Company Quick10K Filing
Peloton Interactive
Price-0.00 EPS-1
Shares38 P/E0
MCap-0 P/FCF0
Net Debt-1,377 EBIT-50
TEV-1,377 TEV/EBIT28
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-06
10-K 2020-06-30 Filed 2020-09-11
10-Q 2020-03-31 Filed 2020-05-06
10-Q 2019-12-31 Filed 2020-02-06
10-Q 2019-09-30 Filed 2019-11-06
S-1 2019-08-27 Public Filing
8-K 2020-11-05
8-K 2020-09-16
8-K 2020-09-10
8-K 2020-09-08
8-K 2020-05-11
8-K 2020-05-06
8-K 2020-04-27
8-K 2020-02-05
8-K 2019-11-05

PTON 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 q1fy2110-qexhibit311.htm
EX-31.2 q1fy2110-qexhibit312.htm
EX-32.1 q1fy2110-qexhibit321.htm
EX-32.2 q1fy2110-qexhibit322.htm

Peloton Interactive Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
2.41.91.41.00.50.02018201820192020
Assets, Equity
0.30.20.10.1-0.0-0.12018201820192020
Rev, G Profit, Net Income
1.20.90.70.40.2-0.12018201820192020
Ops, Inv, Fin

pton-20200930
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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 September 30, 2020
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.)
125 West 25th Street, 11th Floor10001
New York, New York
(Zip Code)
(Address of principal executive offices)
(866679-9129
(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, as amended (Exchange Act) 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 Act).     Yes       No  

As of October 30, 2020, the number of shares of the registrant's Class A common stock outstanding was 255,512,826 and the number of shares of the registrant's Class B common stock outstanding was 37,019,599.










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. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding 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.

Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, Adjusted EBITDA, operating expenses including changes in sales and marketing, general and administrative expenses (including any components of the foregoing), and research and development, and our ability to achieve and maintain future profitability;

our business plan and our ability to effectively manage our growth;

anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

our international expansion plans and ability to continue to expand internationally;

anticipated release dates for new Connected Fitness Products and services;

market acceptance of our Connected Fitness Products and services;

beliefs and objectives for future operations;

our ability to increase sales of our Connected Fitness Products and services;

our ability to further penetrate our existing Subscriber base and maintain and expand our Subscriber base;

the effects of seasonal trends on our results of operations;

our expectations regarding content costs for past use;

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

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

the direct and indirect impacts to our business and financial performance from the COVID-19 pandemic;

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; and

economic and industry trends, projected growth, or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

We have based these forward-looking statements largely 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, including those described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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. In particular, the impact of the current COVID-19 pandemic to economic conditions and the fitness industry in general and our financial position and operating results in particular have been material, are changing rapidly, and cannot be predicted.

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. 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 Securities and Exchange Commission, or the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
3



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.
4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
September 30,June 30,
20202020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$1,430.5 $1,035.5 
Marketable securities
592.3 719.5 
Accounts receivable, net
49.9 34.6 
Inventories, net
364.0 244.5 
Prepaid expenses and other current assets
146.3 124.5 
Total current assets
2,583.0 2,158.6 
Property and equipment, net
295.5 242.3 
Intangible assets, net
14.7 16.0 
Goodwill
39.7 39.1 
Restricted cash
1.5 1.5 
Right-of-use assets, net516.7 492.5 
Other assets
26.4 31.8 
Total assets
$3,477.5 $2,981.8 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$275.0 $135.8 
Accrued expenses
246.7 225.9 
Customer deposits and deferred revenue
521.2 363.6 
Current portion of lease liabilities and other current liabilities
50.8 46.9 
Total current liabilities
1,093.7 772.2 
Long term lease liabilities, net553.7 508.2 
Other non-current liabilities
29.1 23.4 
Total liabilities
1,676.5 1,303.8 
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.000025 par value; 2,500,000,000 and 2,500,000,000 Class A shares authorized, 255,036,221 and 237,518,574 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively; 2,500,000,000 and 2,500,000,000 Class B shares authorized, 36,776,277 and 50,538,538 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively.
  
Additional paid-in capital
2,412.9 2,361.8 
Accumulated other comprehensive income12.7 10.1 
Accumulated deficit
(624.6)(693.9)
Total stockholders’ equity
1,801.0 1,678.0 
Total liabilities and stockholders’ equity
$3,477.5 $2,981.8 
See accompanying notes to these unaudited condensed consolidated financial statements.


PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in millions, except share and per share amounts)

Three Months Ended September 30,
20202019
Revenue:
Connected Fitness Products
$601.4 $160.8 
Subscription
156.5 67.2 
Total revenue
757.9 228.0 
Cost of revenue:
Connected Fitness Products
364.2 93.4 
Subscription
65.0 29.5 
Total cost of revenue
429.2 122.9 
Gross profit
328.7 105.1 
Operating expenses:
Sales and marketing
114.6 77.6 
General and administrative
108.6 60.9 
Research and development
36.6 17.4 
Total operating expenses
259.8 156.0 
Income (loss) from operations
68.9 (50.9)
Other income, net:
Interest income, net
2.4 1.3 
Other expense, net
(0.7)(0.1)
Total other income, net
1.7 1.2 
Income (loss) before provision for income taxes
70.6 (49.7)
Income tax expense
1.3 0.1 
Net income (loss)
$69.3 $(49.8)
Net income (loss) attributable to Class A and Class B common stockholders$69.3 $(49.8)
Net income (loss) per share attributable to common stockholders, basic$0.24 $(1.29)
Net income (loss) per share attributable to common stockholders, diluted$0.20 $(1.29)
Weighted-average Class A and Class B common shares outstanding, basic288,719,834 38,453,864 
Weighted-average Class A and Class B common shares outstanding, diluted342,101,984 38,453,864 
Other comprehensive income (loss):
Net unrealized losses on marketable securities$(1.3)$ 
Change in foreign currency translation adjustment3.9 (1.3)
Total other comprehensive income (loss)2.6 (1.3)
Comprehensive income (loss)$71.9 $(51.1)

