$PTON thread

$PTON are air freighting bikes at higher cost. Why are they doing this?

3 main benefits:
Allowing capacity to catch up with demand
Allows for faster revenue recognition
Onboards monthly subscribers faster

More details below

$PTON have indicated they will spend $100m opex on air freight

This is included within guidance which is almost 700bps hit to the Connected Fitness GM in FY21 & 600bps hit to Group Gross margins for FY21


But wait- crunching the numbers this actually makes economic sense

The bike weighs 135lbs so at $3- $4 per lb you’re looking at $400-$500 additional cost per bike.

This $100m investment in air freight allows for faster delivery of 200-250k

Current backlog: 200-250k Connected fitness products -(Math worked out from customer deposit liabs)

Benefit 1: Allowing production capacity to catch up with demand

Popularity of $PTON is such that demand was outstripping production capacity and hence backlog was growing.

As a result lead times were growing and backlog stood at 10+ weeks over the Xmas period & in January

Additional production capacity from the opening of the new Shin Ji factory came on stream before Xmas allowing additional bikes to be produced

By having these air freighted to customers it means the backlog of customer orders are delivered much faster.

This has enabled the backlog to be reduced from >10 weeks in January to now 3 weeks for the $PTON Bike

Bike+ is still at higher delivery lead times of ~8 weeks due to high demand and it being a newer product line where manufacturing efficiency is not likely fully ramped yet.

However with the Shin Ji factory continuing to ramp toward full production capacity & $PTON having more capacity coming on stream with Precor in the second half of calendar 2021. This will allow for reduction in Bike+ delivery times.

On the last earnings call $PTON said they are now finally producing more connected fitness products than there was demand. This is largely due to additional production capacity coming on stream in the new factories

This now prevents the large backlog at 10+ weeks experienced in January from continuing to be that elevated in the future.

What the air freight does is it significantly speeds up customer delivery times and helps to clear the current backlog to optimal levels.

Once this is achieved; supply will largely match demand given the additional production capacity a available in the new factories.

Benefit 2: Allows for faster revenue recognition

See attached picture for explanation of how $PTON recognises revenue on the connected fitness products (CFP)

By using air freight to speed up the backlog it allows for customers to receive their bikes faster and for $PTON to recognise revenue faster and hence supports revenue growth

$2,000 deposit x 200-250k CFP backlog converted faster to revenue = $400-$500m revenue recognised faster

Revenue growth is one of the most important financial KPIs that the market pays attention to!

The market wants to see continued strong sales growth which gives evidence of continued strong demand.

Revenue recognition policy & speeding up backlog allows $400-$500m to be recognised faster which gives rise to incremental revenue growth from accounting treatment, in addition to growth from current demand

Benefit 3: Faster delivery of bike = faster onboard of monthly subs

How does this fit into management guidance..?

$PTON have already included the extra $100m cost of air freight in guidance and its impact of GMs
This is reflected within consensus numbers.

For guidance on Revenue, we do not know if it only includes growth from current demand thats now being met by extra capacity,or if it also includes some/all of extra Rev growth achieved from faster recognition of $400-$500m from faster backlog work thru,as a result of air freight

200-250k monthly subs @ $39 sped up by 6 weeks = ~$12- $15m

One would surmise that given $PTON are coming up against tough comps, management are savvy & that not ALL of the faster revenue recognition of $400-500m, nor the extra $12-15m Subs Revenue is included in guidance

Q3’21 Company Revenue guidance: $1.1B

Q3’21 Revenue Consensus: $1.119B

Chart below shows the distribution of Consensus revenue data for the next 5 quarters

For Q3’21 highest estimate is $1.246B
Lowest estimate is $1.094B

FY21 Company Revenue Guidance: $4.07B

FY21 Revenue Consensus: $4.106B

On the topic of Gross Margin contraction in FY21 and how it recovers:

Group Gross margins fall ~600bps in FY21, given supply chain issues & $100m air freight investment.

Additionally there is an expected mix effect from new product launch of the Tread which also drags on GMs

Tread is a lower GM product than the Bike.

However Gross Margins expand from 2022:
Supply issues are resolved
Air freight temporary cost falls out of the cost base
Benefits of scale accrue
Subscription revenues grow

I have Group Gross margins recovering to FY20 Gross margin of 46% over the mid term:
- Higher margin Subscription segment becomes a larger part of the overall business
- This is offset by lower CFP segment margins from Tread

See picture for my view on Gross Margins by segment

Consensus annual Gross Profit development from FY19- FY24

Q3’21 Guidance: ~35%
Q3’21 Consensus: 35.4%

FY21 Guidance: ~39%
FY21 Consensus: 39.2%

In summary:

Shorter term-
Revenue growth could surprise to upside for reasons mentioned above, yet GM contraction already de risked given it has been in the guidance and Consensus numbers for a while

Longer term-
GM expansion driven by Subscriptions & some CFP GM recovery

Hope u enjoyed some hedge fund analyst insight on $PTON

Tagging some $PTON interested parties @TheMarkCooke @InvestmentTalkk @PatternProfits @plantmath1 @BackpackerFI @BahamaBen9 @Beth_Kindig @OphirGottlieb @cperruna

Feel free to share with anyone I have missed

Thank you