in our teams and systems. R&D expense was 5.5% of total revenue versus 4.3% in the year-ago period. We will continue to prioritize investments in R&D as we build best-in-class hardware and software teams, both organically and through acqui-hires. With better than expected sales in operating expense leverage, our fiscal year '21 Q3 adjusted EBITDA was $63.2 million, representing an adjusted EBITDA margin of 5%. As I will discuss in a moment, most of the outperformance relative to our $10 million adjusted EBITDA guidance for Q3 was due to the pull forward of deliveries that we had expected to make in Q4. Net loss for Q3 was negative $8.6 million, or a loss of $0.03 per basic and diluted share. Lastly, we ended the quarter with $2.7 billion of liquidity and have additional liquidity in the form of an untapped $285 million credit facility. As a reminder, our balance sheet benefited this quarter from approximately $900 million in net proceeds from our convertible note offering completed in February. Now onto our outlook. With the recent developments John mentioned with the Tread line, it is more difficult than usual to predict our financial results. But based on what we know today, we are updating our Q4 outlook. Our revised revenue guidance for Q4 is $915 million. We estimate the revenue impact of the Tread and Tread Plus recall will be approximately $165 million. The breakout of this impact on revenue is as follows: One, we currently estimate that ceasing Tread and Tread Plus deliveries will negatively impact revenue in the quarter by approximately $105 million. Two, we are offering both Tread and Tread Plus members the ability to return the product for a full refund. We currently estimate an increase to our return reserves for this in Q4 of about $50 million. And lastly, three, we will continue to produce Tread content as John mentioned, and in conjunction with the stop-use directive, we will be waiving monthly all-access subscriptions for both Tread Plus and Tread members for three months. We estimate that this will impact subscription revenue by approximately $10 million in Q4. Here are a few additional drivers of revenue guidance for Q4. We mentioned previously that we reduced our delivery backlog more than expected in Q3. And as a result, we pulled forward approximately $125 million of revenue that we had expected to fall into Q4. Secondly, we closed Precor on April 1, and so Precor will be consolidated into our Q4 financials. Our Q4 revenue estimate includes $60 million of Precor revenues. In the context of these events, and also the continued reopening in the U.S., we thought it would be helpful to offer some overall commentary on our bike sales outlook. As anticipated, global Bike and Bike Plus sales have been tapering from COVID highs, and we're expecting a gradual return to historical seasonal sales trends. However, our unit sales remain significantly higher than pre-COVID levels. We expect global Bike and Bike Plus unit sales in Q4 fiscal '21 to be over 3x higher than they were in Q4 of fiscal '19, two years prior. This continued robust growth of bike sales is the result of the benefits of our better-best bike portfolio strategy, including our bike price reduction last fall. Our international business is growing at a faster rate than the U.S., our scale and growing member base driving continued strong word-of-mouth. And of course, the resumption of media spend. We believe all of this sets us up very well for continued strong bike portfolio growth in fiscal '22. We have ramped media investments in recent weeks coinciding with our greatly improved order to delivery outlook. After a long period of little to no marketing activity, we are very eager to build on our connected fitness leadership position. And this is particularly important as our demographic profile of our membership base continues to broaden. With our revised Q4 revenue outlook, we now expect full year fiscal '21 total revenue of $4 billion, inclusive of the contribution of $60 million from Precor. For fiscal year '21, the expected ending connected fitness subscription is 2.275 million, consistent with our prior guidance, taking into account our estimates of returns for treads and tread plusses. For Q4, we expect average net monthly connected fitness churn under 0.85%. This is an increase from Q3 due to typical seasonality observed in the warmer months of the year. Please note that our churn estimate excludes the impact of expected churn from those members who return their tread or tread plus, as well as the impact of the subscription waivers. Moving on to profitability metrics in Q4, we expect Q4 gross margin of approximately 35%, comprised of a connected fitness product gross margin of approximately 21%, and a subscription contribution margin of approximately 68%. We expect connected fitness gross margin in Q4 to be impacted