See accompanying notes to these unaudited condensed consolidated financial statements.
6

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


Three Months Ended September 30,
20202019
Cash Flows from Operating Activities:
Net income (loss)$69.3 $(49.8)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense11.4 7.1 
Stock-based compensation expense29.6 18.7 
Non-cash operating lease expense13.3 9.3 
Amortization of premium from marketable securities1.7 0.3 
Other non-cash items1.4 0.1 
Changes in operating assets and liabilities:
Accounts receivable(15.0)(2.4)
Inventories(118.0)(69.1)
Prepaid expenses and other current assets(18.2)1.9 
Other assets5.9 (1.4)
Accounts payable and accrued expenses156.4 17.5 
Customer deposits and deferred revenue157.4 8.5 
Operating lease liabilities, net11.3 (16.7)
Other liabilities5.5 (0.1)
Net cash provided by (used in) operating activities312.1 (76.2)
Cash Flows from Investing Activities:
Maturities of marketable securities124.5 115.3 
Purchases of property and equipment(49.2)(19.1)
Capitalization of software costs(12.9)(3.4)
Net cash provided by investing activities62.4 92.8 
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon initial public offering, net of offering costs 1,195.7 
Proceeds from employee stock purchase plan withholdings3.3  
Proceeds from exercise of stock options15.4 2.7 
Net cash provided by financing activities18.8 1,198.4 
Effect of exchange rate changes1.7 (1.3)
Net change in cash, cash equivalents, and restricted cash395.0 1,213.7 
Cash, cash equivalents and restricted cash — Beginning of period1,037.0 163.0 
Cash, cash equivalents and restricted cash — End of period$1,432.0 $1,376.7 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$0.3 $ 
Cash paid for income taxes$0.5 $ 
Supplemental Disclosures of Non-Cash Investing and Financing Information:
Conversion of convertible preferred stock to common stock$ $941.1 
Property and equipment accrued but unpaid$19.6 $8.9 
Stock-based compensation capitalized for software development costs$0.7 $0.4 
See accompanying notes to these unaudited condensed consolidated financial statements.
7

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in millions)

Redeemable Convertible
Preferred Stock
Class A and Class B Common StockAdditional Paid-In CapitalOther Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance – June 30, 2019
210.6 $941.1 25.3 $ $90.7 $0.2 $(629.5)$(538.6)
Initial public offering, net of issuance costs of $6.3 million
— — 43.4 — 1,195.7 — — 1,195.7 
Conversion of redeemable convertible preferred stock to common stock(210.6)(941.1)210.6 — 941.1 — — 941.1 
Exercise of stock options— — 0.6 — 2.5 — — 2.5 
Exercise of stock warrants— — 0.2 — — — — — 
Stock-based compensation expense— — — — 19.0 — — 19.0 
Other comprehensive loss— — — — — (1.3)— (1.3)
Net loss— — — — — — (49.8)(49.8)
Cumulative effect adjustment in connection with adoption of ASU 2016-02
— — — — — — 7.2 7.2 
Balance – September 30, 2019
 $ 280.3 $ $2,249.1 $(1.1)$(672.0)$1,576.0 
Balance — June 30, 2020
— $— 288.1 $— $2,361.8 $10.1 $(693.9)$1,678.0 
Activity related to stock-based compensation— — 3.5 — 45.9 — — 45.9 
Issuance of common stock under employee stock purchase plan— — 0.2 — 5.1 — — 5.1 
Other comprehensive income— — — — — 2.6 — 2.6 
Net income— — — — — — 69.3 69.3 
Balance — September 30, 2020
— $— 291.8$ $2,412.9 $12.7 $(624.6)$1,801.0 

See accompanying notes to these unaudited condensed consolidated financial statements.
8

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 Interactive, Inc. ("Peloton" or the “Company”) 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 Digital subscription. 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 its Members to be the best versions of themselves.
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, 2020, 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. 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, 2020, filed with the SEC on September 10, 2020 (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 months ended September 30, 2020 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2021, 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.
Except as described elsewhere in Note 2 of the notes to the condensed consolidated financial statements in the section titled "—Recently Issued Accounting Pronouncements" in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on 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, and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, the realizability of inventory, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, useful lives of property and equipment, product warranty, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense, transaction price estimates, the fair values of assets acquired and liabilities assumed in business combinations, contingent consideration, and commitments and contingencies. Actual results may differ from these estimates.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Recently Adopted
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This standard changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which may result in earlier recognition of allowances for losses, and require expected credit losses to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. The Company adopted this standard and related amendments on July 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements.

ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which amends ASC Topic 740, Income Taxes. This ASU simplifies the accounting for income taxes by modifying the treatment of intraperiod tax allocation in certain circumstances, eliminating an exception to recognizing deferred tax liabilities for outside basis differences for foreign equity method investments and foreign subsidiaries when ownership or control changes, and modifying interim period tax calculations when a loss is forecast. In addition, this ASU also requires that enacted changes in tax laws or rates be included in the annual effective rate determination in the period that includes the enactment date and clarifies the tax accounting of a step up in tax basis of goodwill. The Company adopted this standard on July 1, 2020. The adoption of this standard did not materially impact the Company's consolidated financial statements.

Accounting Pronouncements Not Yet Adopted
ASU 2020-01
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance clarifies the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the potential impact of adopting this new accounting guidance, but does not expect the adoption of the standard to have a material impact on its consolidated financial statements.

ASU 2020-04
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Company plans to adopt this standard when LIBOR is discontinued. The Company is currently evaluating the potential impact of adopting this new accounting guidance, but does not expect the adoption of the standard to have a material impact on its consolidated financial statements.
3. Revenue
The Company’s primary source of revenue is from sales of its Connected Fitness Products and associated recurring Subscription revenue.

