Earnings Call Transcript
PELOTON INTERACTIVE, INC. (PTON)
Earnings Call Transcript - PTON Q4 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to Peloton's Fourth Quarter Fiscal Year 2021 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 may be recorded. I would now like to hand the conference over to your host, Head of Investor Relations, Peter Stabler.
Peter Stabler, Head of Investor Relations
Good afternoon and welcome to Peloton's fiscal fourth 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. 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 and thanks for joining us today. Our fourth quarter brought a remarkable year to a close. We finished the year with $4.02 billion of revenue, up 120% year-on-year and up 340% versus fiscal 2019. We added over 1.2 million connected fitness subscribers in fiscal 2021 and digital subscriptions ended the year up 176% versus a year ago. We introduced new products and software features, greatly expanded and enhanced our content library, and launched in Australia, which was no small feat given COVID pandemic complexities. We invested aggressively in supply chain and logistics, allowing us to bring product wait times back to pre-pandemic levels. Even with the significant investments we made in manufacturing capacity and expedited shipping, this level of growth drove far more EBITDA profitability than we had anticipated or intended to achieve at this point in our growth cycle. We recognize, of course, that there was a great debate about the growth prospects of our industry post-COVID. Therefore, I think it's worthwhile to spend a minute reflecting on the year and our path forward before we review the quarter and our outlook for fiscal 2022. Over the past two years, you've heard us speak regularly about the connected fitness opportunity we see for Peloton. How the combination of our world-class fitness hardware and software and streaming media is fundamentally disrupting an industry that has seen a little in terms of true innovation in the past 40 years. How our highly engaging, motivating, and entertaining world-class fitness content is consumed in the comfort of your home, creating an unparalleled workout experience at an exceptional value. How the magic of network software and streaming media enables a near constant innovation cycle where your experience on Peloton platform is incrementally better every time you use it. What happens when we put member engagement at the center of our business strategy and adopted a members-first mindset across every part of our operation; the benefits that come with high subscriber retention and the advantage of industry-leading Net Promoter scores; and the power of the Peloton community that motivates and encourages millions of people in their pursuit of physical and mental wellness. We believe that we are still in the first inning of connected fitness industry growth and we have the opportunity to extend our leadership as the pioneer of this category. Our strategy remains constant. We will continue to invest aggressively behind new hardware products, software experiences, and content offerings for both cardio and strength training, the two pillars of physical fitness. We will continue to prioritize subscription growth over near-term profitability as it's still very early days in the consumer migration to connected fitness in the home. We will continue to expand our geographic footprint while leveraging additional distribution channels like commercial and corporate wellness, and we will continue to drive supply chain efficiencies via our focused hardware portfolio. From our beginnings, we have also consistently sought to make our products and content more accessible, lowering a key barrier to purchase. In 2017, we began offering a 0% financing option. In 2019, we introduced our no-risk 30-day home trial. Last year with the introduction of Bike+, we lowered the price of our original bike. Earlier this year, we reduced the price of our digital app for frontline healthcare workers, active military, first responders, and full-time students. And just a few weeks ago, we introduced Peloton Corporate Wellness, further increasing the accessibility of our products through subsidized relationships with corporate partners, and healthcare providers. Today we announce our latest step on the journey to broaden the accessibility of our products. We are lowering the price of our original bike by $400 to $1,495, applying our 39-month 0% APR financing option; this equates to a hardware cost of just $39 per month. Adding our all-access membership comes to just $78 per month, a monthly spend that scales across an entire household, creating an incredible value versus almost any other fitness offering. For a two-person household inclusive of the all-access membership, that's under $40 per person per month during the finance period, and less than $20 per person per month thereafter. Today, we are also introducing revised financing options for our Bike+ and Tread products, extending our 39-month option to a 43 months option, equating to a monthly payment of approximately $59 per month during the finance period. As before, we will continue to offer 12-month and 24-month options as well. Democratizing access to our platform has always been our goal for our team. With our supply constraints largely solved now, we're seizing this opportunity today to continue to deliver against one of our key strategic priorities. Now, turning to some highlights for the quarter. Our community has now passed 5.9 million members globally, up 93% year-on-year on over 320% from the year ending fiscal 2019. Total platform workouts in the quarter reached 154.5 million, up 86% year-on-year and reflecting roughly eight times the number of workouts completed in Q4 of fiscal 2019. In Q4, we averaged 19.9 monthly workouts per connected fitness subscription versus 24.7 in the year-ago period. As expected, engagement levels were lower sequentially and on a year-over-year basis as typical seasonal trends associated with improved weather and consumer mobility have reemerged. Last year's engagement benefited significantly from lockdown orders, work from home mandates, and gym closures. On a two-year basis, monthly workouts per connected fitness subscription increased 66% from 12.0 in Q4 of fiscal 2019, validating our significant software and content investments. As a result of our efforts to keep our members engaged, connected fitness retention rates remain very strong, with average connected fitness monthly churn of 0.73% in Q4, and 0.61% for fiscal year 2021. Moving on to Tread, as we announced on Tuesday of this week, we are thrilled to commence U.S. sales and resume U.K. and Canada sales on August 30th, finally bringing this incredible product to market in the U.S. ahead of the key holiday selling season. Similar to how we reimagined what a stationary bike workout can be, our new Tread experience brings game-changing full-body workouts into the home. The early consumer reception supports our enthusiasm with a Net Promoter Score for all new Tread of 85 in our initial U.K. and Canada launch markets, an incredible result for a brand new product. And to be sure the software and content is only getting better. As we have said, we believe the opportunity for our new Tread is two to three times the size of the bike category. Sales of our slat-belt Tread+ product, which has only been available in the U.S. remain paused as we continue to work on a retrofittable hardware modification to further enhance Tread+'s safety profile. As the category leader, we see a clear opportunity, and frankly, responsibility to innovate on safety and we are encouraged by the progress being made across our teams. Now, I'll hand it over to Jill to review our Q4 financial results and outlook for fiscal 2022.