by the following unusual items. As part of the recall, we will incur logistics costs to pick up return treads and tread pluses. We have also offered our existing tread plus owners the option to have us move the tread plus to another room within their home. These costs combined with the increase in return reserves are expected to reduce connected fitness product gross margin this quarter by approximately 900 basis points. A portion of these costs will also impact operating expenses. The second item is expedited shipping; in the quarter, expedited shipping investments are driving year-on-year deleverage of our connected fitness product gross margin as well. The port congestion issues we have discussed on recent calls remain acute, and we have recently allocated an additional $15 million in expedited shipping expense to our Q4 plan, in part due to the Suez Canal blockage. Based on our current forecasts, we do not anticipate meaningful expedited shipping expenses in fiscal '22. Lastly, I'll note that connected fitness margins continue to be impacted by the September 2020 price reduction of our original bike. Moving on to subscription margin, we expect a subscription contribution margin of 68%. We continue to expect leverage against our fixed costs associated with content production, but the one-time tailwinds in Q3 that I previously discussed are not anticipated to return in Q4. Over the long term, we continue to expect our subscription contribution margin to exceed 70%. Turning to operating expenses, our planned sales and marketing spend in the back half of the fiscal year is now weighted to Q4. This is due to a shift in the timing of media and production spend. For fiscal year '21, we continue to expect sales and marketing expense to be materially lower as a percent of revenue when compared to fiscal year 2020. With regard to G&A, we've accelerated some of our systems and people investments primarily in supply chain and member support functions. Given the lower revenue expectations in the quarter and the increased spend, we expect G&A to be greater than 20% of revenue but continue to expect significant leverage in G&A in fiscal '22. We also continue to invest heavily in R&D and have accelerated certain product development costs, including through engineering acqui-hires. With these investments in people and technology, they will de-leverage our R&D expense base, but they will accelerate the development of new products and features. The increased spend combined with the lower revenue this quarter will result in R&D reaching nearly 10% of revenue. For adjusted EBITDA in Q4, we now expect negative $60 million, including Precor adjusted EBITDA of negative $5 million. Adjusted EBITDA will be negatively impacted by the loss of sales of Tread and Tread Plus for the remainder of Q4 and the loss of revenue from subscription waivers. We estimate these items combined will negatively impact Q4 adjusted EBITDA by approximately $16 million. All other costs associated with the recall will be excluded from adjusted EBITDA, such as the increase to the return reserve, Tread inventory write-down, the logistics costs associated with refunds and moves, and the subscription waiver costs of service. This all represents a revised guide for adjusted EBITDA of approximately $240 million for fiscal year '21. We have done our best to provide our current estimate of the impact to Q4, but obviously, these impacts are subject to change.
John Foley, CEO
In closing, I'd like to reiterate that the safety of our member community is our first priority. And through working with the CPSC and others, our aim is to have the safest products on the market while delivering the best experiences and value in fitness. We will be working diligently against these goals, and we remain optimistic about our business, strategy, and team short, mid, and long-term. The underlying growth of our scale bike business is bringing thousands of new connected fitness members onto our platform daily, building a community million strong that is arguably our greatest asset. We will continue to innovate for our member community, and we're particularly excited about our fiscal year '22 roadmap, when we plan to introduce new hardware, software features, languages, and content, and all with the goal of providing the most comprehensive connected fitness and digital membership experiences in the world and driving ever-increasing engagement among our members. Of note, there were 171 billion total platform workouts during Q3, a 258% year-on-year increase. This engagement leads to industry-leading retention levels and most importantly, a happier and healthier community now numbering over 5.4 million global members. I will now turn it over to the operator to take your questions. Thank you.
Operator, Operator
Thank you. Our first question is from Doug Anmuth with JPMorgan.