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, and incentives as a reduction of the transaction price. Certain contracts include consideration payable that is accounted for as a payment for distinct goods or services. The Company estimates its liability for product returns based on historical return trends by product
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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 standalone selling price based on 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 expense.
Connected Fitness Products
Connected Fitness Products include the Company’s portfolio of Connected Fitness Products and related accessories, branded apparel, and extended warranty agreements. The Company recognizes Connected Fitness Product revenue net of sales returns and discounts when the product has been delivered to the customer, except for extended warranty revenue which is recognized over the warranty period. The Company allows customers to return 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 income (loss).

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

Amounts paid for subscription fees are included within customer deposits and deferred revenue and recognized ratably on a month-to-month basis. 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 income (loss).

Sales tax collected from customers and remitted to governmental authorities is not included in revenue and is reflected as a liability on the balance sheet.

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 covering the touchscreen and most original Bike and Tread components from the date of original delivery. 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, including costs associated with service of Connected Fitness Products outside of the warranty period, 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 both in-house and by contract manufacturers, and in certain cases, the Company may have recourse to such contract manufacturers.
The Company also offers the option for customers in some markets to purchase an 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 Product for an additional period of 12 to 27 months.

Revenue and related fees paid to the third-party provider are 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 income (loss).
Disaggregation of Revenue
The Company's revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 12 under the heading "Segment Information".

The Company's revenue disaggregated by geographic region, were as follows:
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Three Months Ended September 30,
20202019
(in millions)
North America(1)
$721.9 $221.7 
Rest of world(2)
36.0 6.3 
Total revenue$757.9 $228.0 
_________________________        
(1) Consists of United States and Canada.
(2) Consists of United Kingdom and Germany.

The Company's revenue attributable to the United States represented 93% and 95% of total revenue for the three months ended September 30, 2020 and 2019, respectively.

Customer Deposits and Deferred Revenue
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. Deferred revenue consists of subscription fees billed that have not been recognized. Customer deposits represent payments received in advance before the Company transfers a good or service to the customer and are refundable.
As of September 30, 2020 and June 30, 2020, customer deposits of $492.8 million and $341.5 million, respectively, and deferred revenue of $28.5 million and $22.1 million, respectively, were included in customer deposits and deferred revenue on the Company's condensed consolidated balance sheet.
In the three months ended September 30, 2020 and 2019, the Company recognized $22.1 million and $9.5 million, respectively, of revenue that was included in the deferred revenue balance as of June 30, 2020 and 2019, respectively.
4. Investments in Marketable Securities
The following table summarizes the Company's investments in marketable securities:
September 30, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(in millions)
Corporate bonds$326.1 $1.5 $ $327.6 
U.S. treasury securities275.1 1.1  276.2 
Certificate of deposits26.7   26.8 
$628.0 $2.6 $ $630.6 
Less: Restricted marketable securities (1)
$38.2 
Total marketable securities$592.3 
_________________________
(1) The Company is required to pledge or otherwise restrict a portion of cash, cash equivalents, and marketable securities as collateral for standby letters of credit. The Company classifies cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as "Prepaid expenses and other current assets" and of twelve months or longer as non-current "Other assets" on its condensed consolidated balance sheets.
5. Fair Value Measurements
The following table summarizes the Company's assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

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As of September 30, 2020
Level 1Level 2Level 3Total
(in millions)
Assets
Marketable securities$630.6 $ $ $630.6 
Cost-method investments  0.7 0.7 
Total$630.6 $ $0.7 $631.3 
Liabilities
Other current liabilities:
Contingent consideration$ $ $2.5 $2.5 
Other non-current liabilities:
Contingent consideration  4.5 4.5 
Total$ $ $7.0 $7.0 

Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are carried at fair value. All investments classified as available-for-sale are recorded at fair value within marketable securities in the condensed consolidated balance sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets.
The contingent consideration represents the estimated fair value of cash consideration payable in connection with a recent acquisition that is contingent upon the achievement of certain performance milestones. The Company estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant's view of risk associated with the obligation, which are considered to be Level 3 inputs. The fair value of the contingent consideration arrangement is sensitive to change in the expected achievement of the applicable milestones and changes in discount rate. The Company remeasures the fair value of the contingent consideration arrangement each reporting period, including the accretion of the discount, if applicable, and changes are recognized in general and administrative expense in the interim condensed consolidated statements of operations and comprehensive income (loss).
6. Inventory
Inventories were as follows:
September 30, 2020June 30, 2020
(in millions)
Raw materials$24.1 $17.8 
Work-in-process6.0 4.6 
Finished products345.9 232.5 
Total inventories376.0 254.9 
Less: Reserves(12.0)(10.5)
Total inventories, net$364.0 $244.5 

7. Debt and Financing Arrangements
Amended and Restated Credit Agreement
In 2019 the Company entered into an amended and restated loan and security agreement (“Amended Credit Agreement”). The Amended Credit Agreement provides for a $250.0 million secured revolving credit facility, including up to the lesser of $150.0 million and the aggregate unused amount of the facility for the issuance of letters of credit. Interest on the Amended Credit Agreement is paid based on LIBOR plus 2.75% or an Alternative Base Rate plus 1.75%. The Company is required to pay an annual commitment fee of 0.375% on a quarterly basis based on the unused portion of the revolving credit facility.

The Company incurred total commitment fees of $0.3 million and $0.2 million during the three months ended September 30, 2020 and 2019, respectively, which are included in interest expense in the condensed consolidated statements of operations and comprehensive income (loss).

The outstanding balance, if any, is payable in full in June 2024. As of September 30, 2020, the Company has not drawn on the credit facility and did not have outstanding borrowings under the Amended Credit Agreement.
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In connection with the execution of the Amended Credit Agreement, the Company incurred debt issuance costs of $0.9 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 Amended Credit Agreement.
The Company has the option to repay its borrowings under the Amended Credit Agreement without premium or penalty prior to maturity. The Amended Credit Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that restrict its ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare cash dividends in the entirety or make certain other distributions, and undergo a merger or consolidation or certain other transactions. The Amended Credit Agreement also contains certain financial condition covenants, including maintaining a total level of liquidity of not less than $125.0 million and maintaining certain minimum total revenue ranging from $725.0 million to $1,985.0 million depending on the applicable date of determination. As of September 30, 2020, the Company was in compliance with the covenants under the Amended Credit Agreement. At September 30, 2020, the Company was contingently liable for approximately $4.8 million in standby letters of credit as security for an operating lease obligation.
8. Commitments and Contingencies
Content Costs for Past Use Reserve
To secure the rights to stream music on the Peloton platform, the Company must obtain licenses from, and pay royalties to, copyright owners of both sound recordings and musical compositions. The Company has entered into negotiations with various music rights holders, to pay for any and all uses of musical compositions and sound recordings to date and, at the same time, enter into go-forward license agreements for the use of music in the future.

