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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 001-39058

Peloton Interactive, Inc.
(Exact name of registrant as specified in its charter)
Delaware
47-3533761
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
441 Ninth Avenue, Sixth Floor10001
New York, New York
(Zip Code)
(Address of principal executive offices)
(929567-0006
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.000025 par value per sharePTONThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes     No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No  



As of January 30, 2024, the number of shares of the registrant’s Class A common stock outstanding was 348,856,682, and the number of shares of the registrant’s Class B common stock outstanding was 18,016,072.









TABLE OF CONTENTS
Page
Part I. Financial Information
Part II. Other Information




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including, without limitation, statements regarding our execution of and timing of and the expected benefits from our restructuring initiatives and cost-saving measures, the cost savings and other efficiencies of expanding relationships with our third-party partners, details regarding and the timing of the launch of new products and services, our new initiatives with retailer partners and our efforts to optimize our retail store footprint, the prices of our products and services in the future, our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “target,” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements use these words or expressions.

We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions and other important factors that could cause actual results to differ materially from those stated, including, but not limited to:

our ability to achieve and maintain future profitability;

our ability to attract and maintain Subscribers;

our ability to accurately forecast consumer demand for our products and services and adequately maintain our inventory;

our ability to execute and achieve the expected benefits of our restructuring initiatives and other cost-saving measures;

our ability to effectively manage our growth and costs;

our ability to anticipate consumer preferences and successfully develop and offer new products and services in a timely manner, or effectively manage the introduction of new or enhanced products and services;

demand for our products and services and growth of the Connected Fitness Products market;

our ability to maintain the value and reputation of the Peloton brand;

our reliance on a limited number of suppliers, contract manufacturers, and logistics partners for our Connected Fitness Products;

our lack of control over suppliers, contract manufacturers and logistics partners for our Connected Fitness Products;

our ability to predict our long-term performance and declines in our revenue growth as our business matures;

the effects of increased competition in our markets and our ability to compete effectively;

any declines in sales of our Bike and Bike+;

our dependence on third-party licenses for use of music in our content;

actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products;

increases in component costs, long lead times, supply shortages or other supply chain disruptions;

accidents, safety incidents or workforce disruptions;

seasonality or other fluctuations in our quarterly results;

our ability to generate class content;

risks related to acquisitions or dispositions, including the acquisition of Precor;

risks related to expansion into international markets;

disruptions or failures of information technology systems, or websites;

risks related to payment processing, cybersecurity, or data privacy;

risks related to the Peloton App and its ability to work with a range of mobile and streaming technologies, systems, networks, and standards;

our ability to effectively price and market our Connected Fitness Products and subscriptions and our limited operating history with which to predict the profitability of our subscription model;

any inaccuracies in, or failure to achieve, operational and business metrics or forecasts of market growth;

our ability to maintain effective internal control over financial and management systems and remediate material weaknesses;

impacts from warranty claims or product returns;

our ability to maintain, protect, and enhance our intellectual property;

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

our reliance on third parties for computing, storage, processing and similar services and delivery and installation of our products;

our ability to attract and retain highly skilled personnel and maintain our culture;

risks related to our common stock and indebtedness; and

those risks and uncertainties described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 in this Quarterly Report on Form 10-Q and the sections titled “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, as such factors may be updated in our filings with the Securities and Exchange Commission (the “SEC”).

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law.

You should read this Quarterly Report on Form 10-Q, and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

In this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” and "Peloton" refer to Peloton Interactive, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
December 31,June 30,
20232023
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$737.7 $813.9 
Accounts receivable, net141.0 97.2 
Inventories, net427.2 522.6 
Prepaid expenses and other current assets220.7 205.4 
Total current assets1,526.5 1,639.1 
Property and equipment, net398.6 444.8 
Intangible assets, net20.1 25.6 
Goodwill41.2 41.2 
Restricted cash60.4 71.6 
Operating lease right-of-use assets, net499.3 524.1 
Other assets23.2 22.7 
Total assets$2,569.4 $2,769.1 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses$513.1 $478.4 
Deferred revenue and customer deposits189.2 187.3 
Current portion of long-term debt and other bank borrowings7.5 7.5 
Operating lease liabilities, current79.1 83.5 
Other current liabilities4.4 4.6 
Total current liabilities793.3 761.4 
0% Convertible Senior Notes, net
990.3 988.0 
Term loan, net691.6 690.9 
Operating lease liabilities, non-current566.3 593.8 
Other non-current liabilities27.1 30.1 
Total liabilities3,068.6 3,064.2 
Commitments and contingencies (Note 8)
Stockholders’ deficit
Common stock, $0.000025 par value; 2,500,000,000 and 2,500,000,000 Class A shares authorized, 346,192,530 and 338,750,774 shares issued and outstanding as of December 31, 2023 and June 30, 2023, respectively; 2,500,000,000 and 2,500,000,000 Class B shares authorized, 18,016,072 and 18,016,853 shares issued and outstanding as of December 31, 2023 and June 30, 2023, respectively.
  
Additional paid-in capital4,767.1 4,619.8 
Accumulated other comprehensive income19.5 16.8 
Accumulated deficit(5,285.9)(4,931.8)
Total stockholders’ deficit(499.3)(295.1)
Total liabilities and stockholders' deficit$2,569.4 $2,769.1 
See accompanying notes to these unaudited condensed consolidated financial statements.
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PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in millions, except share and per share amounts)
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
Revenue:
Connected Fitness Products
$319.1 $381.4 $499.7 $585.6 
Subscription
424.5 411.3 839.5 823.6 
Total revenue
743.6 792.7 1,339.2 1,409.2 
Cost of revenue:
Connected Fitness Products
305.3 424.2 480.2 684.1 
Subscription
139.0 133.4 274.2 272.9 
Total cost of revenue
444.2 557.6 754.4 957.0 
Gross profit
299.4 235.0 584.8 452.2 
Operating expenses:
Sales and marketing
230.3 217.1 376.4 355.8 
General and administrative
160.8 192.6 311.8 386.1 
Research and development
79.9 80.0 158.6 168.1 
Impairment expense 3.6 9.7 27.7 72.6 
Restructuring expense13.4 49.0 31.2 155.9 
Supplier settlements(1.5)17.9 (1.5)19.1 
Total operating expenses
486.5 566.4 904.2 1,157.6 
Loss from operations
(187.1)(331.3)(319.4)(705.3)
Other expense, net:
Interest expense
(27.7)(22.2)(54.9)(43.2)
Interest income
8.4 5.8 16.9 9.8 
Foreign exchange gain (loss)9.6 11.8 1.9 (5.2)
Other income, net
0.1 2.4 0.4 2.6 
Total other expense, net(9.5)(2.2)(35.7)(35.9)
Loss before provision for income taxes
(196.6)(333.5)(355.1)(741.2)
Income tax (benefit) expense
(1.7)1.9 (1.0)2.7 
Net loss
$(194.9)$(335.4)$(354.1)$(743.9)
Net loss attributable to Class A and Class B common stockholders$(194.9)$(335.4)$(354.1)$(743.9)
Net loss per share attributable to common stockholders, basic and diluted$(0.54)$(0.98)$(0.98)$(2.18)
Weighted-average Class A and Class B common shares outstanding, basic and diluted362,334,326 341,930,937 360,440,945 340,516,100 
Other comprehensive income:
Change in foreign currency translation adjustment0.8 3.9 2.7 8.2 
Derivative adjustments:
Reclassification for derivative adjustments included in Net loss 0.1  0.6 
Total other comprehensive income0.8 4.0 2.7 8.9 
Comprehensive loss$(194.1)$(331.4)$(351.5)$(735.1)
See accompanying notes to these unaudited condensed consolidated financial statements.