Doug Anmuth, Analyst
I have two. First, John, just probably you could talk about what impact the recalls may have on bike and bike plus sales and demand. I mean, we have obviously the 4Q numbers, but as you look into fiscal '22 a bit as well. And then, just definitely if you could talk more about the process to get Tread to market in terms of repairing existing kind of built-up tread inventory, making the changes in manufacturing and then also getting approvals as well. Thanks.
Jill Woodworth, CFO
Hi, Doug, it's Jill. I'm going to take the first question on bike. I think as we said in the prepared remarks that our guidance for Q4 certainly embeds our thoughts on the impact of the recall on tread. We do have baked in some modest impact to bike and bike plus sales, but we think that'll be temporary, and we don't think there will be any long-lasting impact. And I think as I outlined, we're still predicting unit sales in Q4 to be more than 3x what they were two years ago. So, obviously last year was a big comp; it was the first few months of COVID. But that type of growth over a two-year stack, we are pretty excited about, and we believe that that can continue into fiscal '22.
John Foley, CEO
And Doug, let me break out the second question with respect to Tread, to make sure that everyone on the call understands that there's two very distinct products: the Tread Plus and the Tread. The Tread Plus is the more expensive treadmill that we've been selling here in the States for a couple of years, and that is the tread that we are working with the CPSC to get a couple different fixes in. I talked about the software fix that's going to allow us to have a code that will help prevent misuse. People who call it kids who shouldn't be on the Tread won’t know your PIN and won’t be able to start the Tread. So that's the first step to start that fix should go out in the next couple of days, to all Tread Pluses. But we won't get that product back in the market, and we won't take the suggested stop use off until we get what we're calling a hardware fix—something more robust that would go at the back of the Tread that would physically keep objects from getting under the Tread. I don't want to talk too much about it; there’s a lot of different R&D as we look at it. Once we get a plan and proposed solutions, we have to work through the CPSC to ensure that they're okay with it. So that could take months, and it’s going to take some time. The Tread, which is the low-profile, lower-priced product that we've been selling in the U.K. and Canada with great reception and great Net Promoter Score reviews, is something that we think could be on a hopefully more accelerated timeline with potentially just improving the screws and/or locking washers. We have a couple of different solutions to ensure that the screws don't come out of the console. That product quality is improved; we're already in people's homes in the U.K. and Canada securing their screen so that they’re stronger attachment. Here in the States, we're excited. If you think about the CPSC potentially turning around a solution that we would present to them within six to eight weeks, we're optimistic that in early Q1 of next year, we'll be able to bring the Tread to market—the lower price Tread to market here in the States with their approval. I just want to make sure everyone understands there are two separate products, two separate issues. I think the Tread will be coming back to market much sooner than the Tread Plus.
Doug Anmuth, Analyst
Just to clarify, when you say early 1Q because you're obviously on a different fiscal, you mean your fiscal second quarter that you're saying.
John Foley, CEO
That's right. Early Q1 would be hopefully July.
Operator, Operator
Our next question is from Ron Josey with JMP Securities.
Ron Josey, Analyst
Great. Thanks for taking the question. Just maybe following up on Doug's question real quick and very helpful John with the additional commentary. Any changes to your manufacturing process that you're thinking of when you add maybe that additional hardware to the back of the Tread that just might take a little time as you think about it as we think about just the newer manufacturing processes that Peloton has done this past year? And then that's question number one. Then maybe the second question, Jill, you talked about improving free trial conversion on digital, but then also digital being a bigger part of the overall sort of newer subscribers to connected fitness going forward. Can you talk a little bit more just about that strategy and what that might mean for overall marketing going forward? Thank you.