Jill Woodworth, CFO
Thanks John. I will start with a review of our fourth quarter results. In Q4, we generated total revenue of $937 million, representing 54% year-on-year growth. The primary drivers leading to our revenue outperformance versus guidance were higher than expected bike deliveries and better than expected connected fitness churn. This was partially offset by a higher than anticipated Tread and Tread+ churn rate. We made significant progress on product wait times with Bike and Bike+ order to delivery windows at pre-pandemic levels for the past several weeks. We added 250,000 net connected fitness subscriptions in the quarter, bringing our end-of-quarter connected fitness membership base to 2.33 million, up 114% year-on-year. This was ahead of expectations reflecting strong Bike and Bike+ demand, as well as better than expected growth additions helped by secondary market sales. Despite typical seasonality and increased consumer mobility, average net monthly connected fitness churn was also better than anticipated at 0.73%. As of June 30th, we had over 874,000 digital subscribers, representing 176% year-over-year growth. This was a modest sequential decline from the previous quarter, which mostly reflects the seasonality of our digital business, which is more pronounced than for connected fitness. In addition, our growth in digital quarter-to-quarter is influenced by our marketing spend with acquisition efficiency and LTV in mind. As we discussed last quarter, we see digital as a healthy emerging business as well as an effective path for many to upgrade to connected fitness. Furthermore, Peloton's digital accessibility and compatibility with multiple operating systems is very attractive to potential Corporate Wellness partners. As a result, we expect continued growth in our digital subscriber base in fiscal 2022, albeit with some quarter-to-quarter growth rate variability. Moving to gross margin. Gross margin for the quarter was 27.1%, which came below our expectations. This was entirely due to our connected fitness product segment which had a gross margin of 11.6% below our 21% guidance. As I mentioned a moment ago, initial Tread and Tread+ return rates were higher than our forecast as of the third quarter call. We are now recognizing a higher than anticipated expense associated with actual returns and have updated the return reserve rate accordingly. Please keep in mind that we always expected some uncertainty in modeling returns, and we do not believe the delta versus our expectations is meaningful. The impact of recall-related returns is added back to our adjusted EBITDA, but it's fully reflected on the revenue and gross profit lines. The Tread recalls also have some carryover impact on our logistics and warehousing costs, which came in higher than anticipated rounding out the balance of the shortfall in connected fitness margin versus expectations. As we are now largely past these recall-related activities, we expect a rapid return to more normalized and predictable execution across our logistics platform. Subscription gross margin was 63.3% and subscription contribution margin was 69.3%, modestly ahead of expectations as we continue to leverage fixed costs associated with content production. As a reminder, quarter-to-quarter, we will continue to see some variability, but we have strong visibility to our goal of a subscription contribution margin target above 70%. Turning to operating expenses, total operating expense as a percent of revenue was 59.3% compared to 32.7% in Q4 last year. Operating expense deleverage was driven by our planned shift in marketing spend from Q3 to Q4, lower revenue due to recall impacts in the quarter, and the impacts of adding Precor to our financials. Sales and marketing expense was 24.5% of total revenue versus the prior year period of 13.9%. As planned, we ramped marketing in Q4, given our improved order to delivery windows and we lapped a year-ago period in which we paused the majority of our advertising spend. G&A expense was 24.8% of total revenue versus 14.2% in the prior year. As you know, our business grew significantly during fiscal 2021. We made substantial investments across member support, financial systems, and other functions so that the organization can scale effectively with the growth of the business. With our member experience as our North Star, these investments will help us continue to improve our end-to-end member touchpoints. Also, we added Precor to our organization, which was a driver of some of the sequential increase in G&A inclusive of legal and integration costs related to the acquisition of Precor in Q4. R&D expense was 10% of total revenue versus 4.7% in the year-ago period. Similar to recent quarters, we continue to invest in developing best-in-class hardware and software teams, both organically and through Aqua hires. Fiscal 2021 Q4 adjusted EBITDA was better than expected at a loss of $45 million representing an adjusted EBITDA margin of negative 4.8%. Net loss for Q4 was $313.2 million or a loss of $1.05 per basic and diluted share. We ended the quarter with $1.6 billion of cash in liquid assets and have additional liquidity in the form of an untapped $285 million credit facility. As a reminder, our balance sheet benefited in fiscal 2021 from approximately $900 million of net proceeds from our convertible note offering completed in February. Now, on to our outlook. As you know, fiscal 2021 was a very unusual year in which both supply and demand shocks impacted our performance. We are now lapping those comparisons which makes predicting our year-over-year performance more challenging than normal. The Q1 and fiscal 2022 outlook we are sharing today reflect our