Peloton Interactive, Inc. (NASDAQ:PTON) Morgan Stanley Technology, Media & Telecom Conference Call March 7, 2024 12:30 PM ET
Company Participants
Elizabeth Coddington - CFO
Conference Call Participants
Nathan Feather - Morgan Stanley
Nathan Feather
Okay, great. Well, good morning, everyone. Thank you so much for joining us. My name is Nathan Feather and I'm Morgan Stanley's small and mid-cap Internet analyst. I'm excited to be joined today by Liz Coddington, Peloton's CFO. Thank you so much for joining us.
Elizabeth Coddington
Yes, thank you. Good morning, everybody.
Nathan Feather
Now before we begin, quick housekeeping item. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Question-and-Answer Session
Q - Nathan Feather
And with that, let's take it off. So Liz, it's been about two years since you joined the company and have been working on the turnaround. I think it would be helpful to talk through the progress you've made over the past two years and where the company is at today.
Elizabeth Coddington
Yes. That's a really great question. When I joined the company a little less than two years ago, our cost structure had to be completely reconsidered. The explosive growth that Peloton saw over the pandemic resulted in us building out a fixed cost base that when our business began to normalize post the pandemic was just too large for the size of the business, a size that we wanted and quite frankly, larger than what we could sustain. So I spent a lot in the first part of my time at Peloton basically rebuilding our balance sheet and focusing on achieving our North Star goal of moving towards positive free cash flow.
The first 12 months of both my time and Barry's time at Peloton were really focused on rightsizing our cost structure. So some of the things that we did were getting out of first-party manufacturing and shifting away from first-party logistics to third-party -- 3PL outsourced model, effectively trading a large fixed cost base for one that was much more variable. And then we also reduced our operating expenses by optimizing our costs and lowering our costs in sales and marketing, legal, HR, finance, et cetera. And we made a lot of progress there.
And we're continuing to look at opportunities to rightsize our cost structure. While the biggest opportunities for efficiency, the easiest ones to get have already been realized. We do see that there are some more opportunities for us to consider to reduce our cost over time. But the key -- when Barry joined the company, he set a couple of key objectives for us. Number one was to achieve breakeven or better free cash flow, and we do expect to do that in Q4. We should be cash flow positive in Q4. And then moving forward into fiscal '25, we expect to be positive free cash flow on the full year. And if you think about that, it's pretty remarkable considering the fact that in fiscal '22, we lost nearly $2.5 billion in terms of negative free cash flow in the business.
So then what are we focused on now, right? We are still focused on optimizing our costs. But really, it's our second goal that Barry established when he got to the company, which is to return the business to growth. And so we're continuing to look for opportunities to grow the business. And it is taking us a bit longer to find those growth opportunities than we had initially expected. But our pace of execution has greatly improved at Peloton. And we've launched several new initiatives designed to grow our subscriber base and have seen some success with many of them.
Some of the ones that have been successful include our Bike rental model, our refurbished Bike product, and also our third-party channel partners, partners like Amazon and DICK'S Sporting Goods and also Sport-Tiedje in Europe, and we're seeing great success there. We've also seen some areas that have not been quite as successful and we talked about in our shareholder letter about the co-branded University of Michigan Bike being an area that was not as successful as we had hoped.
But the key to growth is innovation, right? And in order to innovate successfully, you have to take smart risks. And if we're not failing sometimes, then we're probably not taking enough smart risks. And so the key there is that we have to learn and gain insights from everything that we do, continue to focus on opportunities to grow the business. And we still see opportunities in international growth. We see opportunities in our Peloton for business offering and in other areas around innovation. And then we also continue to see opportunity in a large addressable market for Connected Fitness.
Nathan Feather
Okay. Well, a lot I want to unpack from that. But let's start with a minute on macro. Since the back half of '21, I mean, the connected fitness industry as a whole has been pressured. What do you see as the primary reasons for that? And do you think there's still some lingering effects of the COVID go forward?
Elizabeth Coddington
So I think it's probably important to let's step back and talk about the overall fitness industry first and then we'll kind of get into Connected Fitness and all of that. So overall, we continue to see strong resilience in the fitness industry. It tends to grow nominally with GDP each year, although our data -- our internal tracking data suggests that it did decline very slightly in 2023 overall.
But we are seeing, from a generational perspective, that as the boomers age, they're aging into great consciousness around their fitness and wellness, and we're also seeing that Gen Z actually cares more about their health and wellness than any other generation has at their age. And with those consumer trends are really important to us, and we believe that those trends actually, we are well positioned to benefit from those trends going forward.