5

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

Six Months Ended December 31,
20232022
Cash Flows from Operating Activities:
Net loss$(354.1)$(743.9)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense55.9 60.9 
Stock-based compensation expense140.8 263.7 
Non-cash operating lease expense33.7 44.4 
Amortization of debt discount and issuance costs7.0 6.7 
Impairment expense 27.7 72.6 
Loss on sale of subsidiary3.8  
Net foreign currency adjustments(1.9)5.6 
Changes in operating assets and liabilities:
Accounts receivable(44.0)(41.4)
Inventories80.1 287.5 
Prepaid expenses and other current assets(21.1)13.0 
Other assets(1.2)5.3 
Accounts payable and accrued expenses8.6 (218.5)
Deferred revenue and customer deposits1.9 9.6 
Operating lease liabilities, net(44.5)(43.6)
Other liabilities(3.0)(13.1)
Net cash used in operating activities(110.4)(291.3)
Cash Flows from Investing Activities:
Capital expenditures and capitalized internal-use software development costs(10.0)(49.5)
Proceeds from sale of subsidiary14.6  
Net cash provided by (used in) investing activities4.6 (49.5)
Cash Flows from Financing Activities:
Principal repayment of Term Loan(3.8)(3.8)
Proceeds, net from employee stock purchase plan withholdings
1.9 2.8 
Proceeds from employee stock plans
19.1 29.9 
Principal repayments of finance leases(0.5)(1.0)
Net cash provided by financing activities16.8 27.9 
Effect of exchange rate changes1.7 7.1 
Net change in cash, cash equivalents, and restricted cash(87.3)(305.7)
Cash, cash equivalents, and restricted cash — Beginning of period885.5 1,257.6 
Cash, cash equivalents, and restricted cash — End of period$798.1 $951.9 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$47.8 $33.1 
Cash paid for income taxes$1.9 $7.6 
Supplemental Disclosures of Non-Cash Investing and Financing Information:
Accrued and unpaid capital expenditures, including software$2.2 $2.5 
Stock-based compensation capitalized for software development costs$ $4.4 
See accompanying notes to these unaudited condensed consolidated financial statements.
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PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in millions)
Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmount
Balance - September 30, 2022
339.8 $ $4,320.0 $17.1 $(4,078.6)$258.5 
Activity related to stock-based compensation4.6 — 103.4 — — 103.4 
Other comprehensive loss— — — 4.0 — 4.0 
Net loss— — — — (335.4)(335.4)
Balance - December 31, 2022
344.6 $ $4,423.4 $21.1 $(4,414.0)$30.5 
Balance - September 30, 2023
360.4 $ $4,701.4 $18.7 $(5,091.0)$(370.9)
Activity related to stock-based compensation3.8 — 65.7 — — 65.7 
Other comprehensive loss— — — 0.8 — 0.8 
Net loss— — — — (194.9)(194.9)
Balance - December 31, 2023
364.2 $ $4,767.1 $19.5 $(5,285.9)$(499.3)
Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmount
Balance - June 30, 2022
338.3 $ $4,291.3 $12.2 $(3,710.6)$592.9 
Activity related to stock-based compensation5.9 — 288.8 — — 288.8 
Issuance of common stock under employee stock purchase plan0.4 — 3.3 — — 3.3 
Cumulative effect of adopting ASU 2020-06
— — (160.1)— 40.6 (119.5)
Other comprehensive loss— — — 8.9 — 8.9 
Net loss— — — — (743.9)(743.9)
Balance - December 31, 2022
344.6 $ $4,423.4 $21.1 $(4,414.0)$30.5 
Balance - June 30, 2023
356.8 $ $4,619.8 $16.8 $(4,931.8)$(295.1)
Activity related to stock-based compensation7.0 — 145.3 — — 145.3 
Issuance of common stock under employee stock purchase plan0.4 — 2.0 — — 2.0 
Other comprehensive income— — — 2.7 — 2.7 
Net loss— — — — (354.1)(354.1)
Balance - December 31, 2023
364.2 $ $4,767.1 $19.5 $(5,285.9)$(499.3)
See accompanying notes to these unaudited condensed consolidated financial statements.
7

PELOTON INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions, except share and per share amounts)





1. Description of Business and Basis of Presentation
Description and Organization
Peloton is the largest interactive fitness platform in the world with a loyal community of Members, which we define as any individual who has a Peloton account through a paid Connected Fitness Subscription or a paid Peloton App Membership. The Company pioneered connected, technology-enabled fitness with the creation of its interactive fitness equipment (“Connected Fitness Products”) and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere. The Company makes fitness entertaining, approachable, effective, and convenient while fostering social connections that encourage Members to be the best versions of themselves.
Our Connected Fitness Products portfolio includes the Peloton Bike, Bike+, Tread, Tread+, Guide, and Row. Access to the Peloton App is available with an All Access or Guide Membership for Members who have Connected Fitness Products or through a standalone App Membership with multiple Membership tiers. Our revenue is generated primarily from recurring Subscription revenue and the sale of our Connected Fitness Products. We are additionally focused on growing our Paid App subscribers, including through efforts such as our recent branding and App relaunch in May 2023. We define a “Connected Fitness Subscription” as a person, household, or commercial property, such as a hotel or residential building, who has paid for a subscription to a Connected Fitness Product (a Connected Fitness Subscription with a successful credit card billing or with prepaid subscription credits or waivers).

Basis of Presentation and Consolidation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. The condensed consolidated balance sheet as of June 30, 2023, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (the "Form 10-K"). However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows, and the changes in equity for the interim periods. The results for the three and six months ended December 31, 2023 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2024, or any other period.

Certain monetary amounts, percentages, and other figures included elsewhere in these financial statements have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Certain immaterial amounts from the prior year have been reclassified to conform with current-year presentation.

Except as described elsewhere in Note 2 - Summary of Significant Accounting Policies in the section titled “Recently Issued Accounting Pronouncements,” there have been no material changes to the Company’s significant accounting policies as described in the Form 10-K.


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2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, product recall and corrective action cost, the realizability of inventory, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, impairment of long-lived and intangible assets, useful lives of long-lived assets, including property and equipment and finite-lived intangible assets, product warranty, goodwill, accounting for income taxes, stock-based compensation expense, transaction price estimates, the fair values of assets acquired and liabilities assumed in business combinations and asset acquisitions, future restructuring charges, contingent consideration, and commitments and contingencies. Actual results may differ from these estimates.
Internal-Use Software
The Company incurs development costs related to internal-use software. These software development costs meet the criteria for capitalization once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.
The Company evaluates the costs incurred during the application development stage of internal use software and website development to determine whether the costs meet the criteria for capitalization. Costs related to preliminary project activities and post-implementation activities including maintenance are expensed as incurred.
Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful life of the software, not to exceed three years. Capitalized costs less accumulated amortization are included within Property and equipment, net on the Consolidated Balance Sheets. Software development costs that do not meet the criteria for capitalization and are expensed as incurred within Research and development in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Recently Adopted Accounting Pronouncements
ASU 2021-08
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company adopted ASU 2021-08 on July 1, 2023. The standard will be applied to acquisitions occurring on or after the effective date. The impact will depend on the contract assets and liabilities acquired in future business combinations.

Accounting Pronouncements Not Yet Adopted
ASU 2023-07
In November 2023, the Financial Accounting Standards Board issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, and is effective for fiscal years beginning after December 15, 2023 on a retrospective basis. The Company is currently evaluating the impact of adopting this ASU.
ASU 2023-09
In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU enhances income tax information primarily through changes in the rate reconciliation and income taxes paid information, and is effective for fiscal years beginning after December 15, 2024 on a prospective basis. The Company is currently evaluating the impact of adopting this ASU.
3. Revenue
The Company’s primary sources of revenue are its recurring content Subscription revenue, revenue from sales of its Connected Fitness Products, rental lease arrangements, accessories, and branded apparel, as well as Precor branded fitness products, delivery, and installation services.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s revenue is reported net of sales returns, discounts, incentives, and rebates to commercial distributors as a reduction of the transaction price. Certain contracts include
9


consideration payable that is accounted for as a payment for distinct goods or services. The Company estimates its liability for product returns and concessions based on historical trends by product category, impact of seasonality, and an evaluation of current economic and market conditions and records the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.

Some of the Company’s contracts with customers contain multiple performance obligations. For customer contracts that include multiple performance obligations, the Company accounts for individual performance obligations if they are distinct. The transaction price is then allocated to each performance obligation based on its standalone selling price. The Company generally determines the standalone selling price based on the prices charged to customers.

The Company applies the practical expedient as per ASC 606-10-50-14 and does not disclose information related to remaining performance obligations due to their original expected terms being one year or less.

The Company expenses sales commissions on its Connected Fitness Products when incurred because the amortization period would have been less than one year. These costs are recorded in Sales and marketing in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
Some of the Company’s revenues relate to rental lease arrangements. The Company’s rental program allows Members to lease a Bike or Bike+ with a Peloton Rental Membership for a single monthly cost and a one-time delivery fee, and gives the Member the option to purchase the equipment outright or cancel at any time with no penalty. These lease arrangements include both lease and non-lease components. Consideration is allocated between the lease and non-lease components based on management’s best estimate of the relative standalone selling price of each component. The lease component relates to the customer’s right to use the equipment over the lease term and is accounted for as an operating lease in accordance with ASC 842, Leases. Lease revenue is recognized on a straight-line basis over the life of the lease within Connected Fitness Products revenue, while the underlying equipment subject to the lease remains within Property and equipment, net on the Company’s Consolidated Balance Sheets and depreciates over the equipment’s useful life. Depreciation expense associated with the underlying equipment is reflected in Connected Fitness Products cost of revenue in the Company’s Consolidated Statements of Operations and Comprehensive Loss. Non-lease components primarily consist of an All-Access Membership, which is recognized within Subscription revenue.
Connected Fitness Products
Connected Fitness Products include the Company’s portfolio of Connected Fitness Products and related accessories, Precor branded fitness products, delivery and installation services, Peloton branded apparel, extended warranty agreements, and commercial service contracts. The Company recognizes Connected Fitness Products revenue net of sales returns and discounts when the product has been delivered to the customer, except for extended warranty revenue that is recognized over the warranty period and service revenue that is recognized over the term of the service contract. The Company allows customers to return Peloton branded Connected Fitness Products within thirty days of purchase, as stated in its return policy.

The Company records fees paid to third-party financing partners in connection with its consumer financing program as a reduction of revenue, as it considers such costs to be a customer sales incentive. The Company records payment processing fees for its credit card sales for Connected Fitness Products within Sales and marketing in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Subscription
The Company’s subscriptions provide access to Peloton content in its library of live and on-demand fitness classes. The Company’s subscriptions are offered on a month-to-month or prepaid basis.

Amounts paid for subscription fees, net of refunds are included within Deferred revenue and customer deposits on the Company’s Condensed Consolidated Balance Sheets and recognized ratably over the subscription term. The Company records payment processing fees for its monthly subscription charges within cost of Subscription revenue in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Sales tax collected from customers and remitted to governmental authorities is not included in revenue and is reflected as a liability on the Company’s Condensed Consolidated Balance Sheets.

