Earnings Call Transcript
PELOTON INTERACTIVE, INC. (PTON)
Earnings Call Transcript - PTON Q3 2025
Operator, Operator
Thank you for standing by. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to Peloton Interactive Third Quarter Fiscal Year 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to James Marsh. Please go ahead.
James Marsh, Moderator
Thank you, operator. Good morning, and welcome to Peloton's third quarter fiscal year 2025 conference call. Joining today's call are Peloton's Chief Executive Officer and President, Peter Stern, and Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include forward-looking statements related to our business 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. Please refer to our SEC filings and today's shareholder letter, both of which can be found in our Investor Relations website for a discussion of material risks and other important factors that could impact our results. 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. Following prepared remarks from Peter and Liz, we will begin the question-and-answer session with two questions submitted by shareholders before the call. I'll now turn the call over to Peloton's Chief Executive Officer and President, Peter Stern.
Peter Stern, CEO
Thank you, James. Good morning, everyone, and thanks for joining today's call. Having achieved the Peloton employee Century Club of 100 days, I'm even more optimistic about our future and grateful for the opportunity to lead this company than I was when I was appointed. The first few months have been dedicated to redefining our purpose and values, learning about this fascinating business, and getting to know its mission-driven people. Q3 was my first quarter as Peloton's CEO, and I'm pleased to share that we performed at the high end of or above guidance on our key metrics. We slightly grew Paid Connected Fitness subscriptions in this seasonally strong quarter, further improved our unit economics, and once again delivered significantly positive adjusted EBITDA and free cash flow. At the same time, we are making substantial progress in formulating our strategic plans for fiscal year 2026 and beyond. You can expect more details on that next quarter, but for now, I'd like to discuss our approach to empowering millions of Peloton members to live fit, strong, long and happy, and in so doing to deliver long-term shareholder value. Our approach begins with four objectives: improving member outcomes by delivering even better equipment, software, and instruction for our members, which increases how much they value Peloton; meeting members everywhere, where they shop, work out, and online, because that is how we grow our base of members; creating members for life by deepening connections with and among our members, which will extend the time they stay with us and their lifetime value; and finally, operating with business excellence, because optimizing pricing and promotions and reducing costs will enhance our competitiveness, enable us to invest in our future, and deliver superior shareholder returns. During the remainder of my prepared remarks, I will elaborate on each of these objectives to provide you a deeper understanding of our strategy in advance of a more comprehensive forward-looking reveal as we progress through my first calendar year at Peloton. There are three components to our objective of improving member outcomes. The first is delivering even better cardio experiences since cardio is the foundation of our business and of a balanced fitness regimen. Second, we will develop a more holistic science-backed wellness ecosystem that goes beyond cardio. Third, we will focus on becoming ever-more personal coaches to our more than 6 million members. Peloton is already the category leader in connected cardio, as evidenced by our strong NPS scores and by the millions of members who engage in our cardio disciplines. In Q3, all our cardio hardware products achieved a Net Promoter Score above 70 and Tread exceeded 80 on a scale of minus 100 to 100. We observed 5% year-over-year growth in running workouts and 11% growth in walking workouts. Engagement with newer features such as Pace Targets on our treadmill continued to improve. In Q3, over 80% of Tread users taking a running workout used Pace Targets, up from just under 60% last quarter. We see further opportunities to keep winning cardio by delivering innovative software, hardware, and even more engaging content. We'll share more about our innovation roadmap later this calendar year. Turning to holistic wellness, in Q3, we saw a higher mix of workout time in strength disciplines quarter-over-quarter and year-over-year. We also delivered new kettlebell content in late February, and nearly 70,000 members completed kettlebell workouts by the end of the quarter. Beyond strength, meditation classes taken increased 7% year-over-year in the third quarter. Peloton has a vast library of classes. With so many to choose from, we want to help our members reach their goals by becoming a more personal coach. We are lucky at Peloton to have expert instructors, motivated members, and subject to our strong privacy safeguards, a wealth of data on what works at both the individual and population levels. The starting point for personalized coaching is a plan tailored to a member's goals. In January, we launched Personalized Plans to all members, and nearly 500,000 members had started a plan by the end of Q3. We're pleased with the repeat engagement from members using plans, and our testing shows that members who set up Personalized Plans work out more often and with more disciplines. Over time, we'll iterate on Personalized