Prior to the execution of go-forward music license agreements, the Company estimates and records expenses inclusive of estimated content costs for past use as well as normal and recurring music royalty expenses. During the three months ended September 30, 2020 and 2019, the Company recorded content costs for past use and estimates for normal and recurring royalty expense of $2.4 million and $2.6 million, respectively. The Company includes both of these components in its reserve. As of September 30, 2020 and 2019, the Company recorded reserves of $24.5 million and $20.8 million, respectively, included in accrued expenses in the accompanying condensed consolidated balance sheets.

Legal 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 business. Some of these proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages, such as litigation that centers around intellectual property claims. Accordingly, it is not possible to determine the probability of loss or estimate damages, 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. The Company does not believe that the outcome of any existing legal or regulatory proceeding to which it is a party, either individually or in the aggregate, will have a material adverse effect on its results of operations, financial condition or cash flows.
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, or a lesser amount as determined by the Board of Directors. On July 1, 2020, the number of shares of Class A common stock available for issuance under the 2019 Plan was automatically increased according to its terms by 14,401,954 shares. As of September 30, 2020, the number of shares of Class A common stock available for future award under the 2019 Plan is 50,065,240.

Stock Options
The following summary sets forth the stock option activity under the 2019 Plan:
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Options Outstanding
Number of Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate
Intrinsic
Value (in millions)
Outstanding — June 30, 2020
66,818,860 $10.57 8.0$3,153.6 
Granted2,155,099 $81.11 
Exercised(3,497,582)$5.75 
Forfeited(480,418)$14.58 
Outstanding — September 30, 2020
64,995,959 $13.14 7.8$5,596.0 
Vested and Exercisable— September 30, 2020
27,318,967 $5.47 6.8$2,561.7 

Unvested option activity is as follows:

OptionsWeighted-Average Grant Date Fair Value
Unvested - June 30, 2020
39,674,590 $7.41 
Granted2,155,099 $33.43 
Early exercised unvested(20,240)$2.74 
Vested(3,655,136)$6.09 
Forfeited(477,321)$6.86 
Unvested - September 30, 2020
37,676,992 $9.04 

The aggregate intrinsic value of options outstanding, 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 September 30, 2020. Prior to the IPO, the fair value of the Company's common stock was determined by the Board of Directors. After the IPO, 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.

As part of the 2015 Plan and 2019 Plan (collectively, the "Plans"), the Company issued options to certain key management that vest upon the achievement of certain performance milestones. During the three months ended September 30, 2020 and 2019, the Company recorded stock-based compensation expense related to the performance based options of $0.2 million and $3.7 million, respectively.

For the three months ended September 30, 2020 and 2019, the weighted-average grant date fair value per option was $33.43 and $12.80, respectively. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:

Three Months Ended September 30,
20202019
Weighted average risk-free interest rate (1)
0.4%1.6%
Weighted average expected term (in years)
6.36.3
Weighted average expected volatility (2)
42.5%45.0%
Expected dividend yield
____________________________
(1) Based on U.S. Treasury seven-year constant maturity interest rate whose term is consistent with the expected term of the option.
(2) Expected volatility is based on an analysis of comparable public company volatilities and adjusted for the Company’s stage of development.

Restricted Stock and Restricted Stock Units
The following table summarizes the activity related to the Company's restricted stock and restricted stock units:


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Restricted Stock Units Outstanding
Number of Awards
Weighted-Average Grant Date Fair Value
Outstanding — June 30, 2020
616,113 $32.02 
Granted550,256 $80.08 
Cancelled(189)$82.59 
Outstanding — September 30, 2020
1,166,180 $54.69 

Employee Stock Purchase Plan
In August 2019, the Board of Directors adopted, and in September 2019, the Company's stockholders approved, the 2019 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 the date the registration statement, in connection with the Company’s IPO, was declared effective by the SEC (the "Effective Date"). 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, 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, 2020, the number of shares of Class A common stock available for issuance under the ESPP was automatically increased according to its terms by 2,880,390 shares. As of September 30, 2020, a total of 8,101,657 shares of Class A common stock are 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 the Effective Date and will end 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 included weighted average expected terms of 1.2 years, weighted average expected volatility of 58.1%, and weighted average risk-free rate of 1.3% for the three months ended September 30, 2020. The expected term assumptions were based on each offering period's respective purchase date. Since the Company does not have a historical trading history of its stock, the expected volatility was derived from the average 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. 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 months ended September 30, 2020, the Company recorded stock-based compensation expense associated with the ESPP of $1.6 million.

During the three months ended September 30, 2020, employees purchased approximately 216,094 shares of Class A common stock, under the ESPP, at a weighted-average price of $23.73. As of September 30, 2020, total unrecognized compensation cost related to the ESPP was $14.6 million, which will be amortized over a weighted-average remaining period of 1.7 years.

Stock-Based Compensation Expense
The Company's total stock-based compensation expense was as follows:

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Three Months Ended September 30,
20202019
(in millions)
Cost of revenue
   Connected Fitness Products$1.5 $0.3 
Subscription4.5 1.0 
Total cost of revenue5.9 1.3 
Sales and marketing3.4 1.6 
General and administrative16.7 13.5 
Research and development3.6 2.3 
  Total stock-based compensation expense$29.6 $18.7 

As of September 30, 2020, the Company had $376.7 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 3.3 years.
10. Income Taxes
The Company recorded a provision for income taxes of $1.3 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively. Furthermore, our effective tax rates were 1.81% and (0.20)% for the three months ended September 30, 2020 and 2019, respectively. The income tax provision and the increase in effective tax rate is primarily driven by state and international taxes.