Product Warranty
The Company offers a standard product warranty that its Connected Fitness Products will operate under normal, non-commercial use for a period of one year from the date of original delivery, covering the touchscreen and most original Bike, Bike+, Tread, Tread+, Row, and Guide components. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenue. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices. The Company’s products are manufactured by contract manufacturers, and in certain cases, the Company may have recourse to such contract manufacturers.
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Activity related to the Company’s accrual for our estimated future product warranty obligation was as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Balance at beginning of period$20.7 $36.7 $26.4 $51.1 
Provision for warranty accrual7.9 8.6 9.7 5.8 
Warranty claims(7.2)(9.2)(14.7)(20.7)
Balance at end of period$21.5 $36.2 $21.5 $36.2 
The Company also offers the option for customers in some markets to purchase a third-party extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Products for additional periods ranging from 12 to 36 months.

Extended warranty revenue is recognized on a gross basis as the Company has a continuing obligation to perform over the service period. Extended warranty revenue is recognized ratably over the extended warranty coverage period and is included in Connected Fitness Product revenue in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Disaggregation of Revenue
The Company’s revenue disaggregated by segment, excluding sales-based taxes, are included in Note 12 - Segment Information.

The Company’s revenue disaggregated by geographic region was as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
North America
$686.3 $737.5 $1,235.0 $1,304.1 
International57.4 55.2 104.1 105.1 
Total revenue$743.6 $792.7 $1,339.2 $1,409.2 

During the three and six months ended December 31, 2023, the Company’s revenue attributable to the United States was $658.0 million and $1,186.1 million, or 88% and 89% of total revenue, respectively. During the three and six months ended December 31, 2022, the Company’s revenue attributable to the United States was $711.7 million and $1,256.8 million, or 90% and 89% of total revenue, respectively.

Deferred Revenue and Customer Deposits
Deferred revenue is recorded for nonrefundable cash payments received for the Company’s performance obligation to transfer, or stand ready to transfer, goods or services in the future. Customer deposits represent payments received in advance before the Company transfers a good or service to the customer and are refundable.

As of December 31, 2023 and June 30, 2023, deferred revenue of $94.9 million and $99.2 million, respectively, and customer deposits of $94.3 million and $88.1 million, respectively, were included in Deferred revenue and customer deposits on the Company’s Condensed Consolidated Balance Sheets.

In the six months ended December 31, 2023 and 2022, the Company recognized revenue of $92.5 million and $90.7 million, respectively, that was included in the deferred revenue balance as of June 30, 2023 and 2022, respectively.

4. Restructuring

In February 2022, the Company announced and began implementing a restructuring plan to realign the Company’s operational focus to support its multi-year growth, scale the business, and improve costs (the “Restructuring Plan”). The Restructuring Plan originally included: (i) reducing the Company’s headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for the Company’s previously planned Peloton Output Park; (iii) closing and consolidating several distribution facilities; and (iv) shifting to third-party logistics providers in certain locations. The Company expects the Restructuring Plan to be substantially implemented by the end of fiscal year 2024.

In fiscal year 2023, the Company continued to take actions to implement the Restructuring Plan. In July 2022, the Company announced it was exiting all owned-manufacturing operations and expanding its current relationship with Taiwanese manufacturer, Rexon Industrial Corporation. Additionally, in August 2022, the Company announced the decision to (i) fully transition its North American Field Operations to third-party providers, including the significant reduction of its delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit its real-estate footprints in its Plano and Tempe locations; and (iii) reduce its retail showroom presence. In
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January 2024, the Company completed the sale of the Peloton Output Park building and a portion of the corresponding land and received net proceeds of approximately $31.9 million. The Company continues to market the remaining land parcel.

As a result of the Restructuring Plan, the Company incurred the charges shown in the following table, of which Asset write-downs and write-offs are included within Impairment expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The remaining charges incurred due to the Restructuring Plan are included within Restructuring expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
Cash restructuring charges:(in millions)
Severance and other personnel costs$0.3 $34.1 $6.4 $61.1 
Exit and disposal costs and professional fees9.3 8.9 13.8 12.0 
Total cash charges9.6 43.0 20.2 73.1 
Non-cash charges:
Asset write-downs and write-offs$1.3 $9.7 $24.1 $72.6 
Stock-based compensation expense 6.07.282.8
Write-offs of inventory related to restructuring activities(1)
0.5 3.7 1.0 3.7 
Loss on sale of subsidiary3.8  3.8  
Total non-cash charges5.6 19.3 36.1 159.0 
Total$15.2 $62.4 $56.4 $232.2 
_________________________
(1) Write-offs of inventory are included within Cost of revenue: Connected Fitness Products in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

In connection with the Restructuring Plan, the Company committed to the closures of certain warehouse and retail locations, the discontinuation of manufacturing in North America, and the wind down of certain software implementation and development projects. Due to the actions taken pursuant to the Restructuring Plan, the Company tested certain long-lived assets (asset groups) for recoverability by comparing the carrying values of the asset group to estimates of their future undiscounted cash flows, which were generally the liquidation value, or for operating lease right-of-use assets, income from a sublease arrangement. Based on the results of the recoverability tests, the Company determined that during the three and six months ended December 31, 2023 and 2022, the undiscounted cash flows of certain assets (asset groups) were below their carrying values, indicating impairment. The assets were written down to their estimated fair values, which were determined based on their estimated liquidation or sales value, or for operating lease right-of-use assets, discounted cash flows of a sublease arrangement.

The following tables present a roll-forward of cash restructuring-related liabilities, which is included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets, as follows:
Severance and other personnel costsExit and disposal costs and professional feesTotal
(in millions)
Balance as of September 30, 2022
$15.5 $1.5 $17.1 
Charges34.1 8.9 43.0 
Cash payments(27.4)(9.3)(36.7)
Balance as of December 31, 2022
$22.3 $1.1 $23.4 
Balance as of September 30, 2023
$5.9 $0.6 $6.5 
Charges0.3 9.3 9.6 
Cash payments(3.9)(5.2)(9.1)
Balance as of December 31, 2023
$2.2 $4.7 $7.0 
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Severance and other personnel costsExit and disposal costs and professional feesTotal
(in millions)
Balance as of June 30, 2022
$10.9 $ $10.9 
Charges61.1 12.0 73.1 
Cash payments(49.8)(10.9)(60.6)
Balance as of December 31, 2022
$22.3 $1.1 $23.4 
Balance as of June 30, 2023
$13.6 $0.3 $13.9 
Charges6.4 13.8 20.2 
Cash payments(17.8)(9.4)(27.2)
Balance as of December 31, 2023
$2.2 $4.7 $7.0 

In connection with the Restructuring Plan, the Company estimates that it will incur additional cash charges of approximately $20.0 million, primarily composed of lease termination and other exit costs, which are expected to be substantially incurred by the end of fiscal year 2024. Additionally, the Company expects to recognize additional non-cash charges of approximately $10.0 million, primarily composed of non-inventory asset impairment charges in connection with the Restructuring Plan, which are expected to be substantially incurred by the end of fiscal year 2024.

5. Fair Value Measurements

Fair Value Measurements of Other Financial Instruments
The following tables present the estimated fair values of the Company’s financial instruments that are not recorded at fair value on the Condensed Consolidated Balance Sheets:
As of December 31, 2023
Level 1Level 2Level 3Total
(in millions)
0% Convertible Senior Notes
$ $778.8 $ $778.8 
As of June 30, 2023
Level 1Level 2Level 3Total
(in millions)
0% Convertible Senior Notes
$ $759.5 $ $759.5 
The fair value of the 0% Convertible Senior Notes due February 15, 2026 (the “Notes”) is determined based on the closing price on the last trading day of the reporting period.
The carrying value of the Term Loan (as defined below) approximates the fair value of the Term Loan as of December 31, 2023.
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6. Inventories
Inventories were as follows:
December 31, 2023June 30, 2023
(in millions)
Raw materials$43.9 $53.2 
Finished products(1)
590.3 703.0 
Total inventories634.1 756.2 
Less: Reserves(207.0)(233.6)
Total inventories, net$427.2 $522.6 
_________________________
(1) Includes $46.0 million and $26.4 million of finished goods inventory in transit, products owned by the Company that have not yet been received at a Company distribution center, as of December 31, 2023 and June 30, 2023, respectively.
The Company periodically assesses and adjusts the value of inventory for estimated excess and obsolete inventory based upon estimates of future demand and market conditions, as well as damaged or otherwise impaired goods. The Company’s recorded inventory reserves as of December 31, 2023 primarily consisted of $97.3 million related to excess accessories and apparel inventory and $82.4 million related to returned Connected Fitness Products that the Company does not expect to sell.
7. Debt
Convertible Notes and the Indenture
In February 2021, the Company issued $1.0 billion aggregate principal amount of the Notes in a private offering, including the exercise in full of the over-allotment option granted to the initial purchasers of $125.0 million. The Notes were issued pursuant to an Indenture (the “Indenture”) between the Company and U.S. Bank National Association, as trustee. The Notes are senior unsecured obligations of the Company and do not bear regular interest, and the principal amount of the Notes does not accrete. The net proceeds from this offering were approximately $977.2 million, after deducting the initial purchasers' discounts and commissions and the Company’s offering expenses.