Plans to make them more comprehensive, dynamic, and data-driven, helping our members take advantage of everything Peloton offers and become the best versions of themselves. Our second strategic objective is to meet members everywhere. The very essence of Peloton, a studio-quality workout from the convenience of your home, necessitates that we work to increase our presence outside the home. We need to meet new and existing members at retail stores, gyms, hotels, online, and in real-life events, both in the U.S. and in the other countries in which we operate. Our Precor brand provides a great opportunity to expand the presence of Peloton in commercial gyms. We recently launched a pilot program with Precor to bring a collection of Peloton instructor-led Tread classes to select Precor treadmills. And we've engaged Precor to provide installation and maintenance support on Peloton equipment in gyms, given the exacting demands of gym operators and the duty cycles imposed on gym equipment. We're also continuing to test new models to bring Peloton to gyms. In February, we opened a Peloton-branded facility at the University of Texas at Austin. In this one studio, we've already met nearly 1,000 new Peloton members. Turning to retail, our micro-store test in Nashville has been encouraging, as store revenue has outpaced the average of our other North America retail showrooms despite having one-tenth the square footage. We plan to bring on additional locations soon. In addition to our owned first-party retail channels, third-party retailers allow us to meet members where they already shop. Amazon's seasonal sales events are a great example of moments that capture incremental hardware sales. In March, we observed year-over-year growth in the US from Amazon's Big Spring Sale. Meeting members everywhere also includes growing our international markets, where we grew paid connected fitness subscriptions year-over-year in Q3. A prerequisite to further scaling internationally is cost-effectively translating our programming, especially given our enormous output with 3,300 classes released in the quarter alone. In March, we launched AI-powered subtitles, starting with our existing languages in English, Spanish, and German. And we are now translating roughly 100 classes per day. Our third objective is to keep our members for life. This starts with delivering elevated experiences at each stage in the member lifecycle. Member satisfaction scores are our preferred way to measure the member experience. This quarter, we worked with our repair partners to pilot dedicated vans stocked with Peloton spare parts to increase first visit-repair resolution, and we are now extending this pilot to additional locations. Our service and repair MSAT was 4.5% in Q3, an improvement of 5% quarter-over-quarter and 7% year-over-year. We also introduced AI into our call centers, providing our agents with a powerful intelligent agent, while still delivering the human interactions our members expect. In Q3, our member support MSAT score was 4.3, improving 1% quarter-over-quarter and 20% year-over-year. We see significant opportunities to continue improving our member satisfaction by optimizing the journey from the point of purchase to delivery, installation, and onboarding, improving our hardware design to allow for easier installation, and repairs and reducing the number of times that members need to contact our member support teams. Beyond strengthening members' connections with Peloton, we believe that when members feel connected to each other, they're more likely to stay committed to their fitness regimen. We launched Team Feed in January, enabling members who have joined the team to encourage and support each other by sharing workout activity and reacting to activity from teammates. We also launched Community Teams in the quarter, which are public, discoverable, and recommended teams of up to 50,000 members. As of Q3, our members have created nearly 100,000 teams. We see higher engagement within the first month after members join a team. Last but not least, we need to operate with greater efficiency and effectiveness in revenue realization and cost reduction. To accelerate our progress, I recently made changes to our leadership team. The first change was recruiting Charles Kirol to be our COO. Charlie knows how to manufacture complex consumer-facing equipment. He also currently holds the rank of Rear Admiral in the U.S. Navy Reserves, where he is one of the senior-most procurement logistics and supply corps officers. This is the type of expertise and leadership we need for our next chapter. The second change was designating Dion Camp Sanders as our Chief Commercial Officer. I referenced earlier the importance of scaling Peloton's presence in more places, including gyms, retail, hospitality, and internationally. Dion oversees all these areas and so bears principal responsibility for our strategy of meeting members everywhere. Additionally, we have announced a search for a CIO, CMO, and Chief Communications Officer. Even in advance of these changes, I want to highlight the team's significant progress in reducing costs. We continue to track ahead of our $200 million cost restructuring plan, which is driving meaningful improvement in profitability and helping us to deleverage our balance sheet at a swift pace. We see further opportunities to reduce our costs. We are formalizing a company-wide program to drive continuous cost improvement while ensuring our bases for competitive differentiation remain best-in-class. Having walked you through our strategy at a high level, I'll now turn it over to Liz to discuss Q3 results.