Let's talk a little bit about Connected Fitness specifically. So we talked about Peloton's rise during the pandemic. The connected fitness industry overall experienced explosive growth during the pandemic, and the key reason for that is pretty obvious. Lots of other fitness options were completely unavailable, because people couldn't get together for in-person experiences. And so post COVID, the Connected Fitness market has seen some pressure as a portion of the market has shifted back to in-person experiences like gyms.
Arguably, the growth in Connected Fitness in the connected fitness market during COVID was unnatural, and so seeing it shift back makes sense to some degree. We are seeing, and our internal data suggests this, that the rate of decline of the Connected Fitness segment has slowed significantly from where it was a year ago, though. So we are getting close to probably a more balanced natural segmentation between Connected Fitness and other parts of the market.
Now for Peloton specifically, we believe that we are far more resilient than our competitors in the connected fitness market. While our bike demand was down year-over-year, we talked about that in [indiscernible] it was down year-over-year in Q2, our subscriber base was relatively stable. And there are a couple of reasons of dynamics at play there. Number one is our -- what we believe is best-in-class retention that we have for our member base. And number two is the fact that we are seeing growth in the secondary market, which is when a Peloton subscriber that has churned, sells their bike to someone else who, then becomes a Peloton subscriber, but there's no hardware sale for us in any of that transaction.
Now your question about whether there's any still lingering effects of COVID, it's really hard to know. While our Bike demand has been down a bit year-over-year, our demand for Tread has been up year-over-year, and that is promising for us. We're also seeing that we are able to start to engage different audiences, newer audiences for us, more men, more younger, more diverse, Gen Z. And that is proving to be an opportunity for us. We're also pursuing, again, the international growth. And we still, again, believe that the connected fitness market is large and that there's still a tremendous amount of opportunity for us in the market.
Nathan Feather
Okay, great. And as you noted and as Barry noted in the last shareholder letter as well, I think one of the biggest difficulties has been returning to substantial growth at scale. And so we've talked about a lot of the initiatives they think could help get there. If you had to pick out 1 or 2 do you think could be most impactful, what would you say there?
Elizabeth Coddington
Yes. So I think -- as I think about opportunities for us, I like to think about the ones that are kind of like short-term opportunities that we can go after now and then those that we're going to have to sort of build into over the medium to longer term. One of the ones that I see as an opportunity for us right now or that we see overall is treadmill. So we relaunched our Tread+ in Q2, and that was -- there was a lot of interest and enthusiasm around that product. And then even aside from the preorders that we took for our Tread+, we saw growth year-over-year in our treadmill, 17% year-over-year growth in Q2, which is pretty amazing.
And if you think about it, we -- our demand for bikes today is much, much larger than our demand for treadmills. And our data suggests that the market for at-home treadmills is more than 2x that of the bike. So it's a really big opportunity for us to lean into. So we are leaning into it, and we are creating content experience that's focused on Tread. For example, we have our partnership with New York Road Runners. We're also leaning into more Marathon content and other content experience focused on training and performance in that space.
Another area of near-term execution opportunity for us is around Peloton for business. I briefly mentioned that earlier. There are 2 pieces to that business. There's our commercial sales of hardware and associated subscriptions that we're selling to hotels, multifamily, residential, and gyms. And we like that model, because it's a source of lead generation for us. People use the hardware in those settings, and they get a sense of our experience and then they convert to becoming Peloton subscribers, whether they buy hardware or whether they use our app, and that's a great model.
And then we also have our corporate wellness offering, which is where we offer -- where employers are able to subsidize the cost of Peloton hardware or subscription or both to their employees. And we are seeing that employers are increasingly looking for opportunities to provide differentiated health and wellness benefits to their employees. It's a source of differentiation for them. And we do see really great success when they choose Peloton to offer as part of their benefits program. So those are a couple of near-term opportunities.
But I also want to talk about some longer-term opportunities that we see. We see opportunities particularly around software product innovation. We know our members join Peloton, because they are looking to improve their overall health and wellness. And presumably, they stay, because they're getting the results that they are looking for. But they do that with very little personalization for us. So we see an opportunity to do much better in terms of helping them find the right fitness experiences for them and discover the right content, so they can be much more engaged with our platform over time. And we see that as an opportunity both for our members using our hardware as well as for those who are using our app. So there's a lot of opportunity on software product innovation.