Each $1,000 principal amount of the Notes is initially convertible into 4.1800 shares of the Company’s Class A common stock, which is equivalent to an initial conversion price of approximately $239.23 per share. The conversion rate is subject to customary adjustments under certain circumstances in accordance with the terms of the Indenture. In addition, if certain corporate events that constitute a make-whole fundamental change occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Notes will mature on February 15, 2026, unless earlier converted, redeemed, or repurchased. The Notes will be convertible at the option of the holders at certain times and upon the occurrence of certain events.

On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. Upon conversion, the Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Class A common stock or a combination of cash and shares of the Class A common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. It is the Company’s current intent to settle the principal amount of the Notes with cash.

The Company may redeem for cash all or any portion of the Notes, at its option, on or after February 20, 2024 and on or before the 20th scheduled trading day immediately before the maturity date, if the last reported sale price per share of the Class A common stock exceeds 130% of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (2) the trading day immediately before the date the Company sends such notice at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid special interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes, which means that the Company is not required to redeem or retire the Notes periodically.

Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date.

The Notes are senior unsecured obligations of the Company and rank senior in right of payment to any of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively subordinated in right of payment to any of the Company’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other liabilities of current or future subsidiaries of the Company (including trade payables and to the extent the Company is not a holder thereof, preferred equity, if any, of the Company’s subsidiaries).

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The net carrying amount of the liability component of the Notes was as follows:
December 31, 2023June 30, 2023
(in millions)
Principal$1,000.0 $1,000.0 
Unamortized debt issuance costs(9.7)(12.0)
Net carrying amount$990.3 $988.0 

The following table sets forth the interest expense recognized related to the Notes:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Amortization of debt issuance costs$1.1 $1.1 $2.3 $2.3 
Total interest expense related to the Notes$1.1 $1.1 $2.3 $2.3 

Capped Call Transactions
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Call Transactions”). The Capped Call Transactions have an initial strike price of approximately $239.23 per share, subject to adjustments, which corresponds to the approximate initial conversion price of the Notes. The cap price of the Capped Call Transactions will initially be approximately $362.48 per share. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, 6.9 million shares of Class A common stock. The Capped Call Transactions are expected generally to reduce potential dilution to the Class A common stock upon any conversion of Notes and/or offset any potential cash payments the Company would be required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. If, however, the market price per share of Class A common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the Class A common stock exceeds the cap price of the Capped Call Transactions.

For accounting purposes, the Capped Call Transactions are separate transactions, and are not part of the terms of the Notes. The net cost of $81.3 million incurred to purchase the Capped Call Transactions was recorded as a reduction to Additional paid-in capital on the Company’s Condensed Consolidated Balance Sheets.

Second Amended and Restated Credit Agreement
In 2019, the Company entered into an amended and restated revolving credit agreement.

On May 25, 2022, the Company entered into an Amendment and Restatement Agreement providing for a Second Amended and Restated Credit Agreement (as amended, restated, or otherwise modified from time to time, the “Second Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and certain banks and financial institutions party thereto as lenders and issuing banks.

The Second Amended and Restated Credit Agreement provides for a $750.0 million term loan facility (the “Term Loan”), which will be due and payable on May 25, 2027 or, if greater than $200.0 million of the Notes are outstanding on November 16, 2025 (the “Springing Maturity Condition”), November 16, 2025 (the “Springing Maturity Date”). The Term Loan amortizes in quarterly installments of 0.25%, payable at the end of each fiscal quarter and on the maturity date.

The Second Amended and Restated Credit Agreement also provided for a $500.0 million revolving credit facility (the “Revolving Facility”), $35.0 million of which would mature on June 20, 2024 (the “Non-Consenting Commitments”), with the rest ($465.0 million) maturing on December 10, 2026 (the “Consenting Commitments”) or if the Springing Maturity Condition is met and the Term Loan is outstanding on such date, the Springing Maturity Date. On August 24, 2022, the Company amended the Second Amended and Restated Credit Agreement (the “First Amendment”) such that the Company is only required to meet the total liquidity covenant, set at $250.0 million (the “Liquidity Covenant”), and the total revenues covenant, set at $3.0 billion for the four-quarter trailing period, to the extent any revolving loans are borrowed and outstanding. On May 2, 2023, the Company further amended the Second Amended and Restated Credit Agreement (the “Second Amendment”) to, among other things, (i) reduce the aggregate revolving credit commitments from $500.0 million to $400.0 million, with the Non-Consenting Commitments reduced to $28.0 million and the Consenting Commitments reduced to $372.0 million, and (ii) remove the covenant requiring the Company to maintain a minimum total four-quarter revenue level of $3.0 billion at any time when revolving loans are outstanding. Following the Second Amendment, borrowings under the Revolving Facility are limited to the lesser of (a) $400.0 million and (b) an amount equal to the “Subscription” revenue of the Company and its subsidiaries for the most recently completed fiscal quarter of the Company. The Liquidity Covenant will still be replaced with a covenant to maintain a minimum secured debt to adjusted EBITDA ratio upon our meeting a specified adjusted EBITDA threshold.

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The Revolving Facility bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 2.25% per annum or the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 1.25% per annum for the Consenting Commitments, and bears interest at a rate equal to, at our option, either at the Adjusted Term SOFR Rate plus 2.75% per annum or the Alternate Base Rate plus 1.75% per annum for the Non-Consenting Commitments. The Company is required to pay an annual commitment fee of 0.325% per annum and 0.375% per annum on a quarterly basis based on the unused portion of the Revolving Facility for the Consenting Commitments and the Non-Consenting Commitments, respectively.

The Term Loan bears interest at a rate equal to, at our option, either at the Alternate Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus 5.50% per annum or the Adjusted Term SOFR Rate (as defined in the Second Amended and Restated Credit Agreement) plus 6.50% per annum. As stipulated in the Second Amended and Restated Credit Agreement, the applicable rates applicable to the Term Loan increased one time by 0.50% per annum as the Company chose not to obtain a public rating for the Term Loan from S&P Global Ratings or Moody’s Investors Services, Inc. on or prior to November 25, 2022. Any borrowing at the Alternate Base Rate is subject to a 1.00% floor and a term loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.50% floor and any revolving loan borrowed at the Adjusted Term SOFR Rate is subject to a 0.00% floor.

The Second Amended and Restated Credit Agreement contains customary affirmative covenants as well as customary covenants that restrict our ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Second Amended and Restated Credit Agreement also contains certain customary events of default. Certain baskets and covenant levels have been decreased and will apply equally to both the Term Loan and Revolving Facility for so long as the Term Loan is outstanding. After the repayment in full of the Term Loan, such baskets and levels will revert to those previously disclosed in connection with the Amended and Restated Credit Agreement.
The obligations under the Second Amended and Restated Credit Agreement with respect to the Term Loan and the Revolving Facility are secured by substantially all of our assets, with certain exceptions set forth in the Second Amended and Restated Credit Agreement, and are required to be guaranteed by certain material subsidiaries of the Company if, at the end of future financial quarters, certain conditions are not met.

In connection with the execution of the Second Amended and Restated Credit Agreement, the Company incurred debt issuance costs of $1.1 million, which are capitalized and presented as Other assets on the Company’s Condensed Consolidated Balance Sheets. These costs are being amortized to interest expense using the effective interest method over the term of the Second Amended and Restated Credit Agreement.

During the three and six months ended December 31, 2023, the Company incurred total commitment fees of $0.3 million and $0.7 million, respectively, and $0.4 million and $0.8 million during the three and six months ended December 31, 2022, respectively, which are included in Interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

As of December 31, 2023, the Company had drawn the full amount of the Term Loan and had $738.8 million of total outstanding borrowings under the Second Amended and Restated Credit Agreement.

As of December 31, 2023, the Company had not drawn any amount under the Revolving Facility and as such did not have to test the financial covenants under the Second Amended and Restated Credit Agreement. The Company is required to pledge or otherwise restrict a portion of cash and cash equivalents as collateral for standby letters of credit. As of December 31, 2023, the Company had outstanding letters of credit totaling $60.4 million, which are classified as Restricted cash on the Condensed Consolidated Balance Sheet.

Our proceeds in connection with the Term Loan were $696.4 million, net of discount of $33.8 million and issuance costs of $19.8 million. Both the discount and issuance costs are being amortized to interest expense over the term of the Term Loan using the effective interest rate method. Upon entering into the Term Loan, the effective interest rate was 10.2%. On each of November 25, 2022, May 25, 2023, and November 25, 2023, the rate was updated to 13.7%, 14.3%, and 14.5%, respectively. The current effective interest rate on the Term Loan is 14.5% as of December 31, 2023.

The net carrying amount of the Term Loan was as follows:
December 31, 2023June 30, 2023
(in millions)
Principal$750.0 $750.0 
Principal payments(11.3)(7.5)
Unamortized debt discount(25.0)(27.8)
Unamortized debt issuance costs(14.7)(16.3)
Net carrying amount$699.1 $698.4 

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The following table sets forth the interest expense recognized related to the Term Loan:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Amortization of debt discount$1.5 $1.4 $2.8 $2.7 
Amortization of debt issuance costs0.9 0.8 1.7 1.6 
Total interest expense related to the Term Loan$2.3 $2.2 $4.5 $4.4 
8. Commitments and Contingencies
The Company is subject to minimum guarantee royalty payments associated under certain music license agreements.