John Foley, CEO
Yes, Ron, for the Tread Plus, to the extent that there is a hardware fix, as we're calling it broadly, there will be a manufacturing change; we'll probably have to tool apart and then work with our contract manufacturer to get that into the manufacturing flow. So that could take a month. Again, the Tread, which will be the lower-profile product, that was doing well in the U.K. and Canada, we hope to quickly bring to market in the U.S. pending the CPSC approval of our screw system. We believe that won’t be meaningfully a change to manufacturing; it would just be a change to potentially just the screw itself. But we're working through some solutions. So yes, for Tread Plus, there will probably be a change in manufacturing, but we're optimistic that the Tread, which will probably be the higher volume product for next year, we won't have to change our manufacturing process.
Jill Woodworth, CFO
Great. And on the second question on digital, it's obviously something we're really excited about. As you know, the way we've thought about digital is as a sales funnel to connected fitness. Two ways to obviously drive that are to drive the total number of digital subscribers as high as we can. We're really proud that we're nearing nearly 900,000 digital subscribers, which is pretty staggering growth to have achieved over the last 18 months. First of all, we have a much bigger lead pool for digital. The second thing, which was something that we've only really done in earnest over the past year, is really how do we get them on a more robust upgrade path to connected fitness? We're so excited by both of those growing in tandem with one another. But it's a testament—we’ve said in the past that we run that business at breakeven to an extent; we're not trying to lose a lot of money going after digital subscribers. But we are marketing that product. It is something we evaluate from time-to-time, how do we allocate potentially more marketing dollars to digital knowing that it will ultimately end up as a connected fitness sale? So that is something in real-time that we're constantly looking at: how do we allocate marketing dollars between connected fitness and digital? And certainly, with the success of digital, that might be something that we do more of in the future, but it's pretty fluid. Again, we do try to operate it on a relatively breakeven basis. A lot of it is true—it's also a testament to the fact that our content and platform just gets better and better. So the digital value is just going through the roof.
Operator, Operator
Our next question is from Ed Yruma with KeyBanc Capital Markets.
Ed Yruma, Analyst
Hey, good afternoon. Thanks for taking the questions. Two for me, I guess first on pricing with the bike now that you've got an OTB times kind of in line. Thoughts on kind of pricing? I know you did run a Mother's Day promo that was non-comp. So should we expect to see more of those? And then second, John kind of a broader question, right? You've had lots of highs and lows this year. You've kept people healthy during COVID, but you also had delivery delays in tread. How would you assess brand health and kind of how do you get back to the perception that Peloton once had? Thank you.
John Foley, CEO
Yes. The first one, Ed, I will say the awareness of our $49 bike is still pretty low. We weren't able to lean into marketing that. It feels like the understanding that for $49 a month you get the Peloton, the award-winning original Peloton bike now in a week's time, feels like we have a lot of runway with that. So we're not looking at a price drop anytime soon. The second question around brand health, it's obviously something we care deeply about. Yes, I think it ebbed and flowed over the last two years, going back to ad-gate. We've had moments and months where our brand has seen both its peak and then situations, like right now, where we feel we have some work to do to get back on the right side of the line with trust and safety and let people know what we stand for. Yesterday was a big day in mending trust and telling the market, our consumers, and our members that we're going to prioritize safety. We plan to have an industry-leading brand, one of the special brands, one of the most trusted brands for the next couple of decades. It started yesterday with our recall to say we're going to take some short-term financial pain to invest in building something that's built to last for decades where our brand is pristine. That’s what you saw yesterday and something we're obviously committed to.
Operator, Operator
Our next question is from Justin Post from Bank of America.
Justin Post, Analyst
Jill, I think you're suggesting about 200 net adds in Q4. Could you clarify what the tread impact is and what the bike impact is? And then, as you think about next year, interesting bikes to grow. So, can you talk about, as you look back how much supply was a limitation or the long order to delivery times versus the stay at home, being a positive driver? How do you think about those two factors as we get into '22? Thank you.
