Strong earnings fail to mask users' pain of "bleeding out" Peloton's (PTON.US) road to recovery disappoints the market.

On Thursday (August 6) before the market opened, Peloton Interactive (PTON.US) released its fourth-quarter and full-year financial results for the fiscal year ending June 30, 2026. This fitness technology company delivered its first full-year profit since going public, with Q4 revenues and profits both exceeding expectations. However, due to revenue guidance for fiscal year 2027 falling short of expectations, combined with a continued decline in core user metrics, the stock price plunged by over 15% in pre-market trading. From being a "cash-burning machine" to achieving its first-ever full-year profit, Peloton has managed to deliver a passing grade in financial discipline; however, on the critical battleground of user growth, the company's "bleeding" has yet to stop, leading to a significant drop in its stock price during pre-market trading. Q4 performance: Revenues exceed expectations, but hardware losses intensify In the fourth quarter, Peloton achieved revenues of $608 million, a year-on-year increase of about 1%, exceeding the market expectation of $597 million. GAAP earnings per share were $0.13, in line with analyst expectations. Net profit reached $61.6 million, a significant increase from $21.6 million in the same period last year. Despite revenues surpassing expectations, the divergence in revenue structure is concerning. Subscription revenue grew by 7% year-on-year to $437 million; however, connected fitness product revenue (hardware) plummeted by 14% to $171 million. Gross margin significantly improved by 260 basis points year-on-year to 56.7%Peloton achieved short-term financial improvement through price increases and cost control, but the continuous decline in hardware sales is eroding the foundation of its user growth. Even more worrying is the continued loss of paid subscription users. At the end of the fourth quarter, the number of paid connected fitness subscription users was 2.553 million, a decrease of 247,000 year-on-year (down 8.8%), falling within the companys previous guidance range. The total membership dropped by 8% year-on-year to 5.5 million. The simultaneous contraction of hardware sales and user base poses the most significant challenge currently facing the company. The decline in hardware revenue stands in stark contrast to the increase in subscription revenue, reflecting Peloton's shift from a hardware seller to a service seller business model. Q4's profitability was also bolstered by the price increases implemented for hardware and subscription plans in the previous autumn. Annual milestone: First annual profit achieved For the fiscal year 2026, Peloton reported a net profit of $63.2 million, turning around from a loss of $118.9 million in the same period last year. Total revenue for the year was approximately $2.42 billion, with adjusted EBITDA reaching $468 million, a 16% year-on-year increase, and free cash flow growing by 17% to $378 million. CEO Peter Stern referred to fiscal year 2026 as a "milestone year," marking Peloton's "financial maturation." Fiscal year 2027 outlook: Guidance falls short of expectations, price reduction cycle becomes the biggest drag For fiscal year 2027, Peloton expects total revenue of $2.3 to $2.4 billion, representing a nearly 4% year-on-year decline based on the midpoint, lower than the market expectation of $2.42 billion. The gross margin for the year is expected to be around 54.0%, an increase of 140 basis points year-on-year. Adjusted EBITDA is forecasted to be between $475 million and $525 million, with a gross margin of about 54%. The company anticipates continuing to generate positive free cash flow in fiscal year 2027. For Q1 revenue guidance, the company expects to achieve between $545 million and $565 million, below the market expectation of $567 million. Subscription user data is equally concerning. Hardware subscription numbers are expected to decline by 10% year-on-year in fiscal year 2027, widening from the previous quarter's 9% drop. CEO Peter Stern stated that the primary reason for the revenue decline is the high base effect from last autumn's price increases for hardware and subscription plans as the company enters the new fiscal year. "We are gradually improving new user trajectories and connected fitness sales while maintaining a stable user attrition rate... It's not yet the stage where all metrics are positive, but the trend for fiscal year 2027 is getting better." Strategic transformation: From "fitness equipment supplier" to "connected health platform" In response to core user attrition, Peloton is attempting to shift from "selling hardware" to "selling health services." The company plans to double the number of retail outlets, expand commercial partnerships, and increase its investment in strength training. Additionally, the company is targeting the GLP-1 weight loss drug user demographic, aiming to enhance its AI platform capabilities through personalized training plans based on wearable device data. Recently, Peloton appointed Sarah Robb O'Hagan as Chief Content and Membership Development Officer and entered a content licensing partnership with Spotify. In the commercial sector, the company plans to launch its first commercial Bike and Tread products this fall. The company intends to double the number of retail stores and continue to expand new partnerships. The goal of these initiatives is to transform Peloton from a connected fitness company into a connected health ecosystem company. However, whether this transformation can reverse the revenue decline trend in fiscal year 2027 remains the biggest unknown.