The provision for income taxes consists primarily of income taxes related to state and international taxes for jurisdictions in which we conduct business. We maintain a valuation allowance on the majority of our deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.
11. Net Income (Loss) Per Share
The computation of basic and diluted net income (loss) per share is as follows:
Three Months Ended September 30,
20202019
(in millions)
Basic net income (loss) per share:
Net income (loss) attributable to common stockholders$69.3 $(49.8)
Shares used in computation:
Weighted-average common shares outstanding288,719,834 38,453,864 
Basic net income (loss) per share$0.24 $(1.29)
Diluted net income (loss) per share:
Net income (loss) attributable to common stockholders$69.3 $(49.8)
Shares used in computation:
Weighted-average common shares outstanding288,719,834 38,453,864 
Weighted-average effect of potentially dilutive securities:
Employee stock options52,580,485  
Restricted Stock units468,732  
Shares estimated to be purchased under ESPP332,933  
Diluted weighted-average common shares outstanding342,101,984 38,453,864 
Diluted net income (loss) per share$0.20 $(1.29)

The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
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Three Months Ended September 30,
20202019
Employee stock options42,817 38,113,154 
Restricted Stock units8,927  

12. Segment Information
The Company applies ASC 280, Segment Reporting, in determining reportable segments for its financial statement disclosure. 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 Product 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 September 30,
20202019
(in millions)
Connected Fitness Products:
Revenue
$601.4 $160.8 
Cost of revenue
364.2 93.4 
   Gross profit
$237.2 $67.4 
Subscription:
Revenue
$156.5 $67.2 
Cost of revenue
65.0 29.5 
   Gross profit
$91.5 $37.7 
Consolidated:
Revenue
$757.9 $228.0 
Cost of revenue
429.2 122.9 
   Gross profit
$328.7 $105.1 

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 Income (loss) before tax is as follows:
Three Months Ended September 30,
20202019
(in millions)
Segment Gross Profit
$328.7 $105.1 
Sales and marketing(114.6)(77.6)
General and administrative(108.6)(60.9)
Research and development(36.6)(17.4)
Total other income, net
1.7 1.2 
Income (loss) before provision for income taxes
$70.6 $(49.7)

13. Subsequent Events
Acquisitions
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In October 2020, the Company entered into two separate agreements to purchase various developed technology, intellectual property and related assets for approximately $74.0 million.
The Company has not yet completed its evaluation and determination of consideration paid, certain assets and liabilities acquired, or treatment of these transactions as either a business combination or asset acquisition in accordance with Topic 805.
Plano Lease
On October 1, 2020, the Company amended its lease of office space in Plano, Texas to add an additional 103,759 square feet of office space (the “Additional Space”) and extend the lease term through January 31, 2029. The amendment results in an additional $19.7 million committed spend through the extended lease term. The Company expects to begin preparing the Additional Space for use as an office facility on December 1, 2020.


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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, 2020 filed with the SEC on September 10, 2020 (the "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 and uncertainties, as well as assumptions 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 our Form 10-K.

Overview

Peloton is the largest interactive fitness platform in the world with a loyal community of over 3.6 million Members as of September 30, 2020. We pioneered connected, technology-enabled fitness, and the streaming of immersive, instructor-led boutique classes to our Members anytime, anywhere. We make fitness entertaining, approachable, effective, and convenient while fostering social connections that encourage our Members to be the best versions of themselves. We define a Member as any individual who has a Peloton account through a paid Connected Fitness Subscription, or a paid Peloton Digital subscription.

Our Connected Fitness Product portfolio currently include the Peloton Bike, Bike+, and the Peloton Tread and Tread+. Our revenue is generated primarily from the sale of our Connected Fitness Products and associated recurring subscription revenue. We have experienced significant growth in sales of our Connected Fitness Products, which, when combined with our low Average Net Monthly Connected Fitness Churn has led to significant growth in Connected Fitness Subscriptions. From the three months ended September 30, 2019 to the three months ended September 30, 2020, total revenue grew 232%, and our Connected Fitness Subscription base grew 137%.

Our compelling financial profile is characterized by high growth, strong retention, recurring revenue, margin expansion, and efficient customer acquisition. Our low Average Net Monthly Connected Fitness Churn, together with our high Subscription Contribution Margin allows us to generate attractive value from our Connected Fitness Subscriptions. When we acquire new Connected Fitness Subscriptions, we are able to offset our subscription acquisition costs with the Gross profit earned on our Connected Fitness Products. This allows for rapid payback of our sales and marketing investments and results in a robust unit economic model.

For the three months ended September 30, 2020 and 2019:

We generated total revenue of $757.9 million and $228.0 million, respectively, representing 232% year-over-year growth;
As of September 30, 2020 and 2019, we had 1,334,400 and 562,774 Connected Fitness Subscriptions, respectively, representing 137% year-over-year growth;
Our Average Net Monthly Connected Fitness Churn was 0.65%, and 0.90%, respectively;
We recognized net income (loss) of $69.3 million and $(49.8) million, respectively; and
Our Adjusted EBITDA was $118.9 million and $(21.0) million, respectively.

For a definition of Connected Fitness Subscriptions and Average Net Monthly Connected Fitness Churn, see the section titled “—Key Operational and Business Metrics”.

See the section titled “—Non-GAAP Financial Measures” for definitions of and information regarding our use of Adjusted EBITDA, Adjusted EBITDA Margin, Subscription Contribution and Subscription Contribution Margin, and a reconciliation of each of net income (loss) to Adjusted EBITDA and Subscription Gross Profit to Subscription Contribution.