Liz Coddington, CFO
Thanks, Peter. We are pleased with our third-quarter results as we delivered at the high end of or exceeded guidance on key metrics and continued to make meaningful progress on improving unit economics and profitability. We also advanced our marketing objectives by improving our LTV-to-CAC ratio with a disciplined approach to sales and marketing. We ended the quarter with 2.88 million Paid Connected Fitness subscriptions, reflecting a net increase of 5,000 in the quarter due to seasonally higher additions and lower churn. This represented a decline of 6% year-over-year and exceeded the high end of our guidance range by 10,000 subscriptions. Outperformance relative to guidance was driven by both favorable net churn and higher gross additions. Average net monthly Paid Connected Fitness subscription churn was 1.2% in the third quarter, in line with Q3 of last year and an improvement of 20 basis points quarter-over-quarter. Net churn was positively impacted by strong performance in subscription cancellations and reactivations, which benefited from marketing outreach to churned members. Gross additions outperformance was driven by slightly higher first-party hardware unit sales, whilst third-party retail sales and secondary market additions were in line with expectations. We ended the third quarter with 573,000 Paid App subscriptions, inclusive of Strength+ subscriptions, reflecting a net decrease of 12,000 in the quarter. Total revenue was $624 million in the third quarter, comprising $205 million of Connected Fitness products revenue and $419 million of subscription revenue. Total revenue was $9 million above the midpoint of our $605 million to $625 million guidance range. Connected Fitness products revenue decreased $74 million or 27% year-over-year, driven by lower sales and deliveries across all Connected Fitness product categories. Seasonally lower hardware sales in the third quarter compared to last quarter is reflected in the revenue mix of 33% Connected Fitness products revenue and 67% subscription revenue. Subscription revenue decreased $19 million or 4% year-over-year, driven by lower paid Connected Fitness subscriptions and lower paid App subscriptions, partly offset by used equipment activation fee revenue, which was introduced in the first quarter of fiscal 2025. We remain focused on acquiring new members more cost-effectively, and our third-quarter performance reflects the continued progress we've made in evolving our marketing strategy. Our advertising and marketing spend decreased 46% year-over-year, while our Connected Fitness products revenue decreased by a comparatively lower rate of 27% year-over-year. Our Find Your Power marketing campaign that began in the holiday season continued in the third quarter, showcasing the breadth of Peloton's offerings to men and highlighting our Tread and Strength products. Similar to Q2, in Q3, we saw both a 300-basis-point increase year-over-year in the mix of gross additions to men as well as higher new subscription attach rates from Tread sales year-over-year. These efforts drove an improvement in LTV-to-CAC of more than 30% year-over-year, achieving a ratio slightly above 2x for the quarter. Total gross profit was $318 million, an increase of $8 million or 3% year-over-year. Total gross margin was 51%, an increase of 780 basis points year-over-year and 100 basis points above our guidance due to revenue mix shift toward the subscription segment and favorable Connected Fitness products gross margin. Connected Fitness products gross margin was 14.3%, up 1,000 basis points year-over-year, primarily driven by lower inventory write-downs, a mix shift toward higher-margin products, and lower warehousing and transportation costs, partly offset by changes in our warranty reserves. Subscription gross margin was 69%, up 90 basis points year-over-year. Total operating expenses, including restructuring and impairment expenses, were $351 million in the third quarter, a $105 million or 23% decrease year-over-year, reflecting the progress we've made thus far toward right-sizing our cost structure. We continue to track ahead of our target to achieve $200 million of annualized run rate cost savings by the end of fiscal 2025. Sales and marketing expense was $106 million, a decrease of $64 million or 37% year-over-year, primarily from a decrease of $52 million in advertising and marketing spend and a $4 million decrease in personnel-related expenses, inclusive of stock-based compensation expense. General and administrative expense was $151 million, a decrease of $2 million or 1% year-over-year, driven by a $5 million decrease in settlement costs and professional service fees, a $2 million decrease in software and IT costs, and a $2 million decrease in depreciation and amortization costs. These decreases were partly