best current estimate and includes the following assumptions. One, our return to normal seasonal patterns for Q2 and Q3 combined, comprised roughly 60% of sales, with Q1 being our lowest sales and delivery volume quarter. As in the years prior to COVID, we expect fiscal 2022 sales trends to be impacted by seasonal weather as well as holiday and New Year's resolutions purchases. We saw these trends going into fiscal 2022. Two, strong demand for Bike and Bike+, with higher unit sales expected than in fiscal 2021. Three, strong acceptance of our lower price Tread with our expectation that approximately 50% of Treads globally will go to existing connected fitness households and therefore, those sales will not result in an incremental connected fitness subscription. Four, compelling customer acquisition costs with rapid payback. Five, continued high engagement and healthy retention across all cohorts, including those added during the pandemic, implying expected low churn of our connected fitness subscriptions. Six, operating expense growth ahead of revenue growth as we wish to restore sales and marketing following pandemic-related cuts and recognize the annualized impact of recent G&A investments we've made to scale our organization for growth. And last, number seven, sequentially improved connected fitness gross margin and positive adjusted EBITDA in the second half of this year, as we leverage our fixed investments in our supply chain and logistics platform and generate operating expense efficiencies. Moving on to revenue. In Q1, we expect revenue of approximately $800 million, representing 6% year-over-year growth and an 87% two-year CAGR. Please note that our Q1 revenue assumption contemplates a very small contribution from the upcoming launch of Tread in the U.S. and resumption of sales in the U.K. and Canada, due to our anticipated order to delivery expectations of three to four weeks, and the fact that we recognize revenue upon delivery, not sale. For fiscal 2022, we expect total revenue of $5.4 billion or 34% year-over-year growth and a 72% two-year CAGR. Given our significant manufacturing capacity and logistics investments during the past year, we are entering fiscal 2022 with a normalized backlog for our Bike portfolio and guidance reflects our expectation of continued strong demand. Please note we are assuming 15% of full-year revenue will occur during Q1, which is below 19% in the COVID-affected fiscal 2021, but modestly above the 13% contribution we saw in fiscal 2018 and 2019. Moving to connected fitness subs, we expect to end Q1 with 2.47 million connected fitness subscriptions or 85% growth versus last year's Q1, implying 140,000 net adds. For Q1, we expect average monthly net churn for our connected fitness subscriptions of 0.85%. Please note that after this quarter, we will no longer guide monthly average net churn of our connected fitness subscriptions on a quarterly or annual basis. As we have discussed in the past, this is a difficult metric to forecast with precision and we therefore do not see the value in continuing to provide guidance. However, churn remains a very important metric to us and we will continue to report our actual results each quarter. Everything we do at Peloton is designed to keep our members engaged and our churn rate low and over time, we expect our churn and retention rates to remain relatively consistent. For fiscal 2022 we forecast ending connected fitness subscriptions of 3.63 million, implying 56% growth year-over-year and 1.3 million net adds. Similar to revenue, our guidance assumes normalized seasonality, with Q1 net adds representing 11% of the full-year total, down from 20% last year, but similar to the 12% we saw in fiscal 2018 and 2019. Moving on to margin, we expect total company's gross margin of 33% in Q1 and 34% in fiscal 2022, which is based on a connected fitness product gross margin of 15% in Q1 and 23% for fiscal 2022. The year-over-year growth margin compression reflects the following factors. One, the impact of our price reduction on the original bikes that we announced this afternoon. Two, the sales mix impact from launching Treads, which currently carries a lower margin than our Bike portfolio. And three, significantly elevated costs of certain commodities, including steel and semiconductors, as well as freight rates multiple times higher than normal. As we've mentioned previously, we manage our connected fitness product segment to optimize for gross profit dollars, rather than gross margin percentage. While introducing a more accessible price point for Bike and a higher sales mix of Treads will lower our gross margin percentage in the near-term. These are strategic actions that expand our addressable market and will be highly accretive to gross profit dollars over time. We continue to expect connected fitness gross profit to largely offset our fully loaded customer acquisition cost over time, and our fiscal year 2022 guidance assumes a modestly positive net customer acquisition cost, which follows a significantly negative net customer acquisition cost in fiscal year 2021. While our current guidance reflects our best estimate of today for commodity costs and freight rates, it's possible we may see additional pressure on our connected fitness margin if costs are materially worse than we expect or if component shortages necessitate expedited shipping costs. We continue to see tightness in component supply, but we have and are taking steps to prepare for a strong holiday season against fiscal year 2022 demand. Lead times for certain components continue to be abnormally long and we're therefore utilizing longer-term commitments with our supplier base, while expanding our supply