Q1 update
We continue to work through the many challenges associated with the ongoing COVID-19 pandemic. We were incredibly proud to launch the Peloton Bike+ and to announce the new Peloton Tread, an exciting milestone in our history. However, it drove call volumes and unacceptably long wait times, well beyond our expectations, to reach our Sales and Support teams, which impacted our customer experience. Also, as we rapidly scale our organization to meet the extraordinary demand for our products, we realize that some of our Members have faced frustrating delays associated with receiving our products or having support requests fulfilled.

We will continue to work diligently to address delivery and support issues, as we have long prided ourselves on providing superior customer service. With an understanding of what is required to return to our normal standards, we continue to invest in technology, manufacturing capabilities, and people to help us scale and meet the needs of all our customers.

It has truly been a challenging year for the world and our Member community. We know that Peloton offers a service that many need during this time to sustain their physical and mental heath and well-being and we are doing everything we can to get our products to our prospective Members as quickly as possible. Our hearts go out to all those affected by COVID-19 and we are so thankful for the continued and prolonged efforts of our front line and essential workers.

Our Members, both Connected Fitness and Digital, completed over 90 million workouts in the quarter across over 17,000 classes, up 332% year-over-year. We continue to ramp content production and produced over 2,400 new classes in the quarter.

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Our goal is to become the leading connected fitness and wellness platform. In order to do that we have focused on complementing our incredibly effective and immersive cardio offering with world-class strength and wellness content. We will continue to invest in hardware, software, and content to maintain our leadership position.

Strength training is a key pillar of fitness and is a top priority for our teams. In Q1, we increased and improved our strength programming through the introduction of new strength classes in our existing formats and introduced two new exciting strength offerings: Bike Bootcamp and Barre. We also officially launched our U.K. and German strength programming, leveraging the launch of our dedicated U.K. strength studio. And our Members are responding: strength workouts increased nearly 500% year-over-year, significantly outpacing Total Workout growth.

Products
On September 9th we launched Peloton Bike+, a re-envisioning of our award-winning Peloton Bike that incorporates key features requested by our Members. Bike+ was designed to create a challenging total body workout program through the swivel screen, making it easier to complement an indoor cycling class with Peloton’s strength, yoga, stretching, and meditation classes. Key new features include a 24” rotating HD touchscreen, a high-fidelity four-speaker sound system, and Auto-Follow, a feature that automatically scales your resistance based on the instructor’s target metrics.

We anticipate that our new Peloton Tread will be available for purchase starting December 26th in the U.K. The U.S. and Canada markets are scheduled for early next calendar year and the Germany launch is scheduled for later in calendar 2021. We expect to release details soon on our launch timing.

Software
Our frequent software updates are designed to drive easier navigation of our content, increase Member engagement, and deepen the connections within our Peloton community. Recent improvements have included "Skip Intro"— a feature allowing experienced Members to advance past class introductions— and an improved class exit experience to enhance rating and sharing of class content with social media connections. Pelothon, our four week long collaborative Member celebration and engagement campaign, made use of our #Tags software, enabling Members to join one of six workout teams in the friendly competition, driving nearly 10 million Pelothon Member workouts and our single largest day of live classes taken on July 21st.

Content
In conjunction with the introduction of Bike+, we were pleased to debut our groundbreaking Bike Bootcamp classes featuring instruction by Robin Arzon, Cody Rigsby, and Jess Sims. Bike Bootcamp is a series of motivating total body workouts, integrating strength training into our cycling cardio programming for a dynamic workout on and off the Bike. Bike+ Members can challenge themselves using Bike+'s integrated rotating screen, while our Members riding our original Bike can experience Bike Bootcamp through our TV integrations on platforms such as Roku, Apple TV, and Amazon Fire TV. From launch through the end of the quarter, our Members logged over 350,000 Bike Bootcamp workouts.

On September 21st, we further expanded our Strength offering with the launch of Peloton Barre classes. Barre had long been a Member requested addition to our programming, and the launch of classes led by Hannah Corbin and Ally Love were quickly embraced by our Member community. From launch through the end of the quarter, our 10 Barre classes were taken over 530,000 times. We’re excited to debut additional new fitness modalities in the future.





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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 September 30,

20202019
Ending Connected Fitness Subscriptions1,334,400 562,774 
Average Net Monthly Connected Fitness Churn0.65 %0.90 %
Total Workouts (in millions)77.8 19.2 
Average Monthly Workouts per Connected Fitness Subscription20.7 11.7 
Subscription Gross Profit (in millions)$91.5 $37.7 
Subscription Contribution (in millions)(1)
$100.4 $42.4 
Subscription Gross Margin58.5 %56.1 %
Subscription Contribution Margin(1)
64.1 %63.0 %
Net Income (loss) (in millions)$69.3 $(49.8)
Adjusted EBITDA (in millions)(2)
$118.9 $(21.0)
Adjusted EBITDA Margin(2)
15.7 %(9.2)%
______________________________
(1) 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 metrics for investors.
(2) Please see the section titled “Non-GAAP Financial Measures—Adjusted EBITDA and Adjusted EBITDA Margin” for a reconciliation of Net income (loss) to Adjusted EBITDA and an explanation of why we consider Adjusted EBITDA to be a helpful metric for investors.

Connected Fitness Subscriptions
Our ability to expand the number of Connected Fitness Subscriptions is an indicator of our market penetration and growth. We define a Connected Fitness Subscription as a person, household, or commercial property, such as a hotel or residential building, who has either 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) or requested a "pause" to their subscription for up to 3 months. We do not include canceled or unpaid Connected Fitness Subscriptions in the Connected Fitness Subscription count.

Average Net Monthly Connected Fitness Churn
We use Average Net Monthly Connected Fitness Churn to measure the retention of our Connected Fitness Subscriptions. We define Average Net Monthly Connected Fitness Churn as Connected Fitness Subscription cancellations, net of reactivations, in the quarter, divided by the average number of beginning Connected Fitness Subscriptions in each month, divided by three months. This metric does not include data related to our Peloton Digital subscriptions for Members who pay a monthly fee for access to our content library on their own devices.