Jill Woodworth, CFO
Great. I want to try to be the most helpful to answer your question. On sub adds, you're correct; it is roughly 200,000 adds. As you know, we stopped delivering tread and tread plusses, so obviously, that had some impact on our guide for connected fitness subs. The other thing to take into account is that the 2.275 million guidance, or the roughly 200,000 net adds, also takes into account the returns that we expect, right? So for tread and tread plus, we talked about the fact that we have a $50 million increase in our return reserve for tread and tread plus returns. That is also net of tread. So you can pretty much think at least on a net add perspective that the majority of those net ads are due to bike and bike plus globally. Does that make sense?
Justin Post, Analyst
Yes, that makes sense. And then, on '22? Yes, you mentioned you think bikes can grow? I just want to make sure, is that versus this year? And how do you think about the drivers?
Jill Woodworth, CFO
Yes. In the context of everything, right, we obviously have the tread news, we have the economy reopening as we finally get out from under the pandemic, right? Then, you go back to history with Peloton, and you look at the seasonality of our sales, right? We typically see more heavy sales, call it 60% to 65% of sales in Q2 and Q3, our Q2 and Q3, which is September through March, versus the warmer summer months. So, there's a few things going on there, which is why I thought it was helpful to give the context that even with all of that backdrop, we're still looking at a bike comp two years stack. We’re still talking about more than 3x in unit sales, right? We typically talk in deliveries because that's what translates into revenue. But we feel very good about the health of the bike and bike plus business. What I talked about was the portfolio, the fact that we have a better-best strategy, the fact that we have a long runway to market, that lower-price bike, the fact that international is actually profitably camping last year, which is crazy, given the type of volumes that we saw in the first few months when COVID hit us all. International is firing on all cylinders, and we ramped media investment. So, there’s just—there’s a lot of opportunity.
William Lynch, President
It's William Lynch just to build on Jill's point. Also, notably, it was in your question, OTDs will be in a lot better shape on bike and bike plus to Jill's point about our portfolio. As we look at last year versus getting into fiscal year '22, meaningfully that order to delivery and overall supply will be in a lot better shapes, this isn't another point.
Operator, Operator
We have a question from Youssef Squali with Truist Securities.
Youssef Squali, Analyst
I have two quick questions. First, Jill, the $50 million in returns—in refunds that you've mentioned, if I'm doing my math right, that assumes about maybe 10% or 15% of the installed base for both tread and tread plus. Is that the right way of thinking about it? And is there a risk of seeing maybe more refunds extended into early next year? And then John, I guess on Precor, just how quickly can you launch new connected devices leveraging Precor just beyond the tread, beyond the bike and the bike plus? Thanks.
Jill Woodworth, CFO
Great. As you can imagine, estimating the number of Tread and Tread Pluses that we will get back is a very difficult thing to do. This is our best estimate using all the data that we have available to us at this time. I think your math is reasonably correct—it represents roughly 10% of Tread and Tread Plusses out there. Hopefully, we'll be able to give a much more robust update at the end of Q4 in August when we report. You're correct; the customers for Tread and Tread Plus have been offered the ability to return their product all the way through November 2022. This will be something that we'll be adjusting for over time, but we imagine that we'll see a sort of a bigger spike initially and that should subside over the next several months.
William Lynch, President
And then, Youssef, it's William Lynch. I'll pick the Precor question. So, we had closed the transaction, and we're pleased as John noted, closed it on time. The stated goal of that acquisition was to build the best R&D and supply chain team in all of fitness. We feel like that. As we look to the future, that is an important strategic mode. Given our growth, as a practical matter, be able to meet the demand that we think we're going to have looking forward across our best-in-class portfolio. John mentioned in his opening script, we're on track; we stated that we’d be manufacturing in the U.S., notably for the first time in the back half of the calendar year, first half of our fiscal year. We’d mentioned that we would be focusing on the bike line. The good news is we are on track for that—we're actually early. Rob Barker, who is our CEO of Peloton Commercial; President of Precor, Rob led the Precor business and it's a big part of the acquisition. He's done great work, and so we're tracking ahead. Additionally, we decided to also ramp up manufacturing out of that same North Carolina facility in the fall on Treads. That’s a new development and is a testament to our conviction in that product line and underscores just how strategic that acquisition was for us.