offset by a net increase of $7 million in personnel-related expenses, inclusive of stock-based compensation, driven primarily by $21 million of executive departure costs. Excluding the impact of these executive departures, general and administrative expense decreased $23 million or 15% year-over-year. Research and development expenses were $60 million, a decrease of $17 million or 22% year-over-year, primarily driven by lower employee-related and contractor expenses. In Q3, we recognized $33 million of impairment and restructuring expenses, of which $31 million was non-cash. The non-cash charges were primarily asset write-downs related to plans to right-size portions of our corporate office footprint. The cash charges consisted of $2 million of severance and other exit and disposal costs as we continue executing on our restructuring efforts. Adjusted EBITDA was $89 million in the third quarter, which was $4 million above the high end of our guidance range and $84 million improvement year-over-year. We generated $95 million of free cash flow in the third quarter, a decrease of $11 million quarter-over-quarter and an increase of $86 million year-over-year. As of Q3, we generated $211 million of free cash flow fiscal year to date. This was also our fifth consecutive quarter of positive adjusted EBITDA and positive free cash flow. We ended the quarter with $914 million in unrestricted cash and cash equivalents, an increase of $85 million quarter-over-quarter. We continue to make progress toward deleveraging our balance sheet as net debt reduced $312 million or 35% year-over-year to $585 million. As of Q3, trailing 12-month adjusted EBITDA of $334 million reflects an improvement of $435 million year-over-year. Overall, our third-quarter performance reflects a continuation of meaningful profitability improvement, driven by higher gross margins and cost discipline. By generating meaningful free cash flow, we are also de-risking our balance sheet quickly. We are well-positioned for future growth as the leader in the connected fitness category with a high retention, high gross margin subscription business. Next, I'd like to take time to provide some context for the financial outlook for the remainder of the fiscal year. We are raising the midpoint of our full-year FY '25 guidance for key metrics, including ending paid connected fitness subscription, total revenue, and adjusted EBITDA, while maintaining guidance for total gross margin. We are prioritizing these metrics along with delivering free cash flow. Our full-year FY '25 guidance range for ending Paid Connected Fitness subscriptions of $2.77 million to $2.79 million reflects a narrower range and an increase of $10,000 at the midpoint. This increase incorporates the outperformance in Q3 and our expectations for seasonally higher net churn in Q4 as we enter the warmer months of spring and summer. Our full-year FY '25 guidance range for ending Paid App subscriptions of $540,000 to $550,000 reflects a narrower range and a decline of $30,000 at the midpoint. Our Paid App subscription guidance reflects lower gross additions, primarily due to limiting media spend and investment in attracting new corporate wellness clients. Our outlook for full-year FY '25 total revenue of $2.455 billion to $2.47 billion reflects a narrower range and an increase of $8 million at the midpoint. This increase incorporates an expectation for favorable subscription revenue, mainly driven by higher Paid Connected Fitness subscriptions. Our FY '25 outlook for total gross margin of 50% remains unchanged and incorporates our expectations for minimal impact from tariffs in Q4. We are raising our FY '25 adjusted EBITDA guidance to $330 million to $350 million, an increase of $15 million at the midpoint. Our outlook reflects continued improvements in profitability, largely due to favorability in gross profit and continued operating expense savings. Before we cover free cash flow, a quick note on tariff policy, which as you know is a dynamic situation. Peloton and Precor branded equipment are currently subject to a 25% tariff on their aluminum content. Precor and Apparel products sourced from China are subject to additional tariffs. We expect our full-year FY '25 free cash flow to be in the vicinity of $250 million, which incorporates our expectations for a roughly $5 million free cash flow headwind in Q4 from the impact of tariffs. This meaningful free cash flow generation will continue reducing net debt and deleveraging our balance sheet. Now, we'd like to open the line for Q&A.
Operator, Operator
I would like to turn back the call over to James Marsh for the first two questions. Please go ahead.
James Marsh, Moderator
Great. Thank you. The first question is from Danielle in Boston. Danielle asks, how are you incorporating AI to chart the future of Peloton?