Total Workouts and Average Monthly Workouts per Connected Fitness Subscription
We review Total Workouts and Average Monthly Workouts per Connected Fitness Subscription to measure engagement, which is the leading indicator of retention for our Connected Fitness Subscriptions. We define Total Workouts as all workouts completed during a given period. We define a Workout as a Connected Fitness Subscription for Members either completing at least 50% of an instructor-led or scenic ride or run, or ten or more minutes of “Just Ride” or “Just Run” mode. We define Average Monthly Workouts per Connected Fitness Subscription as the Total Workouts completed in the quarter divided by the average number of Connected Fitness Subscriptions in each month, divided by three months.


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Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles generally accepted in the United States, or GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance.
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: other (income) expense, net; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; transaction costs; certain litigation expenses, consisting of legal settlements and related fees for specific proceedings that arise outside of the ordinary course of our business; and specific non-recurring costs associated with COVID-19. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenue.
We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operating performance and the operating leverage in our business. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense, depreciation and amortization expense, other (income) expense, net, and provision for income taxes that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;
Our management uses Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and
Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, facilitate period-to-period comparisons of our core operating results, and also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Our use of Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider these measures in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are, or may in the future be, as follows:

Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us;
Adjusted EBITDA and Adjusted EBITDA Margin do not reflect certain litigation expenses, consisting of legal settlements and related fees for specific proceedings, that arise outside of the ordinary course of our business;
Adjusted EBITDA and Adjusted EBITDA Margin do not reflect transaction costs related to acquisitions;
Adjusted EBITDA and Adjusted EBITDA Margin do not reflect incremental costs associated with COVID-19, which consist of hazard pay for field operations employees; and
The expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results and we may, in the future, exclude other significant, unusual or non-recurring expenses or other items from these financial measures.

Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:

Adjusted EBITDA and Adjusted EBITDA Margin
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  Three Months Ended September 30,

20202019

(in millions)
Net income (loss) $69.3 $(49.8)
Adjusted to exclude the following:
Other (income), net(1.7)(1.2)
Income tax expense1.3 0.1 
Depreciation and amortization expense11.4 7.1 
Stock-based compensation expense29.6 18.7 
Litigation and settlement expenses 3.1 3.9 
Other adjustment items (1)
5.9 0.3 
Adjusted EBITDA$118.9 $(21.0)
Adjusted EBITDA Margin15.7 %(9.2)%
______________________
     
(1) Includes incremental costs associated with COVID-19 of $5.9 million for the three months ended September 30, 2020 and $0.3 million of transaction costs for the three months ended September 30, 2019.

We expect Adjusted EBITDA Margin to increase over the long-term as we continue to scale our business and achieve greater leverage in our operating expenses.
Subscription Contribution and Subscription Contribution Margin
We define Subscription Contribution as subscription revenue less cost of subscription revenue, adjusted to exclude from cost of subscription revenue, depreciation and amortization expense, and stock-based compensation expense. Subscription Contribution Margin is calculated by dividing Subscription Contribution by subscription revenue.
We use Subscription Contribution and Subscription Contribution Margin to measure our ability to scale and leverage the costs of our Connected Fitness Subscriptions. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results because our management uses Subscription Contribution and Subscription Contribution Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance.

Our use of Subscription Contribution and Subscription Contribution Margin have limitations as analytical tools, and you should not consider these in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:

Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Subscription Contribution and Subscription Contribution Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; and
Subscription Contribution and Subscription Contribution Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy.

Because of these limitations, Subscription Contribution and Subscription Contribution Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.

The following table presents a reconciliation of Subscription Contribution to Subscription Gross Profit, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:

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Three Months Ended September 30,

20202019

(in millions)
Subscription Revenue$156.5 $67.2 
Less: Cost of Subscription
65.0 29.5 
Subscription Gross Profit$91.5 $37.7 
Subscription Gross Margin58.5 %56.1 %
Add back:
Depreciation and amortization expense$4.4 $3.7 
Stock-based compensation expense4.5 1.0 
Subscription Contribution$100.4 $42.4 
Subscription Contribution Margin64.1 %63.0 %

The continued growth of our Connected Fitness Subscription base will allow us to improve our Subscription Contribution Margin. While there are variable costs, including music royalties, associated with our Connected Fitness Subscriptions, a significant portion of our content creation costs are fixed given that we operate with a limited number of production studios and instructors. The fixed nature of those expenses should scale over time as we grow our Connected Fitness Subscription base.

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Components of our Results of Operations
Revenue
Connected Fitness Products
Connected Fitness Product revenue consists of sales of our portfolio of Connected Fitness Products and related accessories, delivery and installation services, branded apparel, and extended warranty agreements. Connected Fitness Product revenue is recognized at the time of delivery, except for extended warranty revenue which is recognized over the warranty period, and is recorded net of returns and discounts and third-party financing program fees, when applicable.

Subscription
Subscription revenue consists of revenue generated from our monthly $39.00 Connected Fitness Subscription and $12.99 Peloton Digital subscription.
As of September 30, 2020, 96% and 100% of our Connected Fitness Subscription and Peloton Digital subscription bases were paying month-to-month, respectively.
If a Connected Fitness Subscription owns both a Bike and Tread product in the same household, the price of the Subscription remains $39.00 monthly. As of September 30, 2020, approximately 3% of our Connected Fitness Subscriptions owned both a Bike and a Tread.

Cost of revenue
Connected Fitness Products
Connected Fitness Product cost of revenue consists of our portfolio of Connected Fitness Products and branded apparel product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty replacement and service costs, fulfillment costs, warehousing costs, and certain allocated costs related to management, facilities, and personnel-related expenses associated with supply chain logistics. As we launch new Connected Fitness Products and continue to grow our presence in new regions where we have not yet achieved economies of scale, we expect to incur higher cost of revenue (as a percentage of sales) for our Connected Fitness Products.