Operator, Operator
We have a question from John Blackledge with Cowen.
John Blackledge, Analyst
Two questions. How were the unit sales for the lower-priced Treads in the U.K. and Canada, Q3 versus your internal expectations? And then, John, you mentioned pretty positive customer reviews on the lower-priced Tread. Just any color on what they liked about it? And then just on the sales and marketing ramp into Q4, is that broad-based across geos? I'm assuming key focus will be on bike and bike plus, but is there anything else there? Thank you.
Jill Woodworth, CFO
Great. The first question is, prior to the news over the last couple of days, the Tread was performing very well against expectations. We had very strong launches in both the U.K. and Canada and had been anticipating a very strong launch in the U.S. as well based on the member feedback from our controlled rollout here, too. Reviews have been great. I think I might pass it to John and possibly William to chime in.
John Foley, CEO
Yes. Good question, John. We are very proud of the Tread product line. Recall notwithstanding, that's kind of why we did the recall—to ensure that the CPSC felt great about it after adding some additional safety features and addressing the quality or screw situation on the console. When we bring them back to market, we expect them to be the best products by far with the safest products in the markets. We're very excited about them. To answer your question when you think about our original bike product that had obviously an industry-leading and one of the highest net promoter scores in the world to learn last month that our tread product had an 85 net promoter score was staggering. It really spoke to how great the product and the experiences are. To your question about what people liked about it, the boot camp classes are particularly popular where you're on and off the Tread, so you don't have the monotony of staying on the Tread for 45 minutes; you get on this gorgeous device, you have a fantastic instructor, a great community, and then you get off and get a full-body workout on our Tread products in your home. When you think about getting the best cardio and the best strength in one workout, it's just so efficient, so fun, and so motivating. It’s one of the things that’s driving the net promoter score. I will add, as I alluded to earlier in my opening remarks, Strive Score is a really cool feature that once you step off the Tread, of course, you get the metrics of the speed, resistance, incline, and all the metrics you would expect from Peloton. Strive Score now connects you to the leaderboard so that you are tracked, ensuring that you're working hard enough and doing the weight training with all the other people in class. We’re very excited; it was a fantastic product. We're confident it will get even better. We also announced target metrics, which now tell you what incline you should be at. Of course, the instructor tells you, but the software and interface tells you how fast you should be going, what your pace should be, and what the incline should be. It’s an incredible software, content, and hardware platform. When we bring it back to market, it's going to be 10 out of 10 from an experience perspective and one of the safest treadmills or if not the safest treadmills in the world. We’re very excited.
William Lynch, President
And just on marketing spend briefly, obviously, when we were in long OTDs, we announced we were spending $110 million to expedite largely bikes, it made no sense to market when we were in that supply constrained environment. The way we've looked at it and Jill noted—Q4, we ramped up marketing spend because OTDs are coming down but also across, obvious, as you mentioned, because we see opportunity. The way we're disciplined performance marketers, the way we look at the calculation is there's a CAC target, customer acquisition cost based on the LTV—substantial LTV that we've got on our connected fitness products, both in terms largely contributed by hardware margin and then our industry-leading membership revenue at the margins with the retention rates. We stick to that, and we see opportunity to fuel growth, the growth that Jill mentioned on the core bike line, and those economics afford us the ability to market aggressively. So that's one of the many attractive things about our business. Now that we're in a better supply position, that's why you're seeing that marketing ramp on bikes across all geos.
Operator, Operator
We have a question from Laurent Vasilescu with Exane BNP Paribas.