chain partnerships in order to limit any disruptions. Connected fitness margin in Q1 will also be significantly impacted by last-mile delivery costs, given the seasonality of our business. Peloton's last-mile logistics is an important aspect of our member experience. The fixed investments we have made in warehouses, vehicles, and people in our delivery network are carried throughout the year. Therefore, we will experience higher fixed cost absorption during our smaller volume first quarter, but expect significant leverage of these expenses in the remaining quarters of fiscal 2022. We expect a subscription contribution margin of 68% in Q1 and for the full year, with the improvement to last year reflecting continued fixed costs leverage. Turning to operating expenses. As I alluded to earlier, we are planning fiscal 2022 as an investment year in marketing our products and optimizing operations after making significant investments to scale our organization. During fiscal 2021, we dramatically curtailed media spend due to supply constraints and were largely off during important holiday and New Year's resolution selling periods, which created a synthetically low spend level that we will lap in the coming year. As we restore media investments in fiscal 2022, we expect material year-over-year deleverage in sales and marketing during Q1 and for the full year. During fiscal 2021, we also scaled our organization to support the higher-than-anticipated growth in our member base since the onset of the pandemic. Much of the needed investments are now largely in place, but the annual impact of a higher G&A base will drive year-over-year deleverage in fiscal 2022. As we expect more modest sequential G&A growth going forward, we expect to achieve healthy leverage on this expense base starting next fiscal year. Finally, R&D will continue to increase as a result of both organic and acquisition-related spend on hardware and software development. Based on these factors, we expect that adjusted EBITDA loss to be $285 million in Q1 and a loss of $325 million in fiscal 2022 or negative 6% adjusted EBITDA margin. Keep in mind that in the absence of COVID, we would not have anticipated or intended to be profitable during fiscal 2021. Although our profitability will step back in fiscal 2022 for the reasons I've outlined, we are very confident about the economic profile of our business model and expect to be adjusted EBITDA profitable again in fiscal 2023. Lastly, we'd like to provide some thoughts on forward capital expenditures. As you know, we officially broke ground on Peloton Output Park a couple of weeks ago, we're glad to be underway with this project and we're looking forward to building Peloton products here in the U.S. As we outlined previously, we expect to invest approximately $400 million over the next two years on this plant, with much of that spend expected to occur in fiscal year 2022. In addition, we continue to make material investments in our supply chain, IT systems, and our retail footprint both domestically and internationally. These investments, which will position us for continued growth, will bring total capital spending to approximately $600 million in fiscal 2022. Looking out to fiscal 2023, we expect capital spend to taper. Lastly, we continue to see a decline in customer deposits with the rollout of deferred payment capture. While this migration does not impact revenue recognition, it will continue to apply modest working capital pressure until fully deployed. We've completed the full rollout of deferred payment capture in the U.S. and expect a full global rollout in the coming quarters.
Operator, Operator
Our first question comes from the line of Doug Anmuth of JPMorgan. Your line is open.
Doug Anmuth, Analyst
Great. Thanks for taking the questions. One for John and one for Jill. John, we know there's seasonality, but just given the light Q1 guide, is the bike price offensive or defensive? And how do you think about demand for Bike+ currently? And then Jill hope you can walk through a little bit more detail around the Tread gross margin structure, perhaps relative to Bike or even Tread+ a couple of years ago when it first came out? Thank you.
John Foley, CEO
Thank you, Doug. As Jill mentioned earlier, we believe that demand for Bike+ and the Bike remains strong, and we are optimistic about our forecast for the entire year. The price reduction of the original bike was indeed surprising. In evaluating the competitive landscape, we're focused on making quality fitness accessible, which has always been part of our strategy. This year marks our first genuine opportunity to pursue this goal. We are thrilled that our investments in the supply chain over the past few years, particularly in the last year, are starting to pay off, allowing us to produce nearly 2 million fitness units this year. This is remarkable, especially considering that just a year ago, the largest contract manufacturer we approached estimated they could manufacture only 10,000 bikes annually. The scale of our investments across our supply chain for bikes, and now including Treads and the more affordable Tread, enabled us to consider lowering the original bike’s price. We believe this decision is beneficial for our business, particularly in generating new subscriber additions, which remains our primary focus. We also see the potential lifetime value of these users extends beyond just subscribers paying $39 for a new bike. It encompasses future purchases of Treads, apparel, and other products, contributing to a wider lifetime value outlook over time.
Jill Woodworth, CFO
Hi, Doug.
William Lynch, President
Hey.
Jill Woodworth, CFO
I'm sorry. William, did you want to chime in?