Peter Stern, CEO
Thanks for the question, Danielle. I think AI has the potential to give human superpowers. And so that's how we're using AI. Let me give you a few examples of that. So, we've been giving our member support agents what we call an intelligent agent to sit alongside them. And that takes their already impressive knowledge about our products and just makes it kaleidoscopic. The AI agent also takes away some of the drudgery in their work, for example, by taking notes on the calls, so they can focus on giving our members the human touch that they expect. Another example of that I talked about earlier is our use of AI for translation. And let me just dimensionalize this. A typical season of a TV show has somewhere between eight to 12 episodes. Last quarter, Peloton produced 3,300 classes. So, a traditional approach to translation just isn't going to cut it, but AI can allow our instructors to communicate with our members in languages beyond the ones that they naturally speak. And so, that's another example of allowing human beings to achieve new heights. We've been, in the last couple of weeks, deploying Google Gemini to most of our Peloton team members. That allows them to use their big creative brains to do big creative thinking and let the AI agent do a lot of the work for them beyond that. And then, to me, the most exciting way that we're using AI is by empowering our Personalized Plans. So, Personalized Plans basically take our amazing human instructors and allow them to create a program so we feel more like a personal coach. I view that as basically a way of empowering our members with AI. We launched that in Q3 and we're already up to nearly half a million plans set up already. So, the future is bright for Peloton members with AI.
James Marsh, Moderator
The next question was asked by a number of folks, including Colin from Ireland, Ben from Sweden, and Jay Smith from Spain. The question is, when will Peloton expand into new markets?
Peter Stern, CEO
I love this question because the world would be a better place with more Peloton in it. We're currently in five countries besides the U.S., which are the U.K., Canada, Germany, Austria, and Australia. Right now, our penetration rates in those countries are significantly lower than they are in the U.S. So, our current focus is on growing from there. Like in the U.S., we need to earn the right to grow before we expand further internationally. So, right now, our international team is focused on trying to dial in the right mix of first-party versus partner-led growth. We’re also trying to drive up the efficiency of our customer acquisition. When we do that, we're going to be able to achieve both meaningful scale and profitability. Then, when you couple that with what I talked about a moment ago, which is AI translation of our content that unlocks new languages, that will position us to expand into new countries. In the meantime, we do see some opportunistic markets that are adjacent to some of the markets we're already in, where they speak the same languages. So, we're going to look at doing some of that starting next year.
Operator, Operator
Great. Can you open up for Q&A now?
Youssef Squali, Analyst
Great. Thank you very much and good morning all. So, Peter, you've been on the job for five months now. I'd love to get your take on your progress on key initiatives to date relative to your initial expectations, where you're running ahead, where you may be trailing a bit and how that informs your view on returning to revenue growth? And second, on changes to the management team and you've touched on this in your prepared remarks a bit, but can you elaborate a little more on the rationale of these moves now and the type of executive profiles you're looking for to fill these vacancies? Thanks a lot.
Peter Stern, CEO
Sure, Youssef. Thanks for the questions. Let me try to take them in order. So, the first part is sort of talking a little bit about our key initiatives and how we're doing against initial expectations. So far so good. As I mentioned a moment ago, the first thing that we need to do is earn the right to grow. When you look at the progress there, I think it's quite remarkable. We've been able to reduce our operating costs by 23% year-over-year. Our unit economics are up over 1,000 basis points year-over-year. Our LTV-to-CAC ratio in the last quarter was kind of in our target zone. So, we're starting to acquire new members much more cost-effectively. We're delivering real cash flow. We talked about being around $250 million this year. All of that, I think on the earning the right to grow front, is really encouraging. We also set other objectives for the remainder of this fiscal year around, for example, winning in Tread, which, as you know, is two times the market size of the Bike, and we're mixing into Tread and also increasing the percentage of new members that we get when we sell a Tread. We talked about reaching new audiences like men. And again, for the quarter, we were up 300 basis points year-over-year in our mix of men among our new subscribers. We're also focused on the importance of strength and becoming more of a holistic wellness provider. I will tell you that is an area where I've really been very positively surprised to realize that Peloton is actually the largest strength subscription service in the world. That just gives me great hope. The second question you had, I think, was about the biggest challenges or opportunities we have in getting back to growth. We need to start innovating on our hardware. We've been doing a great job on software, but it's got to come together as a mix of hardware and software and incredible content that we've got so that our members derive even more value from us and have reasons to buy more from Peloton. We need to meet members in more places. We talked about this, but we've been reducing our presence, for example, in retail, and we need to find ways cost-effectively to get back into retail. And then, of course, I've talked about gyms and hotels; those are big opportunities, and real-life events. We set a goal for our content team of increasing the number of real-life events we're in over the next year by 3x. We need to increase the lifetime of our existing members to manage churn. We're in a good place in the quarter. We did 1.2%, but we can always do better there. That’s going to involve everything from continuing to up-level the quality of member support we provide to creating more reasons for our members to stay loyal to us. We need to do all of what I just described in a balanced way, so we're neither chasing demand nor chasing supply and ensuring that we're growing profitably. So, I think that covers your second question. The third question was to talk more about the management changes. I was really lucky to join a company that already had an excellent lead team, and I’m grateful for the contributions that every one of those lead team members has made to date, including the work that Andy and Lauren have done over the last couple of years to get us to the stage we are at right now. Regarding hiring Charles Kirol as our COO, we're specifically focused on improving our pace of innovation, the agility we have in our supply chain, especially given the economic uncertainty that's out there in the marketplace, the quality of our products, particularly the quality of our installs, and the cost of our connected fitness equipment so we can appeal to more potential new members. That commitment to improving every aspect of our equipment will help deliver a critical part of our magic formula. Our new CMO and I are going to be focused on the plan to get Peloton back to top-line growth. We can continue to do a better job in getting our new story out there, and that's what I'm looking for with the Chief Communications Officer. We still have a lot of tech debt to address as a company, and that will allow us to move faster and reduce costs, which is why we've got a search for a CIO. I think all of those searches are progressing quite well, and I hope to have some good news to report relatively soon.
Youssef Squali, Analyst
Very helpful. Thanks for that.
Arpine Kocharyan, Analyst
Hi. Thank you so much for taking my question. Good morning. Peter, would it be possible to give us a sense of what overall impact on your business you're seeing from kind of broader consumer slowdown and macro fears? I guess, what kind of macro scenarios are factored into your Q4 guidance, which is actually going up by about $3 million by my calculation in terms of EBITDA from what you were implying before. Have you actually seen any slowdown in any segment? What are you watching as far as broader consumer health? And then, I have a quick follow-up.
Peter Stern, CEO
Thanks, Arpine. We've seen some ups and downs lately, but let me pass it to Liz to talk about more specifics on this.
Liz Coddington, CFO
Sure. So, going into the end of April or very early April, we did see a little bit of softness in our sales, but since then, we've actually seen things bounce back and do feel really good about our future. Overall, our business continues to be resilient and we are predominantly a subscription business with a high subscription retention and a loyal member base. If you think about it, on the fitness equipment side, we realize macroeconomic uncertainty could impact demand for connected fitness hardware sales because these are larger ticket purchases. That said, we do have lower-priced entry options for price-sensitive customers we can lean into. For example, we can offer 0% financing so customers can pay for their equipment over time. We also offer Peloton-certified refurbished Bike and Bike+ at lower price points. We offer our Bike+ rental option. And we have the secondary market where churned customers sell their hardware to others via a peer-to-peer model. Regarding our subscription business, which comprises the vast majority of our revenue and gross profit, that part of our business remains highly resilient with quite strong retention. It's worth pointing out that if you look at the price of our All-Access Membership, which provides access to a huge library of classes and more than 50 expert instructors at a price of $44 a month in the U.S., that's lower than many monthly gym memberships and also lower than the prices of individual classes at some boutique fitness studios. One more point that I think is helpful just as you think about the broader fitness industry relates to macro: we took a look at historical GDP data related to the wider fitness industry. Overall, it shows that our fitness industry has been quite resilient during periods of economic uncertainty. During the period of GDP decline between 2008 and 2009, external data showed that U.S. spending on fitness continued to grow. That implies the fitness industry has some resilience to external economic factors, or to put it more plainly, the data suggests that fitness isn't among the areas that consumers are likely to scale back when times are tough, presumably due to the value they place on personal fitness and wellness. Hopefully, that addresses your question.
Arpine Kocharyan, Analyst
That is actually super helpful. Thank you. And then, a quick follow-up. Peter, you highlighted pricing and the continuation of cost discipline in your strategic pillars and how you see returning to growth. Could you expand on that a little bit? It seemed like the initial strategy was super-serving the consumer to protect churn and maybe then focus on pricing while you continue to further reduce OpEx. If you could elaborate on that a little bit more, it would be very helpful.
Peter Stern, CEO
Sure, Arpine. First of all, I don't think super-serving the member and also making sure that we get value for our products are mutually incompatible. As we said during last quarter's remarks, we're taking a hard look at pricing, which builds on work that we did earlier this fiscal year where we improved our unit economics. We took up the price of the Rower in North America and both of our Bike products internationally. We're continuing to look at our equipment pricing, taking into consideration the impact of tariffs as we do so. Regarding the subscription price increase, I don't have anything to say today except to note that it's been almost three years since we did a subscription price increase and we've never done one internationally. We feel good about the value we provide, so it's something we're looking at.