The following represents the Company's minimum annual guarantee payments under music license agreements for the next three years as of December 31, 2023:

Future Minimum Payments
Fiscal Year(in millions)
2024 (remaining)$50.4 
202548.8 
20266.0 
Total$105.2 

Tread+ Product Recall Return Reserves and Cost Estimates
On May 5, 2021, the Company announced a voluntary recall of its Tread+ in collaboration with the U.S. Consumer Product Safety Commission ("CPSC") and halted sales of this product to work on product enhancements. On May 18, 2023, the Company and the CPSC jointly announced the approval of a rear guard repair for the recalled Tread+, for which we are in the process of manufacturing. We have made this rear guard available to our Members who continue to own a Tread+ and resumed pre-sales of the Tread+ from our existing inventory with the rear guard installed.

The following table details the (benefit)/reduction to Connected Fitness Products revenue for actual and future returns and costs associated with the Tread+ product recall that were recorded in Connected Fitness Products cost of revenue.

Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Returns accrual for (benefit)/reduction to Connected Fitness Products revenue$(2.3)$ $(3.9)$26.5 
Costs of product recalls(4.2) (4.3)2.5 

Return reserves related to the impacts of the Tread+ recall of $8.5 million and $24.4 million were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023, respectively. Accruals for costs associated with the Tread+ repair of $10.0 million and $10.0 million were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet as of December 31, 2023 and June 30, 2023, respectively. The estimated return reserves are based on historical and expected product returns. The estimated costs associated with the Tread+ repair are primarily based on the estimated number of requests for the Tread+ repair and the estimated costs of the production, delivery, and installation of the remedy.

Bike Seat Post Recall
On May 11, 2023, in collaboration with the CPSC, the Company announced a voluntary recall of the original Peloton Bike (not Bike+) sold in the U.S. from January 2018 to May 2023 related to its seat post, and the Company is offering Members a free replacement seat post as the approved repair. As of December 31, 2023 and June 30, 2023, accruals of $2.5 million and $42.2 million, respectively, were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet related to the recall. The estimated cost to replace the bike seat posts is primarily based on the estimated number of requests for seat posts and the estimated costs of the production and shipment of the replacement parts. For more detail on the potential impacts of the recall to our business, see “Risk Factors—Risks Related to Our
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Connected Fitness Products and Members—Our products and services may be affected from time to time by design and manufacturing defects or product safety issues, real or perceived, that could adversely affect our business and result in harm to our reputation” in our Form 10-K.
Commitments to Suppliers
The Company utilizes contract manufacturers to build its products and accessories. These contract manufacturers acquire components and build products based on demand forecast information the Company supplies, which typically covers a rolling 12-month period. Consistent with industry practice, the Company acquires inventories from such manufacturers through blanket purchase orders against which orders are applied based on projected demand information and availability of goods. Such purchase commitments typically cover the Company’s forecasted product and manufacturing requirements for periods that range a number of months. In certain instances, these agreements allow the Company the option to cancel, reschedule, and/or adjust our requirements based on its business needs for a period of time before the order is due to be fulfilled. While the Company’s purchase orders are legally cancellable in many situations, there are some which are not cancellable in the event of a demand plan change or other circumstances, such as where the supplier has procured unique, Peloton-specific designs, and/or specific non-cancellable, non-returnable components based on our provided forecasts.

As of December 31, 2023, the Company’s commitments to contract with third-party manufacturers for their inventory on-hand and component purchase commitments related to the manufacture of Peloton products were estimated to be approximately $139.1 million, of which $128.4 million is expected to be paid over the next twelve months.

Legal and Regulatory Proceedings
The Company is, or may become, a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of its business, including the matters set forth below. We deny the allegations in the active matters described below and intend to vigorously defend against such matters.

Some of our legal and regulatory proceedings, including matters and litigation that center around intellectual property claims, may be based on complex claims involving substantial uncertainties and unascertainable damages. Accordingly, except for proceedings that have settled or been terminated, or except where otherwise indicated below, it is not possible to determine the probability of loss or estimate damages for such matters, and therefore, the Company has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, the Company records a liability, and, if the liability is material, discloses the amount of the liability reserved. Given that such proceedings are subject to uncertainty, there can be no assurance that such legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

In May 2021, we initiated a voluntary recall of our Tread+ product in collaboration with the CPSC. In December 2022, we entered into a settlement agreement with the CPSC regarding matters related to the Tread+ recall. In the settlement, we agreed to pay a $19.1 million civil penalty, resolving the CPSC’s charges that we violated the Consumer Product Safety Act (the “CPSA”). On May 18, 2023, the Company and the CPSC jointly announced the approval of a rear guard repair for the recalled Tread+. The SEC is investigating our public disclosures concerning the Tread+ recall, as well as other matters. In addition, in 2021, the U.S. Department of Justice (the “DOJ”) and the Department of Homeland Security subpoenaed us for documents and other information related to our statutory obligations, including under the CPSA. The SEC and DOJ investigations are ongoing. In addition to such investigations, we are presently subject to personal injury claims related to the safety of the Tread+.

On November 16, 2021, the United States District Court for the Eastern District of New York consolidated two putative securities class action lawsuits against the Company and certain of the Company’s officers under the caption In re Peloton Interactive, Inc. Securities Litigation, Master File No. 21-cv-02369-CBA-PK, and appointed Richard Neswick as lead plaintiff. On January 21, 2022, the lead plaintiff filed an amended consolidated complaint in the action purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between September 11, 2020 and May 5, 2021. Lead plaintiff alleged that the Company and certain of the Company’s officers made false or misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the Peloton Tread+ and the safety of the product. On April 17, 2023, the parties entered into a settlement agreement to resolve the action for $14.0 million, for which the Company had previously taken a reserve. Under the terms of this agreement, defendants continue to deny any liability or wrongdoing. The settlement remains subject to court approval.

On October 26, 2021 and January 24, 2022, the United States District Court for the Eastern District of New York consolidated four stockholder derivative actions purportedly on behalf of the Company against certain of the Company’s officers and directors under the caption In re Peloton Interactive, Inc. Derivative Litigation, Master File No. 21-cv-02862-CBA-PK (the “EDNY Derivative Action”), which alleged, among other claims, breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste, and violations of Section 14(a) of the Exchange Act. Alan Chu, Moshe Genack, Xingqi Liu and Anthony Franchi were appointed as co-lead plaintiffs. The EDNY Derivative Action was stayed on February 11, 2022. On December 14, 2022, two putative verified stockholder derivative actions in the Court of Chancery of the State of Delaware, purportedly on behalf of the Company against certain of the Company’s officers and directors asserting similar allegations to those made in the EDNY Derivative Action, were consolidated as In re Peloton Interactive, Inc. Stockholder Derivative Litigation, Consol. Case No. 2022-1051-KSJM (the “Chancery Derivative Action”), and stayed. On December 22, 2022, a stockholder filed a putative stockholder derivative action in the United States District Court for the District of Delaware, asserting similar allegations to those in the EDNY Derivative Action and the Chancery Derivative Action against certain of the Company’s officers and directors, captioned Blackburn v. Foley, et al., Case No. 22-cv-01618-GBW, which was stayed on January 12, 2023.

On May 11, 2023, in collaboration with the CPSC, the Company announced a voluntary recall of the original Peloton Bike (not Bike+) sold in the U.S. from January 2018 to May 2023 related to its seat post, and the Company is offering a free replacement seat post as the approved repair. On May 17, 2023, Brandy Miller filed suit against the Company on behalf of a putative nationwide class of Bike purchasers in the U.S. District Court for the District of South Carolina, Case No. 3:23-cv-02101-MG L. Plaintiff Miller alleged that, as demonstrated by the seat post recall, the Bike was defective when sold, and brought claims of unjust enrichment, breaches of express and implied warranties, breach of contract,
18


negligence, and design and manufacturing defects. On October 19, 2023, the court granted the Company’s motion to compel arbitration and stayed further proceedings pending an arbitrator’s determination of the arbitrability of the plaintiff’s claims. On January 11, 2024, the plaintiff voluntarily dismissed her claims, bringing this litigation to an end.

On June 9, 2023, Sam Solomon filed a putative securities class action against the Company and certain of the Company’s officers in the U.S. District Court for the Eastern District of New York, Case No. 1:23-cv-04279-MKB-JRC (the “2023 Securities Litigation”). Jia Tian and David Feigelman were appointed as co-lead plaintiffs. On November 6, 2023, co-lead plaintiffs filed an amended complaint purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between May 6, 2021 and August 22, 2023, alleging that the defendants made false and/or misleading statements relating to the seat post recall in violation of Sections 10(b) and 20(a) of the Exchange Act. On December 21, 2023, the court set a deadline of February 2, 2024 for the defendants to file a motion to dismiss.

On September 27, 2023, Courtney Cooper and Abdo P. Faissal filed a verified stockholder derivative complaint, purportedly on behalf of the Company against certain of the Company’s officers and directors, captioned Cooper v. Boone, et. al., Case No. 23-cv-07193-MKB-MMH, in the U.S. District Court for the Eastern District of New York, which alleges breaches of fiduciary duties and violations of Section 14(a) of the Exchange Act, as well as a claim for contribution under Sections 10(b) and 21D of the Exchange Act for any liability the Company may incur as a result of the 2023 Securities Litigation. On January 8, 2024, the court stayed the action.