Subscription
Subscription cost of revenue includes costs associated with content creation and costs to stream content to our Members. These costs consist of both fixed costs, including studio rent and occupancy, other studio overhead, instructor and production personnel-related expenses, as well as variable costs, including music royalty fees, content costs for past use, third-party platform streaming costs, and payment processing fees for our monthly subscription billings. While our fixed costs currently represent the majority of these costs, music royalty fees are our largest subscription variable cost. As we have grown the number of licensing agreements with music rights holders, music royalty fees as a percent of our subscription revenue has increased. However, unlike music streaming services where having an exhaustive music catalog is vital to be able to compete for customers, we have control over what music we select for our classes. As a result, we expect to be able to manage music expense such that, over time, these fees as a percentage of subscription revenue will flatten, or even decrease.

Operating expenses
Sales and marketing
Sales and marketing expense consists of performance marketing media spend, asset creation, and other brand creative, all showroom expenses and related lease payments, payment processing fees incurred in connection with the sale of our Connected Fitness Products, sales and marketing personnel-related expenses, and expenses related to Peloton Digital. We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new products and expand internationally. Sales and marketing expense as a percentage of total revenue may fluctuate from period to period based on total revenue and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.

General and administrative
General and administrative expense includes personnel-related expenses and facilities-related costs primarily for our executive, finance, accounting, legal, human resources, and IT functions. General and administrative expense also includes fees for professional services principally comprised of legal, audit, tax and accounting services, and insurance, as well as litigation settlement costs.

We expect to continue to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses, and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue, but we expect to leverage these expenses over time as we grow our revenue and Connected Fitness Subscription base.

Research and development
Research and development expense primarily consists of personnel and facilities-related expenses, consulting and contractor expenses, tooling and prototype materials, and software platform expenses. We capitalize certain qualified costs incurred in connection with the development of internal-use software which may also cause research and development expenses to vary from period to period. We expect our research and
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development expenses to increase in absolute dollars in future periods and vary from period to period as a percentage of total revenue as we continue to hire personnel to develop new and enhance existing Connected Fitness Products and interactive software.

Other income, net
Other income, net consists of interest (expense) income, realized gains (losses) on investments, amortization of debt issuance costs, and impacts from foreign exchange transactions.

Provision for income taxes
The provision for income taxes consists primarily of income taxes related to state and international taxes for jurisdictions in which we conduct business. We maintain a valuation allowance on the majority of our deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.
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Results of Operations
The following tables set forth our condensed consolidated results of operations in dollars and as a percentage of total revenue for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

  Three Months Ended September 30,

20202019

(in millions)
Consolidated Statement of Operations Data:
Revenue
Connected Fitness Products$601.4 $160.8 
Subscription156.5 67.2 
Total revenue757.9 228.0 
Cost of revenue(1)(2)
Connected Fitness Products364.2 93.4 
Subscription65.0 29.5 
Total cost of revenue429.2 122.9 
Gross profit328.7 105.1 
Operating expenses
Sales and marketing(1)(2)
114.6 77.6 
General and administrative(1)(2)
108.6 60.9 
Research and development(1)(2)
36.6 17.4 
  Total operating expenses259.8 156.0 
Income (loss) from operations68.9 (50.9)
Other income, net1.7 1.2 
Income (loss) before provision for income tax70.6 (49.7)
Income tax expense 1.3 0.1 
Net income (loss) $69.3 $(49.8)
____________________
(1) Includes stock-based compensation expense as follows:
  Three Months Ended September 30,

20202019

(in millions)
Cost of revenue
   Connected Fitness Products$1.5 $0.3 
Subscription4.5 1.0 
Total cost of revenue5.9 1.3 
Sales and marketing3.4 1.6 
General and administrative16.7 13.5 
Research and development3.6 2.3 
  Total stock-based compensation expense$29.6 $18.7 
____________________
(2) Includes depreciation and amortization expense as follows:
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  Three Months Ended September 30,

20202019

(in millions)
Cost of revenue
Connected Fitness Products$1.2 $0.5 
Subscription4.4 3.7 
Total cost of revenue5.6 4.2 
Sales and marketing2.9 1.6 
General and administrative2.8 1.3 
Research and development0.1 — 
  Total depreciation and amortization expense$11.4 $7.1 

Comparison of the Three Months Ended September 30, 2020 and 2019

Revenue

 Three Months Ended September 30,

20202019% Change
(dollars in millions)
Revenue:

Connected Fitness Products$601.4 $160.8 273.9 %
Subscription156.5 67.2 133.0 
Total revenue$757.9 $228.0 232.4 %
Percentage of revenue

Connected Fitness Products79.3 %70.5 %

Subscription20.7 29.5 

Total100.0 %100.0 %


Connected Fitness Products revenue for the three months ended September 30, 2020 increased $440.5 million, or 273.9%, compared to the three months ended September 30, 2019. This increase was primarily attributable to the significant growth in the number of Connected Fitness Products delivered during the period, which was the result of investments made in brand and product awareness, compounded by a strong increase in demand driven by the stay-at-home orders issued by governments around the world in response to the COVID-19 pandemic.

Subscription revenue for the three months ended September 30, 2020 increased $89.4 million, or 133.0%, compared to the three months ended September 30, 2019. This increase was primarily attributable to the year-over-year growth in our Connected Fitness Subscriptions from 562,774 to 1,334,400. The growth of our Connected Fitness Subscriptions was primarily driven by the increased number of Connected Fitness Products delivered during the period and our low Average Net Monthly Connected Fitness Churn of 0.65% for the three months ended September 30, 2020. We believe engagement is a leading indicator of retention. Our Member engagement continued to grow with 20.7 Average Monthly Workouts per Connected Fitness Subscription during the three months ended September 30, 2020 versus 11.7 Average Monthly Workouts per Connected Fitness Subscription for the three months ended September 30, 2019. Members with Connected Fitness Subscriptions worked out with us 77.8 million times in the three months ended September 30, 2020, up from 19.2 million workouts during the three months ended September 30, 2019, representing 306% year-over-year growth.

Cost of Revenue, Gross Profit, and Gross Margin

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 Three Months Ended September 30,

20202019% Change
(dollars in millions)
Cost of Revenue: