Earnings Call Transcript - PTON Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Peloton Interactive Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. And we will take one minute to assemble the queue after the Safe Harbor. I would now like to hand the conference over to your speaker today, Peter Stabler, Head of Investor Relations. Please go ahead.

Peter Stabler, Head of Investor Relations

Good morning, and welcome to Peloton's fiscal fourth quarter conference call. Joining today's call are CEO, Barry McCarthy, and CFO, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For 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. I'll now turn the call over to our operator to take our first question.

Operator, Operator

All right. And our first question comes from the line of Justin Post from Bank of America. Your line is open.

Justin Post, Analyst

Great. Thanks. A couple, first, when you said churn about 1.41%, and I think it would be lower if you adjust for Canada, is that what you're looking for in the first quarter, or is the adjusted with Canada? And then secondly, just thinking about the shape of the year, looking for flattish subs in the first quarter, how are you thinking about holiday seasonality going forward? And what needs to happen to get to break-even cash flow? Thank you.

Barry McCarthy, CEO

Take the first two questions, and I'll do the cash flow.

Liz Coddington, CFO

Sure. So the first question, I believe, if I understand correctly was related to churn and what our expectations are for the first quarter. As we mentioned in our shareholder letter, we saw a modest increase in our monthly churn for Q4 and that was related to our All-Access subscription price increase that we had in June. I'm happy to say, though, that for July, we saw churn levels decline from June and declined from the Q4 average. So we expect our retention levels to remain attractive. Our engagement trends suggest that churn will continue to remain low in the first quarter and for the rest of the year. With regard to the flat subs, seasonally, Q1 is a low growth quarter for Connected Fitness product sales. We did increase prices on Bike+ and Tread and that took effect on next 12, and while we do expect our Q1 churn to remain low, as I said before, our volume of Connected Fitness growth additions in Q1 is expected to be offset by churn due to the size of the sub base. Now how does that play for seasonality going forward for the rest of the year? We're not providing any full year guidance on revenue or subscribers, but we do expect revenue for the year to most closely resemble the seasonality for fiscal 2022 in terms of revenue per quarter. Hopefully, that's helpful.

Barry McCarthy, CEO

And then I think the third part of the question, Justin, was the cash flow where we have to get to breakeven cash flow. And the short answer is, not to be glib, we need to rightsize the spending of the business or the run rate of the business, whatever the run rate of the business turns out to be. And then secondly, and I made this point when I first joined the company, both employees and investors, it's not enough to just cut expenses. We have to grow revenue. And we've taken a number of steps in order to accomplish that objective. We have substantially picked up the pace of innovation and testing and risk-taking in order to accomplish that objective among the new initiatives or fitness as a service, the sale of previously owned bikes, evolution of our digital app strategy, which we have more to say over the next several months among other initiatives like the introduction of the roller and the new pricing strategy. So we happen to sit right smack in the middle of the pivot where we have made substantial progress addressing all of the infrastructure-related headwinds of the business. And now it's time to get back to the business of expanding the franchise. We do that principally by expanding the TAM. And we do that principally with a good, better, best strategy that targets not only the premium segment of the market, but the value segment of the market and the use case for connected fitness with competitive platforms.

Justin Post, Analyst

Great. I'll let someone else ask more questions. Thanks.

Operator, Operator

Our next question comes from the line of Doug Anmuth from JPMorgan. Your line is open.

Doug Anmuth, Analyst

Thanks for taking the questions. You've had multiple product price changes over the past several months. Just trying to understand how comfortable you are now with the most recently revised pricing that creates this greater gap between entry level and premium products and then how you're going to communicate those options in your marketing. And then, Barry, if you could perhaps also update us on Fitness-as-a-Service, how we should be thinking about kind of full rollout and how you'll increase awareness around the product going forward? Thanks.

Barry McCarthy, CEO

I have difficulty hearing. But I believe the first part of the question concerns pricing in general and loans to the market. The second part is about Fitness-as-a-Service, including our thoughts and plans for it. Let me start with Fitness-as-a-Service, and then I'll ask Liz to add her input. We have gradually expanded our reach and marketing initiatives in this area. We are currently selling or renting around 30,000 to 40,000 units annually, which is relatively small, and we haven't fully committed to it yet. The question arises as to why, especially since we've been working on it for a while. The reason is that we need to assess the value proposition for consumers and Peloton, particularly by understanding retention behavior and implied churn rates to calculate lifetime value and determine our path forward. So far, we're encouraged by the churn data we've observed, although it's limited. I'm cautiously optimistic. A potential success for us could be around 125,000 to 150,000 rentals annually, and we can now utilize our certified pre-owned inventory to meet that demand. Overall, this looks promising. There could be some substitution between certified pre-owned bikes and Fitness-as-a-Service since they cater to the same value-oriented segment. We're also attracting a younger and slightly more female demographic than before, which is positive news and broadens our total addressable market. Regarding the certified pre-owned program, we've seen significantly better results, having outperformed our forecasts by three times, although we started with a small number of units, so it should be taken with caution. We have plenty of used bikes to integrate into that program. We've discussed it for a year and finally launched it, and now we will focus on its growth and observe how it impacts Fitness-as-a-Service. As for pricing, I want us to adopt a good-better-best strategy. Our Net Promoter Scores suggest that within the premium segment, the integrated hardware user experience with Peloton is the best available, and there are customers willing to pay a premium for that. We aim to serve that market well. However, if we want to accelerate revenue growth, we have to broaden our total addressable market and target new segments, which is where the good and better options come in, along with our Fitness-as-a-Service and digital app strategy. I previously mentioned that we are pursuing a freemium model for the digital app, which we will implement with various price points offering different content access based on payment. About half of our paying customers currently use connected fitness content on the app, indicating they're using it on other hardware, which we've traditionally avoided. Moving forward, we will encourage this. I welcome users to access our content on their existing hardware, which presents a significant opportunity for monetization and will help us expand our total addressable market. We'll refine our pricing strategy as we go. Now that we have improved cash reserves and made changes in the business, we can focus on pricing products to achieve reasonable returns on hardware. Earlier this year, we needed to liquidate hardware for cash management, but that is behind us now. Did I address your question?

Doug Anmuth, Analyst

You did. Very helpful. Thank you, Barry.

Barry McCarthy, CEO

Yes.

Operator, Operator

Thank you. One moment for our next question. Our next question is coming from the line of Ron Josey from Citi. Your line is open.

Ron Josey, Analyst

Great. Thanks for taking the question. And I wanted to ask maybe a bigger picture on gross margins. And, Barry, I know we talked about the focus being on free cash flow, but help us understand how you view gross margins maybe on the subscription side, given the pricing increase? And then, on the product side, as you exit manufacturing in last mile and fast gain share here, just as we think bigger picture on the way towards free cash flow. And maybe a second one, just on that. Any insight or help us understand how you view inventory just continued coming down going forward? Thank you.

Barry McCarthy, CEO

I'm going to ask Liz to discuss the gross margin subscription and broader perspective, while I will focus on the inventory liquidation. There may be an impression that since we have a significant inventory position that we will be liquidating during FY 2023, we will see a substantial boost in free cash flow that could aid our goals for FY 2023. However, I want to clarify that the actual net benefit in FY 2023 will only be about $6 million. While we will gain from selling inventory we have already purchased, there are also considerable costs associated with settling supply-related issues we've faced over the past few quarters. Therefore, on a net basis, the situation is less favorable. For the full year, if we successfully manage our current forecast, we expect to end the year with approximately $1 billion in cash, ensuring we are well-capitalized for the business's ongoing needs. Liz, would you like to address the gross margin aspect of the question?

Liz Coddington, CFO

Yes. Regarding gross margin, I view it as comprising two main components. First is the revenue aspect, where we've increased prices for Bike+ and Tread, which will positively impact gross margin overall. Second, from a cost of goods standpoint, we've chosen to fully outsource our last-mile delivery to third-party logistics, which we believe will lower our delivery costs. We're also working on enhancing our delivery quality, which should subsequently help decrease our warranty costs over time. Additionally, in the longer term, there's potential to improve gross margin related to connected fitness by reducing hardware costs through better product design, although this is more of a long-term opportunity.

Barry McCarthy, CEO

Let me just jump in and mention related to that is redesigned to enable self-install, which would dramatically change the logistics and the costs associated with last mile domestically and internationally.

Liz Coddington, CFO

I want to emphasize that for the first quarter, we expect a gross margin of about 35%, but we are not offering any additional guidance for the year at this moment. You also asked about subscription gross margin, which is clearly higher than our Connected Fitness product gross margin. As our subscription base grows and matures, we expect this will positively impact our overall gross margin.

Ron Josey, Analyst

Thank you Barry. Thank you Liz.

Operator, Operator

One moment for our next question. Our next question comes from the line of Lauren Schenk from Morgan Stanley. Your line is open.

Lauren Schenk, Analyst

Great. Thanks. Just following up on that last one. How should we think about the longer term or stabilized Connected Fitness gross margin? And my second question, in terms of the self-install option, is that only going to be available on Amazon for the time being? Any color on the margin benefit from that? It looks like pricing is similar or the same as having the professional delivery. And then in terms of other potential third-party partners, what are you looking for in those new relationships? Thanks.

Barry McCarthy, CEO

As it pertains to long-term gross margin, our business is increasingly influenced by the growth of recurring subscription revenue, which has a higher margin compared to hardware. Therefore, the long-term trend in margins will align more with software margins than hardware margins. Regarding self-installation, one challenge in hardware delivery is coordinating the schedule with the availability of customers. Transitioning to a drop-ship model would alleviate much of that friction, which would be beneficial. Additionally, designing a self-install option allowed us to reduce the weight of the unit, leading to cost savings in the final stages of delivery. If we successfully implement self-installation, it could significantly enhance our international growth prospects, which we plan to pursue when we are ready to handle the additional costs of that expansion. There was also a question about third-party retail partnerships. I have previously mentioned that this is a strategy we consider important. We are still in the early stages and learning as we go. This does not replace our own retail strategy but acknowledges that we must meet our customers where they are, whether that's in stores or online. Our research indicates there are about 500,000 daily searches for Peloton on Amazon, presenting a sales opportunity there and in other retail formats. It's crucial for us to test and learn through expanding our distribution to identify cost-effective channels. Over time, as we understand the margin implications better, it would be fantastic to extend our distribution to other Peloton hardware on Amazon. However, we currently need to be able to drop-ship to sell on their platform, and thus far, the Tread and Bike+ don't accommodate that solution, which is why they aren't yet available for sale there. We are working towards resolving this short-term issue.

Peter Stabler, Head of Investor Relations

Thank you. Next question, please.

Operator, Operator

Thank you. One moment for our next question. Next question comes from the line of Edward Yruma from Piper Sandler. Your line is open.

Edward Yruma, Analyst

Hey, guys. Good morning. Thanks for taking the question. I want to just point down a little bit on engagement. I know you're going to stop reporting metrics on a quarterly basis. But how do you think about engagement holistically? Obviously, I know a lot of moving pieces post-COVID and seasonality, but where do you see engagement going over time? And is there anything you can do to help drive that number higher? Thank you.

Barry McCarthy, CEO

Let me dive in. I mentioned wanting to focus on software. It's essential for us to be innovative both in hardware and software. However, our main growth opportunity lies in leveraging our unique competitive advantage, which is our content. It truly is the key asset, and it continues to perform exceptionally well. To enjoy it, you need to discover it. We enhance engagement, reduce churn, increase lifetime value, and foster organic growth through word of mouth by ensuring you're delighted with the content. We achieve this by helping you engage with it, personalizing it, and providing an interface that understands your preferences while introducing new content aligned with your tastes. This is how Netflix surpassed Blockbuster and why Spotify leads in music streaming. The more content we have, the more critical it is to excel at creating a personalized user interface. This is a current focus for us, and we will pursue it diligently. We're still in the early stages; we currently offer a limited selection that may reflect some of your past interests, but there's a vast array of content that we think you'd like, even if you haven't engaged with it yet. Ultimately, what matters is aligning with your true interests, and we need to bridge that gap.

Peter Stabler, Head of Investor Relations

Next question please.

Operator, Operator

Our next question will come from the line of Eric Sheridan from Goldman Sachs. Your line is open.

Eric Sheridan, Analyst

Thanks so much for taking the questions. Maybe just a two-parter. Barry, how are you thinking about the health of the brand today? You came out of the pandemic with a lot of awareness of the brand and a lot of halo effect. But sales and marketing has been more of an area of reduction in the last couple of quarters. So, how do you think about sort of returning to sales and marketing as a channel continuing to grow awareness of the brand and use sales and marketing as a tool to address sort of the better, best strategy you talked about in terms of amplifying the gross addition dynamic for the platform.

Barry McCarthy, CEO

Thanks for the question, Eric. The brand is in excellent shape. While the business has faced challenges, the brand continues to be well-loved, and our Net Promoter Scores are outstanding. We are a US-based bike company, where 96% of our hardware platforms are bikes. However, there’s significant opportunity for growth beyond just Bike+, including the Tread, the Rower, the guide, and especially the digital app. Our good, better, best strategy has opened up market segments we haven’t targeted before, and we now have a chance to invest in increasing awareness. For instance, bike unaided awareness stands at 53%, but the Tread is only at 21%. Our analysis shows that the digital app has just a 4% awareness, indicating a lot of potential for improvement. We've identified several areas to enhance marketing and growth. Although there were challenges that needed addressing, we are actively working on these now. We have several initiatives planned to ensure success. It’s important to note that achieving our goals will require increased efforts. We've launched various initiatives aimed at this objective and are confident that we will succeed; it’s just a matter of time. Drawing from my experiences at Netflix and Spotify, I can’t predict which initiatives will lead us to our desired outcomes, but I am confident in their overall positive impact.

Peter Stabler, Head of Investor Relations

Next question, please, Victor.

Operator, Operator

Okay. Our next question comes from the line of Shweta Khajuria from Evercore ISI. Your line is open.

Shweta Khajuria, Analyst

Okay. Thank you for taking my questions. I have one on the next quarter guide. So I think, this was somewhat asked earlier, but I just want to get a little bit more clarification. If you exclude the Canadian members in the guide, organically, does that imply net adds decline, because 85% of members actually did take the action. So could you please clarify that? Second is on gross margins, is it possible to get a little bit more color on the magnitude of impact from the price increases versus the cost-cutting actions that you took related to customer service and outsourcing third-party logistics? And then the final question is, Barry, as you think about growth next year, possible to give a sense of how fast, if at all, the connected fitness market is expected to grow and in terms of the magnitude of the impact of all these initiatives, whether it is FaaS or international or digital subscription, app initiatives. Which ones do you think in order of magnitude will be most impactful next year? Thank you very much.

Barry McCarthy, CEO

Liz is figuring out how to respond to the first two questions. I want to ensure I understand your questions, Shweta. The first question was about Canadian subscribers. It seems you were inquiring whether that indicates a negative net addition because of subscriber churn. However, they are not considered a gross addition. If they hadn't churned, there would be no impact. Therefore, in our view, they are not regarded as a gross addition.

Liz Coddington, CFO

I wasn't quite following your question about the gross margin. Is that what you meant?

Barry McCarthy, CEO

I think, how much of the gross margin improvement comes from last mile and member service reduction as opposed to price increase?

Shweta Khajuria, Analyst

That's right. Thank you.

Operator, Operator

Thank you. One moment.

Barry McCarthy, CEO

No, Victor, we’re not done with this question yet. While Liz is focused on that, let me discuss the connected fitness market for next year. Honestly, I can't predict what will happen in the marketplace due to various economic factors. The real challenge for us is to expand the total addressable market and reach customer segments that we currently do not. This leads me to address your question about the primary leverage points for the business. I’ll set aside the rotor for a moment in this discussion. Probably certified preowned will be a significant driver, followed by Nirvana and growth in the digital space, as that is crucial for us strategically. If we succeed with that initiative, we will gain access to the existing customer base of competing hardware and new usage opportunities for our content, along with Fitness-as-a-Service. If Fitness-as-a-Service really takes off, then we will need to develop a capital strategy for that business. However, I’m confident we’ll have access to capital if the margins are as favorable as we believe and if growth is as robust as we anticipate. And regarding the rotor, we’ll see how that product performs upon its release. It’ll be expensive, but I think we will change the market, and we’ll have to see how those two product developments turn out. We expect it will provide a significantly better user experience than anything currently available.

Liz Coddington, CFO

Okay. For the gross margin question, I think you were asking like how should we think about the composition of the gross margin improvement and how much is coming from price, and how much is coming from our 3PL logistics, moving to the 3PL outsourcing model for last-mile logistics. In Q1, the vast majority is going to come from pricing because we just announced the move to outsource the 3PL to third parties. And so that will take a bit of time. Over the course of the year, we still expect more of it, more than 50% to come from pricing and – but the logistics will be very impactful, and it will be meaningful over the course of the year. Does that help? Does that answer your question, Shweta?

Peter Stabler, Head of Investor Relations

Next question please, Victor.

Operator, Operator

All right. One moment. Our next question comes from the line of Kaumil Gajrawala from Credit Suisse. Your line is open.

Kaumil Gajrawala, Analyst

Hi, thanks. Good morning everybody. Can you talk a little bit about the consumer and maybe the interaction between in-person studios and gyms and Connected Fitness? Obviously, the industry is down quite a bit, and there's a lot of macro effects, but can you maybe just talk about what you might be seeing in terms of the pendulum maybe swinging one direction to the other?

Barry McCarthy, CEO

All right. Let's see. I'm not sure that our experience translates to the experience of our competitors. I think it probably doesn't. In our uniquely different ecosystem where we've just opened up our studios, the amount of energy and amongst our passionate user base is, well, it's just something to behold. People lined up around the block for hours, classes oversold, crashing our reservation system. I mean it's just insane. And that's not what the industry is experiencing generally. Now that's, notwithstanding, the passion and enthusiasm among their rapid member base. As a percentage of total class is taken live, relatively small but it has an enormous halo effect and drives tremendous word of mouth, I think, all of which helps grow the brand. Is that helpful?

Kaumil Gajrawala, Analyst

Yes, that helps. Would you consider expanding the in-person studios and such? Obviously, you have a lot of excitement so far, but it's fairly small.

Barry McCarthy, CEO

I believe there is an opportunity. Let me explain how we are approaching this. Jen Cotter, who manages that business exceptionally well, and I have been considering ways to create local marketing, branding, and public relations opportunities by utilizing the celebrity influence of our instructors in various geographic markets. If we decide to expand, this concept would be a fundamental idea to explore geographically, rather than just opening additional studios across the country, especially given the high costs associated with that.

Kaumil Gajrawala, Analyst

Thank you.

Operator, Operator

One moment please. Our next question will come from the line of John Blackledge from Cowen. Your line is open.

John Blackledge, Analyst

Great. Thanks. Two questions. First, how should we think about the retail store footprint in fiscal 2023 and beyond? And the second question on cash flow breakeven. Is there any way to kind of think about the level of top line in second half 2023 to get to that cash flow breakeven number? Thank you.

Barry McCarthy, CEO

I'll let Liz address the second question. As for the retail footprint, we are not certain how many stores we will have once everything settles. Our goal is to reallocate approximately $50 million in annual spending to use it more effectively from a marketing standpoint once we complete the restructuring of our retail footprint both domestically and internationally. Liz, would you like to take the capital question?

Liz Coddington, CFO

The cash flow question and thinking about revenue. As we mentioned, that we are pulling all these different levers on the business right now. And so there's a lot of uncertainty about how these levers will bear out. And so we're not providing any full year guidance on revenue. But we did expect it to follow the seasonality in terms of revenue per quarter for prior years. Now that being said, from a cash flow perspective, we do have this North Star goal that we are working to achieve, to achieve free cash flow breakeven by the end of the year, and we will be maintaining a cash balance of at least $1 billion. And what we have to do in order to do that is make sure that we continue to work hard to rightsize our cost as Barry mentioned earlier, to align with the run rate of the business. So we will continue to do that in order to make sure that we achieve our goal of being breakeven free cash flow by the second half.

Barry McCarthy, CEO

I would say, by the way, related to the retail footprint savings, not expecting any savings in FY 2023 for the cost of rationalizing that distribution chain will mostly consume whatever savings we would otherwise realize. So, the savings, if there are any, would happen in 2024 in My Nirvana, it wouldn't be any savings. We'd take that $50 million and we redeploy it in marketing to drive some incremental growth. question is, can we find ways to spend that cost effectively using our LTV to CAC framework.

John Blackledge, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Youssef Squali from Truist. Your line is open.

Youssef Squali, Analyst

Thank you very much. I have a couple maybe for Barry. On the Amazon partnership that you announced yesterday, arguably, you guys can do a lot more with Amazon. I wanted to understand just how you think about that partnership right now. It seems like based on the type of products you're allowing Amazon to sell or you're selling through Amazon, it's maybe at the lower end of your good, better, best strategy. Is that kind of the way to think about your retail strategy broadly speaking, or is it versus DTC, or is it that just as you try to learn more about that strategy since you've basically pivoted from DTC to a broader retail strategy? And then maybe can you just talk about the status of Precor within the company? What is the strategic rationale of keeping it?

Barry McCarthy, CEO

I'll let Liz manage the Precor discussion. Regarding Amazon, I would love to offer all of our connected fitness platforms on the platform, ranging from good to best. However, currently, there needs to be an option for consumers to choose self-installation, which is not available with Bike+ or Tread. Until that situation changes and we complete a redesign, those platforms won't be listed on Amazon. It's hard to predict how significant this will be, and we have conservative estimates in our forecasts concerning the impact of this business. I hope there is great potential here, but we won't know until we gain more insights. The main objective is to start learning from this process and then make informed operating decisions that can translate learning into profitable opportunities for both sides. This approach applies to FaaS, certified preowned, and the various versions of digital apps we plan to introduce. It's about using your intuition to identify what to test and then utilizing the data to guide your reactions to test results, taking risks, moving quickly, and not being afraid to make mistakes.