Laurent Vasilescu, Analyst
I think it was called out that the international business is doing very well. I'm curious to know about the milestones you're setting for the Australian launch. What does Australia mean for the potential country rollouts, especially since you recently added a Spanish-speaking instructor?
William Lynch, President
Well, Australia, we look at market opportunities internationally on a couple of different ways. We actually have a matrix. One, it starts with an attractive TAM of what we are identifying as 3.3 million households. If you look at behavior, there are a huge number of universal fitness fanatics, and boutique fitness, as an example, is growing 60% a year. Interestingly, as we looked at and did research on our purchase intent and awareness in Australia, Peloton, actually without any marketing in the country, has had both high awareness and purchase intent relatively. Australians, we know, love global brands. That was another thing that came out of the research. So, all those reasons made it super attractive. We'll launch both with bikes and bike plus and digital. We're actually doing something interesting, and these talks to the benefit of learning from each global launch. We're going to release the app first and seed the market with the app and then amazing digital content that Jill referenced. We will have three retail showrooms at launch. Those are important early on; retail is a great platform for demonstrating our amazing user experiences. We’ve already got three PLs in terms of logistics and delivery identified in the major metros, where a lot of the population is concentrated, as I suspect, in Australia—Melbourne, Sydney, Brisbane. We've got three PLs ready to go. Kevin Cornell in our international team are doing a great job. We have a country manager, Karen Lawson, in that country. So we feel very prepared. We're excited.
John Foley, CEO
Thank you for noticing Marianna Fernandez and our Peloton Spanish yoga in Espanol as it were. We are super excited about all the languages that we plan to offer. Spanish was a big one. Marianna is the first instructor, as you noted, we don’t have any new countries to announce on that in that line right now, but you can imagine we have global ambitions. Spanish language is something that we’re very excited about. Obviously, we have Mexico adjacency. Spain is a big market. There are a lot of Spanish-speaking Americans, which is a third opportunity as we think about the Spanish, the immediate Spanish opportunity. Again, we’re not announcing any timeline there, but Spanish gets me excited. Marianna is a great first addition in that vector.
Operator, Operator
And our last question for today is from Jason Helfstein with Oppenheimer.
Jason Helfstein, Analyst
Maybe wanted to just ask what this all means now with the impact of the industry growing going forward. Your Tread Plus was enormously different from other flat treadmills on the market, but those tended to be in commercial locations. Are those companies now going to be restricted from selling those to home users? And just broader, how are you thinking about kind of what this means for the treadmill sales industry, given that it is the largest? It has the highest market share of all home fitness products? Thanks.
John Foley, CEO
Yes, thank you for asking it because you're right; it is the number one selling piece of fitness equipment in homes globally from a unit perspective. We believe treadmills remain safe and effective exercise machines for the home, when operated as instructed, and we know it is historically, like you said, the most popular fitness option in the home that we have. We know that millions and millions of Americans use treadmills safely in homes today. So we remain incredibly bullish about the opportunity. To run at home, you need a treadmill, and to cycle at home, you need an indoor stationary bike. We believe that they’re going to be pillars for getting in shape at home. Again, especially when you think about treadmills of yesteryear being more for running, our treadmill is more of a multidisciplinary circuit training platform and portal for experiences. Clearly to your question, we need to work with the CPSC to ensure that we not only emerge as the global leader in connected fitness but also the leader in safety in the industry. We believe that it is our opportunity and our responsibility, for that matter, to really be the industry leader in safety. We're obviously already the industry leader in innovation and we're excited to work with the CPSC. We’ll keep you guys appraised of future announcements and future product developments that are going to make our treads even safer. Thanks, everybody.
Operator, Operator
There's no further questions at this time.
Jill Woodworth, CFO
Okay.
Peter Stabler, Head of Investor Relations
Thanks everyone for joining us today. Have a great afternoon.
Operator, Operator
That concludes the call for today. We thank you for your participation, and I ask you to please disconnect your line.