On May 5, 2022, the United States District Court for the Southern District of New York consolidated two putative securities class action lawsuits against the Company and certain of the Company’s officers under the caption City of Hialeah Employees Retirement System et al. v. Peloton Interactive, Inc., et al., Case No. 21-CV-09582-ALC-OTW and appointed Robeco Capital Growth Funds SICAV – Robeco Global Consumer Trends as lead plaintiff in the class action (the “SDNY Class Action”). Lead plaintiff filed its amended complaint on June 25, 2022, alleging that the defendants made false and/or misleading statements about demand for the Company’s products and the reasons for the Company’s inventory growth, and engaged in improper trading in violation of Sections 10(b) and 20A of the Exchange Act. On March 30, 2023, the court granted defendants’ motion to dismiss, with leave to amend. Plaintiffs filed an amended complaint on May 6, 2023, purportedly on behalf of a class consisting of those individuals who purchased or otherwise acquired our common stock between February 5, 2021 and January 19, 2022, and defendants moved to dismiss the complaint on June 16, 2023. Briefing on defendants’ motion to dismiss the amended complaint in the SDNY Class Action was completed on August 18, 2023.

On July 26, 2023, the Court of Chancery in the State of Delaware consolidated three stockholder derivative actions purportedly on behalf of the Company against certain of the Company’s officers and directors under the caption In re Peloton Interactive, Inc. 2023 Derivative Litigation, Consol. Case No. 2023-0224-KSJM, which alleges that defendants breached their fiduciary duties by purportedly making false statements about demand for the Company’s products and engaging in improper trading. Allison Manzella, Clark Ovruchesky, Daniel Banks and Karen Florentino are co-lead plaintiffs. The court stayed the action on September 26, 2023.

On August 4, 2022, Mayville Engineering Company, Inc. (“MEC”) filed suit against the Company in the Supreme Court of the State of New York, Index No. 652735/2022, alleging claims for breach of contract, or, in the alternative, breach of the implied duty of good faith and fair dealing. MEC alleges that the Company breached a supply agreement under which MEC agreed to supply certain parts for Peloton products, and that it is entitled to damages in an amount exceeding $107.0 million, plus pre-judgment interest, fees, and costs. On September 23, 2022, the Company moved to dismiss MEC’s complaint. On January 6, 2023, the court partially granted and partially denied the Company’s motion to dismiss, dismissing MEC’s alternative claim for breach of the implied duty of good faith and fair dealing with prejudice, but allowing MEC’s claim for breach of contract to move forward. The Company and MEC both appealed that ruling and the appeal is pending. The Company also appealed a discovery ruling and that appeal is also pending. In September 2023, the Company asserted a counterclaim and affirmative defense against MEC for fraudulent inducement of the supply agreement. Discovery is ongoing with a current fact discovery deadline of March 29, 2024. No trial date has been set.
9. Equity-Based Compensation

2019 Equity Incentive Plan
In August 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which was subsequently approved by the Company’s stockholders in September 2019. The 2019 Plan serves as the successor to the 2015 Stock Plan (the "2015 Plan"). The 2015 Plan continues to govern the terms and conditions of the outstanding awards previously granted thereunder. Any reserved shares not issued or subject to outstanding grants under the 2015 Plan on the effective date of the 2019 Plan became available for grant under the 2019 Plan and will be issued as Class A common stock. The number of shares reserved for issuance under the 2019 Plan will increase automatically on July 1 of each of 2020 through 2029 by the number of shares of the Company’s Class A common stock equal to 5% of the total outstanding shares of all of the Company’s classes of common stock as of each June 30 immediately preceding the date of increase (the “evergreen feature”), or a lesser amount as determined by the Board of Directors. On July 1, 2023, the number of shares of Class A common stock available for issuance under the 2019 Plan was automatically increased according to its terms by 17,838,381 shares.

In October 2023, the Company’s Board of Directors adopted an amendment to the 2019 Plan (the “Amendment”) that increases the number of shares available under the 2019 Plan by 36,000,000 shares of Class A common stock (and retains the existing evergreen feature through July 1, 2029) and extends the right to grand awards under the 2019 Plan through October 24, 2033. The Amendment became effective following approval by the Company’s stockholders on December 7, 2023. As of December 31, 2023, 80,916,418 shares of Class A common stock were available for future award under the 2019 Plan.

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Stock Options
The following summary sets forth the stock option activity under the 2019 Plan:

Options Outstanding
Number of Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate
Intrinsic
Value (in millions)
Outstanding — June 30, 2023
42,999,273 $19.71 5.2$33.2 
Exercised(1,411,592)$3.56 $5.0 
Forfeited or expired(8,859,317)$26.32 
Outstanding — December 31, 2023
32,728,364 $18.62 5.5$18.8 
Vested and Exercisable— December 31, 2023
24,086,928 $16.14 4.7$18.8 

Unvested option activity is as follows:

OptionsWeighted-Average Grant Date Fair Value
Unvested - June 30, 2023
12,407,094 $18.84 
Vested(2,571,700)$19.17 
Forfeited or expired(1,193,958)$18.55 
Unvested - December 31, 2023
8,641,436 $18.78 

The aggregate intrinsic value of options outstanding and vested and exercisable, were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2023. The fair value of the common stock is the closing stock price of the Company's Class A common stock as reported on The Nasdaq Global Select Market. The aggregate intrinsic value of exercised options was $5.0 million and $17.3 million for the six months ended December 31, 2023 and 2022, respectively.

On July 1, 2022, the Compensation Committee of the Board of Directors of the Company approved a one-time repricing of certain stock option awards that had been granted to date under the 2019 Plan. The repricing impacted stock options held by all employees who remained employed through July 25, 2022. The repricing did not apply to our U.S.-based hourly employees (or employees with equivalent roles in non-U.S. locations) or our C-level executives. The original exercise prices of the repriced stock options ranged from $12.94 to $146.79 per share for the 2,138 total grantees. Each stock option was repriced to have a per share exercise price of $9.13, which was the closing price of the Company’s Class A common stock on July 1, 2022. There were no changes to the number of shares, the vesting schedule, or the expiration date of the repriced stock options. Incremental stock-based compensation expense resulting from the repricing was $21.9 million in the aggregate.

For the six months ended December 31, 2023, no options were granted, and for the six months ended December 31, 2022, the weighted-average grant date fair value per option was $6.42. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:
Six Months Ended December 31,
2022
Weighted average risk-free interest rate (1)
3.3 %
Weighted average expected term (in years) 6.2
Weighted average expected volatility (2)
81.4 %
Expected dividend yield  
____________________________
(1) Based on U.S. Treasury yield curve in effect at the time of grant.
(2) Expected volatility is based on a blended average of average historical stock volatilities of several peer companies over the expected term of the stock options, historical volatility of the Company's stock price, and implied stock price volatility derived from the price of exchange traded options on the Company's stock.

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Restricted Stock and Restricted Stock Units
The following table summarizes the activity related to the Company's restricted stock and restricted stock units:
Restricted Stock Units Outstanding
Number of Awards
Weighted-Average Grant Date Fair Value
Outstanding — June 30, 2023
27,236,428 $13.96 
Granted28,369,193 $6.43 
Vested and converted to shares(5,628,613)$15.14 
Cancelled(4,706,518)$12.09 
Outstanding — December 31, 2023
45,270,490 $9.29 

Employee Stock Purchase Plan
In August 2019, the Board of Directors adopted, and in September 2019, the Company's stockholders approved, the Employee Stock Purchase Plan (“ESPP”), through which eligible employees may purchase shares of the Company's Class A common stock at a discount through accumulated payroll deductions. The ESPP became effective on September 25, 2019, the date the registration statement, in connection with the Company’s initial public offering, was declared effective by the SEC. The number of shares of the Company's Class A common stock that will be available for issuance and sale to eligible employees under the ESPP will increase automatically on the first day of each fiscal year of the Company beginning on July 1, 2020 through 2029, in an amount equal to 1% of the total number of outstanding shares of all classes of the Company's common stock on the immediately preceding June 30, or such lesser number as may be determined by the Board of Directors or applicable committee in its sole discretion. On July 1, 2023, the number of shares of Class A common stock available for issuance under the ESPP was automatically increased according to its terms by 3,567,676 shares. As of December 31, 2023, 15,821,314 shares of Class A common stock were available for sale to employees under the ESPP.

Unless otherwise determined by the Board of Directors, each offering period will consist of four six-month purchase periods, provided that the initial offering period commenced on September 25, 2019 and ended on August 31, 2021, and the initial purchase period ended February 28, 2020. Thereafter, each offering period and each purchase period will commence on September 1 and March 1 and end on August 31 and February 28 of each two-year period or each six-month period, respectively, subject to a reset provision. If the closing stock price on the first day of an offering period is higher than the closing stock price on the last day of any applicable purchase period, participants will be withdrawn from the ongoing offering period immediately following the purchase of ESPP shares on the purchase date and would automatically be enrolled in the subsequent offering period (“ESPP reset”), resulting in a modification under ASC 718.

Unless otherwise determined by the Board of Directors, the purchase price for each share of Class A common stock purchased under the ESPP will be 85% of the lower of the fair market value per share on the first trading day of the applicable offering period or the fair market value per share on the last trading day of the applicable purchase period.