Liz Coddington, CFO

We are currently evaluating our strategy for Precor. While it has been beneficial as we develop our Peloton commercial business, our focus on Precor has not been our top priority due to our ongoing work on supply chain and FaaS initiatives. At this time, we don't have much additional information to provide.

Barry McCarthy, CEO

Liz, there have been other priorities that have consumed our focus and attention. I did say when I first joined, if it wasn't Connected Fitness related, it wasn't going to be part of our long-term strategy and strategy needed to be about choice. All those things are true, Liz pointed out, has been very helpful to us. That acquisition has been very helpful to us with our commercial business, our commercial growing at about 35% year-over-year in terms of revenue. I'd like to lean into that, I'd like to accelerate that growth, making that a priority to make that happen. And in the fullness of time, we'll have more to say about Precor particularly now that we have more bandwidth to be able to think about the role it plays in our long-term strategy.

Youssef Squali, Analyst

Yes. That makes sense.

Peter Stabler, Head of Investor Relations

Thank you. We'll take one more question.

Operator, Operator

Thank you. One moment. And our last question will come from the line of Arpine Kocharyan from UBS. Your line is open.

Arpine Kocharyan, Analyst

Hi. Good morning. Thanks for taking my question. Regarding your previously announced $800 million in cost savings, I understand there are many factors at play. Could you summarize the current status of the different areas you're focusing on for overall cost savings in the medium term? I'm trying to figure out if you've found any areas where the initial expectations for savings might be greater than anticipated. Also, as a quick follow-up, after testing the removal of upfront costs for customers, leading to higher subscription payments over time, do you have an updated sense of the incremental demand opportunity this presents? Any numbers you can share would be appreciated. Thank you very much.

Liz Coddington, CFO

Regarding cost savings, it was a bit difficult to hear, but I believe you are asking about the restructuring plans we announced in February, which target $800 million in savings—$500 million from operational expenses and $300 million from cost of goods sold. We are currently ahead of the $500 million operational expense target. We will continue to adjust the business's cost structure to fit our operational needs. The shift in our third-party logistics strategy is part of this cost-saving initiative. Most of our savings on the cost of goods sold will come from this shift and some workforce reductions. We mentioned that achieving the $300 million target will take longer because it depends heavily on inventory levels. Therefore, realizing those cost of goods sold savings will require more time as we work through our existing inventory.

Barry McCarthy, CEO

That's a function of the way we account for our inventory.

Liz Coddington, CFO

Yes.

Barry McCarthy, CEO

And then, I'm pretty sure I didn't understand the second piece of the question related to upfront cost and subscription.

Arpine Kocharyan, Analyst

Now that you've tested removing the upfront cost and having customers pay a higher subscription, do you have a more updated view or sense of what additional demand that unlocks for you over time?

Barry McCarthy, CEO

Oh, I see this is related to the rental program with FaaS, I think. Well, as I mentioned earlier on the call, we're currently at a run rate of about 40,000 units annually. A win for us would be something like $125,000 to $150,000 a year. The opportunity and challenge for us is to increase that run rate. We really haven't marketed yet, and most people are unaware that it exists. When we do market it, it tends to grow quite rapidly. I'm hesitant to share any specific numbers to avoid being misleading. There are some variables that complicate data interpretation. We have adjusted our price points and the value proposition for consumers; we included Bike+, then removed it, and now we're bringing it back. When we reintroduced Bike+, we observed a 74% week-over-week increase in volume over eight weeks. In comparison, in the week prior when Bike+ was included, there was a 35% increase over nine weeks. This growth is due to our efforts to broaden the marketing of the FaaS program and raise awareness. The question remains how high our potential can be, and I can't predict how long it will take to reach that. I feel we're onto something significant. The FaaS users tend to be younger and slightly more female, and surprisingly, they are more engaged than our core users, which I didn't expect given their lesser financial investment. This might reflect the younger demographic, but we'll have to see if this trend continues as we expand the market. It's clear there's a significant opportunity for us in the value-conscious segment, and we're determined to pursue it.

Arpine Kocharyan, Analyst

Thank you very much.

Peter Stabler, Head of Investor Relations

Thank you, everyone, for your time today. Hope you all have a good day.

Operator, Operator

Thank you for participating. You may now disconnect. Everyone, have a great day.