William Lynch, President
No, I was just going to say on the pricing, Doug just underscoring the point about it being offensive and strategic as Jill said, we, as you might imagine, have done extensive testing on elasticity for pricing on the original bike, both in terms of in-market testing, as well as qualitative and quantitative. And that testing gave us a lot of conviction that this price point will drive the kind of growth that's in the guidance, but also makes this price drop very strategic as we look at unit economics going forward. And so it's super consistent. As John noted, with our strategy around accessibility, we introduced financing in October 2017 for the first moves, the 30-day home trial. Jill talked about her app moves and accessibility around frontline workers and what we've done with the military and student rates. So, we feel like this is just a continuation of that strategy and allows us to continue our lead in connected fitness as we add more and more households to the membership.
Jill Woodworth, CFO
We expect a slightly positive net customer acquisition cost for Tread in fiscal 2022, which we believe is a great trade-off for the lifetime value of our subscribers. The economic conditions are very favorable for us, especially since we have a solid order-to-delivery process and strong manufacturing capabilities. In terms of Tread's gross margin, we are currently facing increases in commodity costs and freight rates across our products. It’s important to note that we've only recently begun producing Treads, so there is still significant potential for economies of scale. We anticipate our margin profile to be in the low teens, and I encourage you to consider what we achieved with the Bike over the past five years. Five years ago, it cost us $1 to produce a bike, and now it’s down to $0.40, despite the increases in commodity and freight costs. Our streamlined portfolio and our ability to produce a limited number of SKUs with strong capacity will provide us with excellent margin potential in the coming years. Additionally, as we transition production to the U.S., we will avoid shipping and freight costs, further enhancing our margins. This year presents some challenges with Tread, such as less efficient marketing while we build product awareness and lower gross margins, but we expect both aspects to improve over time.
Operator, Operator
Thank you. Our next question comes from Justin Post of Bank of America. Your line is open.
Justin Post, Analyst
Great. Thank you. Maybe we could get on the Tread. Can you help us all understand I appreciate the 50% sub contribution per unit? But how you think about units this year and how you thought about the launches in Canada and UK, what you learned there? And maybe the differences between the US launch and the Canada UK launches? Thank you.
John Foley, CEO
Thank you for your question, Justin. We are very enthusiastic about the Tread category and are confident in our ability to succeed in it. I’ll start by addressing your inquiry about our experiences in Canada and the UK, specifically regarding the Tread+, which has been available for a longer period. We've gained substantial insights into the user experience and the software programming, which has significantly evolved over the past two years since the introduction of Tread+. You can view it as a proof of concept for the platform, giving us a two-year head start as we prepare for the launch of the lower-priced Tread in the U.S. next week, as well as its return to Canada and the UK, followed by a quick rollout in Germany. Regarding the reception in Canada and the UK, I want to highlight the impressive 85% Net Promoter Score we received in those markets right from the start, which speaks volumes for a new product, especially since the software and content are continuously improving. In the early days of selling our bikes, I would assure customers to trust us and invest in the Bike, as we would enhance the software and content every quarter. Many long-time Peloton users can attest to this experience over the years. The same assurance applies to the Tread, and we are incredibly excited about this category, which is not just for running but also serves as a versatile strength platform. With features like boot camp content, circuit workouts, and connected heart rate monitoring even off the Tread, it creates an exceptional experience. We’re proud of this platform and thrilled that it will be available for sale again next week.
Jill Woodworth, CFO
And then just to chime in on the 50%, we wanted to give you all just a guidepost just so that you could better understand the contribution to connected fitness subscriptions, with Tread, and wanted to make sure that wasn't overstated in any way. I think as you think through the trends that we saw of course, when you have very low brand awareness in a product your existing member base are going to be the ones first raising their hands to buy the product, and that's what we saw in the U.K. That's also to John's point, what we saw with Tread+ in the very early days. So that 50%, think about it like a blended average. But of course, as we get the word out and we ramp up our incredible marketing efforts around our all new lower priced Tread, I think what you're going to see is very high existing members buying the Tread, but that percentage coming down as we get the word out, and we launch our marketing campaigns around that and attract incremental subscribers to the platform.
Operator, Operator
Thank you. Our next question comes from Ed Yruma of KeyBanc Capital. Your line is open.
Ed Yruma, Analyst
Hey, guys. Thanks very much for taking the question. Jill, just first on the gross margin differential on the original bike, I know, you gave some color there. But just try to really understand again have the price reductions over time been funded by your manufacturing efficiencies? Kind of how much is still left? And kind of what's the timing in terms of getting the gross profit generated by one device to offset customer acquisition cost? And then as a follow-up, lots of exciting stuff in corporate wellness. How should we think about the margin profile there? Thanks, guys.