Arpine Kocharyan, Analyst
Thank you very much.
Doug Anmuth, Analyst
Thanks so much for taking the questions. I have two. First, on the brand, the brand has been through a lot of change over the past several years, and there have also been a number of CMO changes as well. Just curious how you think about improving the marketing strategy overall and if you have thoughts there. I know that obviously the role you’re still trying to fill. And then secondly, could you clarify some of the puts and takes around fiscal '26 free cash flow just following the big move in '25? Thanks.
Liz Coddington, CFO
I'm sorry, Doug. You cut out a little bit on the end of your question. Would you mind repeating the part that you were directing at me?
Doug Anmuth, Analyst
Yes, absolutely. Sorry. I know it's early, but looking for some of the puts and takes around fiscal '26 free cash flow just following the big move up in '25?
Liz Coddington, CFO
Thank you. So first, I want to comment a little about where we were at year-to-date for fiscal '25. Year-to-date, we've delivered $210 million in free cash flow. When we set our guidance last quarter, we talked about delivering a minimum of $200 million in free cash flow for the full year. We continue to outperform a bit on our expectations and have greater visibility on our free cash flow as we progress through the year. We now expect that we will end the year with roughly $250 million in free cash flow for fiscal '25, which, given where we were a year ago, is quite a tremendous improvement year-over-year and massively from two years ago. Now, I'm not going to provide any guidance around fiscal '26, but it is worth noting a few things. In fiscal '25, we are benefiting from a net working capital tailwind associated with optimizing our inventory levels. We do expect to have a modest tailwind going into fiscal '26, but not nearly as much as we observed in fiscal '25. We do expect to generate meaningful positive free cash flow in fiscal '26, just as we are doing in FY '25.
Doug Anmuth, Analyst
Got it. Meaningful positive free cash flow in fiscal '26, you're saying, as in '25?
Liz Coddington, CFO
Sorry, '26. Yeah, '26 as in '25. Sorry for that.
Doug Anmuth, Analyst
No problem. Thank you so much. Appreciate it.
Unidentified Analyst, Analyst
Hi, good morning. Thanks for taking my questions. So, Peter, I mean, it's longer-term in nature and looking at your results today and over the last several quarters, you've done a great job of stabilizing the business, controlling costs. But how are you thinking about or how should we think about the return to positive top-line trends and sort of the building blocks to get there?
Peter Stern, CEO
Yeah, thanks. That's the work we've been doing on developing the strategy and plans for the next few years. Let me translate what we shared in our letter and in my remarks into the math of getting back to positive trends. The first part of the strategy that you heard me talk about was improving member outcomes, and what that does is deliver more value to our members, and that's going to translate into members being willing to pay more for Peloton and buying more things from us. You can look at that as the key to increasing average revenue per member. The second part of the strategy is meeting members in more places. By being in retail, gyms, commercial, growing internationally, being in more real-life events, and having a greater presence online, all of that adds up to more opportunities for us to grow members. You can view that as driving the number of members up. The third part of the strategy you heard was creating members for life, and that's about increasing longevity, which translates into lower churn and higher customer lifetime value. Focusing on the top-line growth, essentially, our whole equation is average revenue per member times the number of members times years per member; that equals our long-term revenue. That is the bridge from the strategy I shared with you to how we drive growth.
Unidentified Analyst, Analyst
That's very helpful. I appreciate it. For my follow-up question about the balance sheet, you've reached a point where you're generating sustainable free cash flow. We've noticed that the leverage ratio has decreased. As we look ahead at the balance sheet, do you anticipate a natural reduction in leverage, or do you plan to take more aggressive steps in the near term?
Liz Coddington, CFO
I can take that one. First of all, the health of our balance sheet is something we are particularly proud of relative to where we were about a year ago. If you think about it, we were approaching maturity while we had to complete a $1.35 billion refinancing of our balance sheet, which has since been done. We've grown our trailing 12-month adjusted EBITDA to $334 million, which is a massive improvement of over $435 million year-over-year. We've also generated over $230 million of free cash flow over the past 12 months. We're pleased with that progress because as you pointed out, it has allowed us to deleverage our balance sheet. Our net debt has decreased by $312 million or 35% year-over-year as of Q3. We also ended the quarter with $914 million in unrestricted cash and cash equivalents. A few things to note: we are mindful of the fact that we have about $200 million in convertible notes due in February of next year. We have ample cash on our balance sheet to pay them. We're not planning to pay them early at this point because they are at a 0% coupon. As our balance sheet becomes healthier, we have more options regarding capital allocation. Our top priority is to continue to deleverage, as we believe that's the best way to create more optionality in regard to capital allocation. That will also help us reduce our cost of capital over time. That may include paying down our debt, investing more in strategic initiatives to grow the business, which Peter talked about, and considering any inorganic growth opportunities we might pursue. Eventually, we hope to in some way return capital through dividends and share buybacks.
Unidentified Analyst, Analyst
Very helpful. I appreciate it. Thank you.
Simeon Siegel, Analyst
Thanks. I was hoping James would introduce me as Simeon from New York, but I'll take it. Good morning, everyone. There's been nice progress in improving the health of the business. Peter, your total members seem to be declining faster than the Paid CF subscriptions, based on the metrics you provided. Do you think this indicates that fewer intentional members are leaving, and that the engagement and strength of the remaining users are inherently stronger? If that’s the case, what could it mean for churn and the potential for pricing changes, or anything else? I'm curious if you are ending up with a smaller but stronger user base, and if so, what initiatives might support that? Also, Liz, regarding the used equipment activation fee, can you provide any estimates on that? If I'm interpreting this correctly, it seems that Paid CF subscriptions are slightly up quarter-over-quarter, but subscription revenue has decreased a bit. I’m just trying to understand what other factors might be affecting that subscription revenue line, possibly related to app declines, or anything else we should consider. Thanks, everyone.
Peter Stern, CEO
Thanks, Simeon. I'll start us off. I don't think we're seeing it the same way you're seeing in terms of total members declining at a different rate from the subscriptions, but nonetheless, what we're seeing year-over-year is consistency around our churn percentage. I think it was strong in the last quarter at 1.2%. We continue benefiting from the tenure effect. We just have long-standing, very loyal members in the business. In general, we're focused on making sure we can serve those members the best we possibly can and build the value they perceive in the company. We're seeing positive signs because our NPS scores have risen in some cases by double digits over the last year, which gives us confidence in the value we're delivering. Again, I'm not going to talk more about our further strategies aside from focusing on improving it. With that, I'll pass to Liz.
Liz Coddington, CFO
So, I just want to correct one thing. The members are down 8% versus subscriptions down 6%, but you have to remember that members are also impacted by the App. In the App, we only have one member per subscriber, and that's why App members are down. It's not just our Connected Fitness members. When you're looking at that, you have to look at the App members as well. The used equipment activation fee is a fee we charge when a subscriber joins us through the secondary market and purchases their hardware from someone else, not through Peloton and not through one of our third-party retail partners. We have been pleased with the secondary market activation fee. It has added revenue for the business and positively impacts us because we get that revenue upfront. We are seeing improved cohort churn among secondary subscribers, presumably because they're investing a little bit more when they pay that fee. It benefits us both in terms of revenue and free cash flow. I also want to remind you that our subscription revenue includes things like content licensing revenue. So, it's not just merely subscribers.
Simeon Siegel, Analyst
Sounds good. Thanks a lot, guys. Best of luck for the rest of the year.
Peter Stern, CEO
Thank you, operator. Before we close, I want to take a moment to share one of the most important things I've tried to do since joining Peloton, and that's to understand what works, so we can do more of that. Today, we discussed a number of things that are working, strength content and features, and solutions around holistic wellness such as meditation. Our micro-store is driving more revenue than our average showroom at a fraction of the size, cost, and lease commitment. Our workout area at the University of Texas is helping us reach more members. Teams are growing fast with nearly 100,000 already, and our reactivation efforts have been successful. We're also shifting perceptions of our content and product offerings, extending beyond the Bike with Tread, Running, Walking, and Strength. As we unveil our strategic plans for fiscal year '26 and beyond, you should expect to hear more from us about doing more of what's working. Many of you are not just shareholders but also among our most avid members. So, here are your assignments: Check out our kettlebell strength workouts and our exclusive lineup of classes featuring DJs from Armin van Buuren's Armada Music. In the meantime, see you on the leaderboard.
Operator, Operator
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.