The Black-Scholes option pricing model assumptions used to calculate the fair value of shares estimated to be purchased at the commencement of the ESPP offering periods were as follows:
Six Months Ended December 31, 2023
Weighted average risk-free interest rate
2.0 %
Weighted average expected term (in years)
1.3
Weighted average expected volatility
92.7 %
Expected dividend yield
 

The expected term assumptions were based on each offering period's respective purchase date. The expected volatility was derived from the blended average of historical stock volatilities of several unrelated public companies that the Company considers to be comparable to its business over a period equivalent to the expected terms of the stock options and the historical volatility of the Company's stock price. Beginning in the fiscal quarter ended March 31, 2022, the expected volatility is based on the historical volatility of the Company’s stock price. The risk-free rate assumptions were based on the U.S. treasury yield curve in effect at the time of the grants. The dividend yield assumption was zero as the Company has not historically paid any dividends and does not expect to declare or pay dividends in the foreseeable future.

During the three and six months ended December 31, 2023, the Company recorded stock-based compensation expense associated with the ESPP of $2.0 million and $3.1 million, respectively, and $4.3 million and $11.9 million for the three and six months ended December 31, 2022, respectively.

In connection with the offering period that ended on August 31, 2023, employees purchased 373,114 shares of Class A common stock at a weighted-average price of $5.42 under the ESPP. As of December 31, 2023, total unrecognized compensation cost related to the ESPP was $10.2 million, which will be amortized over a weighted-average remaining period of 1.7 years.

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Stock-Based Compensation Expense
The Company's total stock-based compensation expense was as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Cost of revenue
Connected Fitness Products$2.6 $2.0 $4.9 $9.3 
Subscription10.0 10.0 19.7 22.7 
Total cost of revenue12.6 12.0 24.6 32.1 
Sales and marketing6.0 7.5 10.7 18.2 
General and administrative32.2 40.5 67.6 92.8 
Research and development15.8 15.6 30.7 37.8 
Restructuring expense 6.0 7.2 82.8 
  Total stock-based compensation expense$66.6 $81.6 $140.8 $263.7 

As of December 31, 2023, the Company had $542.8 million of unrecognized stock-based compensation expense related to unvested stock-based awards that is expected to be recognized over a weighted-average period of 2.6 years.

In the six months ended December 31, 2022, nine employees of the Company who were eligible to participate in the Company’s Severance and Change in Control Plan (the “Severance Plan”) terminated their employment. Certain modifications were made to equity awards, including, in certain instances, the post-termination period during which an employee may exercise outstanding stock options was extended from 90 days to one year (or the option expiration date, if earlier), and extended vesting was tied to certain consulting services that were deemed to be non-substantive. In one instance, the post-termination period during which an employee may exercise outstanding stock options was extended from 90 days to approximately 2.8 years. As a result of these modifications, the Company recognized incremental stock-based compensation expense of $4.9 million and $48.3 million for the three and six months ended December 31, 2022, respectively, within Restructuring expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss. In the six months ended December 31, 2023, one employee who was eligible to participate in the Severance Plan terminated employment. Certain modifications were made to equity awards, including the extension of the post-termination period during which an employee may exercise outstanding stock options from 90 days to the earlier of the original expiration date or 3 years. The employee transitioned to a non-executive advisory role and as a result of this modification, the Company recognized incremental stock-based compensation expense of $5.4 million for the six months ended December 31, 2023 within Restructuring expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
10. Income Taxes
The Company recorded a benefit from income taxes of $(1.7) million and $(1.0) million for the three and six months ended December 31, 2023, respectively, and a provision of $1.9 million and $2.7 million for the three and six months ended December 31, 2022, respectively. Furthermore, the Company's effective tax rates were 0.88% and 0.27% for the three and six months ended December 31, 2023, respectively, and (0.58)% and (0.37)% for the three and six months ended December 31, 2022, respectively. The income tax provision and the effective tax rate are primarily driven by state and international taxes.

The Company maintains a valuation allowance on the majority of its deferred tax assets as it has concluded that it is more likely than not that the deferred assets will not be utilized.
11. Net Loss Per Share
The computation of loss per share is as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
($ in millions except per share amounts)
Basic and diluted loss per share:
Net loss attributable to common stockholders$(194.9)$(335.4)$(354.1)$(743.9)
Shares used in computation:
Weighted-average common shares outstanding362,334,326 341,930,937 360,440,945 340,516,100 
Basic and diluted loss per share$(0.54)$(0.98)$(0.98)$(2.18)
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Basic and diluted loss per share are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.

The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
Employee stock options7,693,440 14,864,037 8,198,291 15,404,476 
Restricted stock units and awards637,660 817,901 815,567 475,649 

Impact of the Notes
The conversion option will have a dilutive impact on net income per share of common stock when the average market price per share of the Company's Class A common stock for a given period exceeds the conversion price of the Notes of $239.23 per share. During the three and six months ended December 31, 2023, the weighted average price per share of the Company's Class A common stock was below the conversion price of the Notes.

The denominator for basic and diluted loss per share does not include any effect from the Capped Call Transactions the Company entered into concurrently with the issuance of the Notes as this effect would be anti-dilutive. In the event of conversion of the Notes, if shares are delivered to the Company under the Capped Call Transactions, they will offset the dilutive effect of the shares that the Company would issue under the Notes.
12. Segment Information
The Company applies ASC 280, Segment Reporting, in determining reportable segments. The Company has two reportable segments: Connected Fitness Products and Subscription. Segment information is presented in the same manner that the chief operating decision maker ("CODM") reviews the operating results in assessing performance and allocating resources. The CODM reviews revenue and gross profit for both of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment.

No operating segments have been aggregated to form the reportable segments. The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis and, accordingly, the Company does not report asset information by segment.

The Connected Fitness Products segment derives revenue from sale of the Company's portfolio of Connected Fitness Products and related accessories, delivery and installation services, branded apparel, and extended warranty agreements. The Subscription segment derives revenue from monthly Subscription fees. There are no internal revenue transactions between the Company’s segments.

Key financial performance measures of the segments including Revenue, Cost of revenue, and Gross profit are as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Connected Fitness Products:
Revenue
$319.1 $381.4 $499.7 $585.6 
Cost of revenue
305.3 424.2 480.2 684.1 
   Gross profit
$13.8 $(42.8)$19.5 $(98.4)
Subscription:
Revenue
$424.5 $411.3 $839.5 $823.6 
Cost of revenue
139.0 133.4 274.2 272.9 
   Gross profit
$285.6 $277.9 $565.3 $550.7 
Consolidated:
Revenue
$743.6 $792.7 $1,339.2 $1,409.2 
Cost of revenue
444.2 557.6 754.4 957.0 
   Gross profit
$299.4 $235.0 $584.8 $452.2 
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Reconciliation of Gross Profit
Operating expenditures, interest income and other expense, and taxes are not allocated to individual segments as these are managed on an entity wide group basis. The reconciliation between reportable Segment Gross Profit to consolidated Loss before provision for income tax is as follows:
Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
(in millions)
Segment Gross Profit
$299.4 $235.0 $584.8 $452.2 
Sales and marketing(230.3)(217.1)(376.4)(355.8)
General and administrative(160.8)(192.6)(311.8)(386.1)
Research and development(79.9)(80.0)(158.6)(168.1)
Impairment expense(3.6)(9.7)(27.7)(72.6)
Restructuring expense(13.4)(49.0)(31.2)(155.9)
Supplier settlements1.5 (17.9)1.5 (19.1)
Total other expense, net
(9.5)(2.2)(35.7)(35.9)
Loss before provision for income taxes
$(196.6)$(333.5)$(355.1)$(741.2)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on August 23, 2023 (“Form 10-K”). As discussed in the section titled "Special Note Regarding Forward Looking Statements," the following discussion and analysis contains forward looking statements that involve risks, uncertainties, assumptions, and other important factors that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Form 10-K.

Overview
Peloton is a leading global fitness company with a highly engaged community of 6.4 million Members as of December 31, 2023. A category innovator at the nexus of fitness, technology, and media, Peloton's first-of-its-kind subscription platform seamlessly combines innovative hardware, distinctive software, and exclusive content. Its world-renowned instructors coach and motivate Members to be the best version of themselves anytime, anywhere. We define a “Member” as any individual who has a Peloton account through a paid Connected Fitness Subscription or a paid Peloton App Membership, and completes 1 or more workouts in the trailing 12 month period. We define a completed workout as either completing at least 50% of an instructor-led class, scenic ride or run, or ten or more minutes of “Just Ride”, “Just Run”, or “Just Row” mode.

Our Connected Fitness Products portfolio includes the Peloton Bike, Bike+, Tread, Tread+, Guide, and Row. Access to the Peloton App is available with an All Access or Guide Membership for Members who have Connected Fitness Products or through a standalone App Membership with multiple Membership tiers. Our revenue is generated primarily from recurring Subscription revenue and the sale of our Connected Fitness Products. We are additionally focused on growing our Paid App subscribers, including through efforts such as our recent branding and App relaunch in May 2023. We define a “Connected Fitness Subscription” as a person, household, or commercial property, such as a hotel or residential building, who has paid for a subscription to a Connected Fitness Product (a Connected Fitness Subscription with a successful credit card billing or with prepaid subscription credits or waivers).

Our financial profile has been characterized by strong retention, recurring revenue, and efficient customer acquisition. Our low Average Net Monthly Connected Fitness Churn, together with our high Subscription Gross Profit and Subscription Contribution Margin, yields an attractive lifetime value (“LTV”) for our Connected Fitness Subscriptions well in excess of our customer acquisition costs (“CAC”). Maintaining an attractive LTV/CAC ratio is a primary goal of our customer acquisition strategy.