Jill Woodworth, CFO
Great. So on the first one, obviously, what we've seen over the last several years, as I've said earlier is that, we've been able to get incredible costs of our Bike product over the last five to six years to the tune of about 70% to 80% right versus what we were paying for a bike five or six years ago. And as you look at our original bike, it's our most mature supply chain. But for us, we think at a $1,495 entry point, it is absolutely worth the ability for us to grow our addressable market and sacrifice gross profit margin percentage because we do think the gross profit dollars matter here more. And over time, even though we are going slightly net positive in CAC this year, that will revert very quickly with marketing efficiencies and with the conversion uplift that we expect. So, we think it's an absolutely right trade-off for that very valuable high margin long lifetime subscriber. Corporate wellness. William?
William Lynch, President
Jill, you want to go ahead.
Jill Woodworth, CFO
Yes. Did you want to take that? I mean, we won't be offering just a breakout in terms of the economics of that business. It is very, very early days. I would say we are still building a lot of the infrastructure both from a sales and e-com flow perspective. So we have, I think, fairly conservative estimates in this year, although we think it's a massive multi-billion dollar market, which I think William can address further.
William Lynch, President
It's now tens of billions of dollars annually when looking at what employers invest in wellness for their employees. As Jill mentioned, it's still early. John talked about our announcements in the last few months. I can say that the initial sales rate through our partners like Accenture, Samsung, and Sky has surpassed our expectations. We're confident in our team, including Cassidy Rouse, and the business model we have in place. Our approach is quite similar to how we view our consumer business regarding net customer acquisition costs. This is a highly efficient channel for acquiring customers. The relationship between gross profit on the hardware and how we acquire customers mirrors the decisions we make in our consumer business. While it's still an early stage, we are encouraged by the initial results, and we don't see much difference in margin between these channels.
Operator, Operator
Thank you. Our next question comes from Ron Josey of JMP Securities. Please go ahead.
Ron Josey, Analyst
Great. Thanks for taking the question. Just a quick one and a follow-up. John, you talked about new products being positioned for just additional product launches later this year. Is there any details you can share on the product insights, type of workout, et cetera, would be really helpful and any insights on the manufacturing capacity ahead of that? And then a follow-up on the lower-priced bike, can you just talk about the impact of what that means for customer purchase order pricing? Thank you.
John Foley, CEO
Ron, I wish I could share more about the new products we’re developing, as I’m really excited about the platforms in our R&D pipeline. We’ve stated that strength is a major focus for this year. While there are some rumors about additional products in the works, we are concentrated on a select few that we believe will be essential to our portfolio. Many of these have been in development for several years. This year should be significant for our members regarding the new product pipeline, and we eagerly await the opportunity to share more information as it becomes available. I believe you also inquired about customer purchase order pricing.
Jill Woodworth, CFO
Yes. I mean, I can take that. Nothing really to update there is, as we've talked about in the past, we just haven't had given our incredibly low return rate of our Bike and Bike Plus, we have just not had the inventory. So it's a little bit of a moot point for now. But obviously, if we ever are in an inventory position, where we can launch customer purchase orders we would certainly be priced below the new pricing for the original bike.
Operator, Operator
Thank you. Our next question comes from Youssef Squali of Truist. Your line is open.
Youssef Squali, Analyst
Thank you very much. So two questions. John, can you maybe speak to the just the quarter-to-date trend in demand, you're seeing obviously the guidance implies sequential decline, but maybe you can parse out the effect of the reopening relative to others, like a pullback in ad spend, et cetera. And then Jill, I think you said something to the effect that you expect higher unit sales of bikes in 2022 than you did in 2021. If you just do a back of the envelope that it looks like that would imply not a whole lot of sales for the new Tread. So I was just wondering if you can maybe provide a little more color on that. Thank you.
Jill Woodworth, CFO
Yes. Yes. I might take the second question first, and then we can double back on the first one. So, I think what you're probably noticing is that, in this year we're forecasting 1.3 million net adds, and last year we added 1.24 million net adds, is that correct?
John Foley, CEO
Yes. Yes. Exactly.
Jill Woodworth, CFO
Great. It's an excellent point. However, I want to highlight that in fiscal 2021, our net additions were significantly influenced by the backlog we had. When COVID hit in March, we scaled back manufacturing and entered fiscal 2021 with a substantial backlog due to lengthy order-to-delivery times. Therefore, I can say that we have much better coordination between sales and delivery schedules in fiscal 2022. From my viewpoint, we anticipate growth in our bike portfolio this year compared to last year. But it's important to keep in mind the size of the backlog we had. You'll see that even with 50% of Tread buyers being existing members, we can expect a strong first year of sales for the Tread.
John Foley, CEO
And Youssef, we can't comment too much on the quarter-to-date trends as you can imagine, but I will say, and Jill alluded this in our opening remarks is that we historically have been a very seasonal business, where not only are people out running and riding their bikes in the summertime, and getting outside this summer, I think is exceptionally true in that sense coming out of last summer where people are on lockdown. But we obviously don't market aggressively. And then I think Jill's opening comments talked about this in the digital business. We couldn't be more excited about the digital business. I think I've been one of the biggest champions for since day one in that business. And we think that it's an incredible lead gen business as well as a standalone business on its own. And it's just not smart for us to market it aggressively in the summer vis-à-vis other times of the year. So, when you think about a basket of advertising dollars against your businesses, summer is generally one of the least efficient. So we're trying to run a little bit more disciplined business, certainly digitally, and you could extrapolate that more broadly. But I will say even in the face of light marketing, sales have been robust across our Bike business. And I guess, I'm not supposed to tell you, but how incredibly strong the leads have been for our Tread business. So we are excited about how many leads are in the hopper for people wanting Treads and we're excited about the demand that we've consistently seen this quarter and frankly since COVID hit as you know.
Operator, Operator
Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Your line is open.
Jason Helfstein, Analyst
Thanks. Thank you. So is there anything the data that's just the kind of the longer pending Tread launch, meaning just it's been talked about, obviously for a long time and all the issues that that could have weighed on bike sales, meaning you have some consumers who were only buy one device, and they were kind of waiting. And the second question on the supply chain, we can see the inventory numbers up pretty dramatically quarter-to-quarter on the balance sheet. Outside of the cost headwinds that you talked about for supply chain, are you worried at all about actually getting product to the consumer over the next, basically through the holiday season? Thanks.
William Lynch, President
I can address the second question first. This is William. Regarding the guidance provided by Jill, we have made the necessary investments discussed by John and Jill. We have established the infrastructure to support our holiday plans. As Jill pointed out, we anticipate that fiscal year 2022 will see a return to more seasonal patterns, with a significant portion of our business occurring in the second and third quarters, particularly in deliveries. Therefore, everything related to the supply chain, from the inventory you mentioned accumulating on the balance sheet to our warehouse expansion and delivery infrastructure—particularly personnel, vans, and last-mile facilities—is being prepared for what we expect to be our biggest holiday season ever. We are very excited about the growth in bikes mentioned by Jill, as well as the launch of Tread, which we believe will have significant long-term potential. Unlike many companies affected by issues in the automotive sector and semiconductor shortages, we take pride in our team's achievements and are grateful to our partners for helping us reach this position. Our inventory is indeed increasing, as we are strategically building it up. Given the extended lead times associated with ocean freight and shipping in general, we have been careful to learn from past experiences and feel confident about executing our plans this year.
Jill Woodworth, CFO
In response to the first question regarding whether Tread might impact bike sales, it’s difficult to be certain, but based on our data, the leads we have for Tread show a lot of existing members and many newcomers. We believe this is a significant category, although there is still very low awareness for us in the Tread segment. Therefore, I personally don't think it has influenced bike sales in the past few months.
Operator, Operator
Thank you. Our next question comes from Jonathan Komp of Baird. Your line is open.
Jonathan Komp, Analyst
Yes, great. Thank you. Jill, can I follow-up on your comment about the first half and the second half adjusted EBITDA outlook. And any more color on the factors that you're expecting to drive the inflection to positive adjusted EBITDA on the second half?
Jill Woodworth, CFO
Yes. And so I would say, first off, the Connected Fitness margin is really one of the main drivers of adjusted EBITDA profitability and that variability throughout the year. So if you look at Q1, the Connected Fitness margin is fairly depressed, largely due to delivery cost inefficiencies, given that we're having lower volumes in the quarter. And of course, what that will do is reverse in Q2, Q3, and Q4, where we will leverage a lot of those fixed cost investments in our field operations with warehouses and people and vehicles. So, that's going to get us a lot of leverage as we move through. And of course, on operating expenses, we will get substantial leverage here too, as we move through the year and have higher revenue quarters. And as I said, 60% of our revenue is going to be generated in Q2 and Q3. And really Q1, I will say is just a little bit of anomaly, right? We built up a cost structure to support and scale our business. We've grown member support. We've grown manufacturing 9x over the last 16 months. And so it will take us a couple of quarters to really see that leverage back into the system, but we expected in the back half of the year.
Jonathan Komp, Analyst
Okay, that's really helpful. And then one other follow-up. I think, John, you mentioned at one point a unit capacity is close to 2 million fitness units of hardware, I think for this year. How should we think about the horizons, which are building out the capacity? And just any other context to how you see the hardware business scaling over the next few years relative to that 2 million unit comment? Thank you.
John Foley, CEO
Yeah. I mean, that's something we spend a lot of time on. I'll extrapolate it also in the context of business that's growing adding subscribers, it's 56% this year, and we will continue to be a hyper-growth company for years to come. I'll extrapolate it into the idea as well with real estate and the context of our headquarters and our field ops and member experiences. You have to try and walk the line of seeing where you're going five to ten years out, but not getting over your skis with fixed costs and overhead. And that's kind of the balance that we've had to strike over the last six or eight years as we've grown the company. And to answer your question, we're excited about our investments in Ohio and state-side manufacturing. We're excited about our continued relationship with Rexon, which is a big manufacturing partner of ours, and Tonic, which we brought in-house a couple of years ago. And continued the contract manufacturing relationships in-house. We have obviously partners on the tablet side as well, which has great scale, and we will probably always use contract manufacturers for that. But you do have to think about how do you make millions of treadmills a year, three or four years from now, and our team is planning that and getting ready for it. Again, try not to get over our skis with the operating expenses or the capital expenditures way too far in advance, but you've got to make some bets. And as always, we're going to bet on success, not bet on failure because they kind of become self-fulfilling. So other than that, I don't have much color for you other than we have incredible people who are planning it and continue to land the planes like they did last year. And we plan to do this year.