Second Quarter Fiscal 2024 Update and Recent Developments
We are committed to the continuous improvement of our product experience. Since early November, we've launched a series of software features on our Connected Fitness and App platforms, many of which were requests from our passionate Member base. These efforts are reflected in our engagement performance, as Average Monthly Watch Time per Paid Subscriber increased 6% for the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Member engagement with our Entertainment options on our Connected Fitness platform continues to grow and we recently announced YouTube TV as an official Peloton Entertainment Hub partner. For Tread+, we launched the auto-incline feature and access to our Lanebreak gamified workouts. For Bike+, we are beta testing ERG mode for Power Zone classes, enabling personalized and automated resistance catered to a Member's fitness level.

For App, we launched frequently requested features like Offline Mode for our "Just Work Out" tracking feature, and an ability to log reps and weight metrics in Peloton Gym content. Lastly, we've refined our App design with improved navigation and filtering.

For our Peloton Rental Members, we launched a self-service buyout process and added a new buyout financing option, both of which reduced the transactional friction for Members to purchase their rental. As a result, we've seen a sharp increase in buyout activity, with over 11% of our rental base choosing to purchase in the three months ended December 31, 2023.

Beyond product enhancements, we continue to invest in improving Member Support and satisfaction. In December we began beta-testing a new troubleshooting capability within our Connected Fitness platform that allows our Members to diagnose common service issues, and use a set of interactive tests to resolve them without contacting Member Support. This tool also generates diagnostic reports that are shared with our engineering team to enhance our software experience. These efforts are expected to improve service costs and efficiency over time for Members and our Member Support teams.

Restructuring Plan
In February 2022, we announced and began implementing a restructuring plan to realign our operational focus to support our multi-year growth, scale the business, and improve costs (the “Restructuring Plan”). The Restructuring Plan originally included: (i) reducing our headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for our previously planned Peloton Output Park; (iii) closing and consolidating several distribution facilities; and (iv) shifting to third-party logistics providers in certain locations. We expect the Restructuring Plan to be substantially implemented by the end of fiscal year 2024.

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In fiscal year 2023, we continued to take actions to implement the Restructuring Plan. In July 2022, we announced we were exiting all owned-manufacturing operations and expanding our current relationship with Taiwanese manufacturer, Rexon Industrial Corporation. Additionally, in August 2022, we announced our decision to (i) fully transition our North American Field Operations to third-party providers, including the significant reduction of our delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit our real-estate footprints in our Plano and Tempe locations; and (iii) reduce our retail showroom presence. In January 2024, we completed the sale of the Peloton Output Park building and a portion of the corresponding land and received net proceeds of approximately $31.9 million. The Company continues to market the remaining land parcel.

Total charges related to the Restructuring Plan were $15.2 million and $56.4 million for the three and six months ended December 31, 2023, respectively, and $62.4 million and $232.2 million for the three and six months ended December 31, 2022, respectively. Total charges for the three and six months ended December 31, 2023 consisted of cash charges of $9.3 million and $13.8 million for exit and disposal costs and professional fees and $0.3 million and $6.4 million for severance and other personnel costs, respectively, and non-cash charges of $3.8 million and $3.8 million for the loss on sale of a manufacturing subsidiary in Taiwan, $1.3 million and $24.1 million related to non-inventory asset write-downs and write-offs, $0.5 million and $1.0 million for write-offs of inventory related to restructuring activities, and zero and $7.2 million for stock-based compensation expense, respectively. Total charges for the three and six months ended December 31, 2022 consisted of cash charges of $34.1 million and $61.1 million for severance and other personnel costs and $8.9 million and $12.0 million for exit and disposal costs and professional fees, respectively, and non-cash charges of $9.7 million and $72.6 million related to non-inventory asset write-downs and write-offs, $6.0 million and $82.8 million for stock-based compensation expense, and $3.7 million and $3.7 million for write-offs of inventory related to restructuring activities, respectively.

In connection with the Restructuring Plan, we estimate that we will incur additional cash charges of approximately $20.0 million, primarily composed of lease termination and other exit costs, which are expected to be substantially incurred by the end of fiscal year 2024. Additionally, the Company expects to recognize additional non-cash charges of approximately $10.0 million, primarily composed of non-inventory asset impairment charges in connection with the Restructuring Plan, which are expected to be substantially incurred by the end of fiscal year 2024.

We may not be able to realize the cost savings and benefits initially anticipated as a result of the Restructuring Plan, and costs may be greater than expected. See “Risk Factors—Risks Related to Our Business—We may not successfully execute or achieve the expected benefits of our restructuring initiatives and other cost-saving measures we may take in the future, and our efforts may result in further actions and/or additional asset impairment charges and adversely affect our business” in our Form 10-K.

Tread+ Product Recall Return Reserves and Cost Estimates
On May 5, 2021, we announced a voluntary recall of our Tread+ product in collaboration with the Consumer Product Safety Commission (the “CPSC”) and halted sales of this product to work on product enhancements. Members were notified that they could return their Tread+ for a full refund, or wait until a solution is available. In collaboration with the CPSC, on May 18, 2023, we jointly announced approval of a rear guard repair for the recalled Tread+, for which we are in the process of manufacturing. We have made this rear guard available to our Members who continue to own a Tread+ and resumed pre-sales of the Tread+ from our existing inventory with the rear guard installed.

Return reserves related to the impacts of the Tread+ recall of $8.5 million and $24.4 million were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023, respectively. Accruals for costs associated with the Tread+ repair of $10.0 million and $10.0 million were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet as of December 31, 2023 and June 30, 2023, respectively. We may continue to incur additional costs beyond what we have currently estimated to be probable and reasonably estimable which could include costs for which we have not accrued or established adequate reserves, including increases to the return reserves, inventory write-downs, logistics costs associated with Member requests to return or move their hardware, subscription waiver variable costs of service, anticipated recall-related hardware development and repair costs, and related legal and advisory fees. Recall charges are based upon estimates associated with our expected and historical consumer response rates.

Actual costs related to this matter may vary from the estimate, and may result in further impacts to our future results of operations and business. See “Risk Factors—Risks Related to Our Connected Fitness Products and Members—We may be subject to warranty claims that could result in significant direct or indirect costs, or we could experience greater product returns than expected, either of which could have an adverse effect on our business, financial condition, and operating results” in our Form 10-K.

Bike Seat Post Recall
On May 11, 2023, in collaboration with the CPSC, the Company announced a voluntary recall of the original Peloton Bike (not Bike+) sold in the U.S. from January 2018 to May 2023 related to its seat post, and the Company is offering Members a free replacement seat post as the approved repair. As of December 31, 2023 and June 30, 2023, accruals of $2.5 million and $42.2 million, respectively, were included within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet related to the recall. The estimated cost to replace the bike seat posts is primarily based on the estimated number of requests for seat posts and the estimated costs of the production and shipment of the replacement parts.

We may continue to incur additional costs beyond what we have currently estimated to be probable and estimable, including if the number of reported incidents materially increases. See Risk Factors—Risks Related to Our Connected Fitness Products and Members—Our products and services may be affected from time to time by design and manufacturing defects or product safety issues, real or perceived, that could adversely affect our business and result in harm to our reputation” in our Form 10-K.
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Key Operational and Business Metrics
In addition to the measures presented in our interim condensed consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

Three Months Ended December 31,

20232022
Ending Paid Connected Fitness Subscriptions(1)
3,004,413 2,979,182 
Average Net Monthly Paid Connected Fitness Subscription Churn(2)
1.2 %1.2 %
Ending Paid App Subscriptions
718,348 852,284 
Average Monthly Paid App Subscription Churn(3)
7.2 %— 
Subscription Gross Profit (in millions)$285.6 $277.9 
Subscription Contribution (in millions)(4)
$304.3 $296.6 
Subscription Gross Margin67.3 %67.6 %
Subscription Contribution Margin(4)
71.7 %72.1 %
Net loss (in millions)$(194.9)$(335.4)
Adjusted EBITDA (in millions)(5)
$(81.7)$(122.4)
Net Cash Used in Operating Activities (in millions)
$(31.2)$(88.5)
Free Cash Flow (in millions)(6)
$(37.2)$(94.4)
______________________________
(1) New reporting metric, effective as of the beginning of fiscal year 2024, replaced Ending Connected Fitness Subscription. See Ending Paid Connected Fitness Subscription definitions below.
(2) New reporting metric, effective as of the beginning of fiscal year 2024, replaced Average Net Monthly Connected Fitness Churn. See Average Net Monthly Paid Connected Fitness Subscription Churn definition below.
(3) This metric, effective as of the beginning of fiscal year 2024, is reported on a go-forward basis as it includes App One and App+ subscriptions that were not available during the three months ended December 31, 2022.
(4) Please see the section titled “Non-GAAP Financial Measures—Subscription Contribution and Subscription Contribution Margin” for a reconciliation of Subscription Gross Profit to Subscription Contribution and an explanation of why we consider Subscription Contribution and Subscription Contribution Margin to be helpful measures for investors.
(5) Please see the section titled “Non-GAAP Financial Measures—Adjusted EBITDA” for a reconciliation of Net loss to Adjusted EBITDA and an explanation of why we consider Adjusted EBITDA to be a helpful measure for investors.
(6) Please see the section titled “Non-GAAP Financial Measures—Free Cash Flow” for a reconciliation of net cash used in operating activities to Free Cash Flow and a