William Lynch, President
To add to that, the $400 million investment in Peloton Output Park represents a long-term commitment to support the capacity growth mentioned by John. Our objective is to maintain our leadership in capacity, cost, quality, and safety within the fitness industry. There are very few companies in this fragmented market and only a small number of factories capable of producing the volumes we deliver. Therefore, the actions we are taking, including the Peloton Output Park initiative, are strategically planned. As John highlighted, we are looking ten years ahead to facilitate the strong growth we anticipate in the future.
Operator, Operator
Thank you. Our last question comes from the line of Kaumil Gajrawala of Credit Suisse. Your line is open.
Kaumil Gajrawala, Analyst
Hi, everybody. Thanks for taking the call. A couple of years ago at your Analyst Day, you talked about the TAM and SAM, and the SAM given the pricing at the time being around $15 million potential members. With the new lower price for the new $1,500 price point, do you have an idea on how those numbers, what those numbers may look like now?
Jill Woodworth, CFO
Yes, I believe you're referring to September 2020, about a year ago when we discussed our household serviceable obtainable market. At that time, we identified an addressable household of 15 million, translating to 20 million in connected fitness unit sales, considering that some households may own multiple products. This figure marked a 43% increase from our previous analysis. While we haven't updated this analysis recently, we anticipate that the new price of $1,495 greatly broadens our addressable market, which is very exciting for us. This adjustment was a key reason behind the pricing strategy, as we aim to make our products more accessible and expand our addressable market. Additionally, factors like the extended financing options we announced for Bike Plus and Tread and increased brand awareness will further enhance our serviceable obtainable market. Over the past few years, awareness has been a major growth driver for us. Just as a reminder, Tread and digital products remain much less recognized compared to our bike portfolio, so we expect significant growth in the coming year now that we are finally introducing that product to the U.S. market.
Kaumil Gajrawala, Analyst
Thank you. Regarding innovation and the timing delays with Tread and Tread+, do these changes affect the rollout schedule of other products you had planned? Would you prefer to have them spaced out, or are any original plans for new products still on track despite the recalls?
William Lynch, President
Well, finally we are bringing that product to the U.S.
John Foley, CEO
Yes. Please continue.
William Lynch, President
We believe that executing the Tread launch in the U.S. presents a significant opportunity. Our research indicates that Tread is a much larger category than Bike. When considering the number of runners participating in Bootcamp and the many boutiques that offer this workout compared to spin, Tread has the potential to become our biggest product. We're very focused on this opportunity and regard it as an incredible product. Additionally, as mentioned, our R&D spending has reached unprecedented levels, allowing us to invest in new and exciting products. We are mindful of our marketing and sales calendar to ensure effective execution and awareness for each product. Currently, Tread has low awareness, which we see as a major opportunity. Furthermore, we have been consistently thinking about and investing in the strength category for some time. While there’s nothing specific to announce at this moment, it is something we are looking into for the near future.
Operator, Operator
Thank you. At this time, I'd like to turn the call back over to the CEO, John Foley for closing remarks.
John Foley, CEO
Thank you. Before we wrap up, I want to share a bit of non-financial but interesting and important news nonetheless. In recent surveys conducted by Comparatively, Peloton earned the number one position in a ranked list of 100 top global brands. And again, the number one position for Best Place to Work in New York, besting a who's who of established brands and household names. For me, this is particularly gratifying recognition, as these rankings point to both our member experience and the internal culture we've been building at Peloton since day one. By definition, powerful brands are recognized for their extraordinary product and service experiences. By always putting members first and obsessing over their experience, we're building the most powerful brand in fitness and potentially one of the most powerful brands in any category. It explains why we're so focused on Net Promoter scores, by the way. And when we couple our dedication to member experiences with a commitment to expanding accessibility, we see an opportunity to extend our leadership position for years to come. Peloton being named the best place to work in New York is personally rewarding as a leader and a co-founder. But it's also a big strategic advantage as you can imagine. Recruiting and retaining the best talent is the foundation of every great technology business and separates the truly great companies from the good ones. Lastly and most importantly, I want to thank the entire Peloton team around the world for their hard work and a tough year of rapidly scaling while managing through a global pandemic. I also want to thank our members for allowing us to play a significant role in their health and wellness journeys. As you know, we don't take this opportunity nor responsibility lightly. We care deeply about every one of you. And with that, we're going to sign off for the night. Thank you all for joining. We'll speak to you next quarter.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.