Another area that continues to be an opportunity for us is international, both the opportunity in our existing markets of the U.K., Germany, Australia, and Austria, as well as entering new markets using an asset-light approach. While our international growth has been -- their scaling has been slower than we had anticipated, we do see that our international members are just -- they retain just as well and are just as engaged as our U.S. members. And that gives us confidence that we have product market fit internationally and that we have the ability to scale into key markets around the world in the medium to longer term.
Nathan Feather
Okay, great. Now one of the key initiatives you've had over the past 2 years to expanding distribution has been rental or FaaS, which you expect to grow over 100% in fiscal '24. And so what portion of new subscribers do you expect to come through this channel over time? And given the success of Bike and Bike+, are you planning to roll this out to additional modalities?
Elizabeth Coddington
Yes. So first and foremost, the way we think about our bike rental business is we do evaluate the economics of it. As we've said publicly, our goal is to achieve a blended 18-month payback period for Bike rental. And the way that we evaluate the performance of that business is we look at a few key performance indicators, one of them being the retention of our rental subscriber base, another one being the rate at which they buy out and convert to regular All-Access Members by buying out their rental membership, and a third one being really importantly, the incrementality of the people that we are reaching with Bike rental.
It's important to understand that our Bike rental program is highly incremental to us. Over 60% of the people, who join Peloton through Bike rental say that they would not have joined Peloton if they did not have that rental option. That being said, I don't have anything to share about what we think the long-term mix of our subscriber base will be in terms of rental members and nonrental members, nor do I have anything to say about the growth additions mix that we expect to have over time in terms of the percentage of subscribers joining through rental versus other channels.
Now you asked me about adding rental options for additional modalities, right? So never say never. I'll never say never, because you never know. We may change our minds. But at this point, we have no plans to offer rental programs for our Tread or our rower. And there are a few reasons for that. First of all, if you think about our Bike, we have been in the market with our Bike for over 10 years. There's pretty high unaided awareness of our Bike offering. But there's actually still relatively low unaided awareness of our Bike rental offering.
So we see that, again, as a way to reach incremental subscribers who would not have joined Peloton otherwise. And that's the key reason for offering Bike rental. For Tread, we -- it's a newer product for us as well as rower, which is even newer. For Tread, we are seeing substantial year-over-year growth in our sales. And then for rower, so far, it's proven to be more of a niche product for us.
The other thing worth pointing out about both of those products is they are at a slightly higher price point than our Bike offering. And if you combine that with the fact that it is more expensive to deliver and set up those products, we would have to charge a higher rental fee for a Tread rental offering or a rower rental offering in order for the unit economics to make sense for us.
Nathan Feather
Okay, great. And digging into the unit economics on the existing offering, can you just kind of how it's been affecting the P&L in terms of your gross margins along with how it impacts the contribution over the period? And then to the extent that you had to add more new bikes to the offering versus used bikes, how does that affect unit economics?
Elizabeth Coddington
Okay. So let me break apart the different pieces of our Bike rental offering and how they affect our P&L. So first, we have a $150 upfront delivery fee that we charge to members that sign up for our Bike rental program. That fee is less than it costs us to actually deliver the bike to the home. And so in the month that a Bike rental member joins us, there is negative Connected Fitness gross margin hit, because of that fee being less than the cost.
We then have the subscription fee, which is $89 for our Bike and $119 a month for our Bike+. The way that flows through our P&L is the $44 portion that is our subscription fee hits our subscription segment, and the remainder hits our Connected Fitness segment as revenue for Connected Fitness, which is offset by -- in part by the cost of goods sold associated with the depreciation of the bike that is a fixed asset on our balance sheet and depreciates over time.
The third component is buyout. So that's when a member decides to buy out their rental membership and become a regular All-Access member. At that point in time, the revenue that we get from the buyout hits our Connected Fitness segment, and we take the remainder of the depreciation of the fixed asset on our balance sheet and apply that to cost of goods sold, and that impacts our Connected Fitness segment.
The key thing to understand here though, again, is we're focused on that 18-month blended payback period. We want to achieve that or better for our Bike rental programs. The way that we calculate that is we've talked about all those different components that I just went through, and we're also burdened with a customer acquisition cost associated with acquiring those members and, of course, the churn curves over time that we expect to see and achieve that blended payback period.
In Q2, actually, our payback period was slightly better than 18 months. And one of the key reasons for that was we had an increase in buyout, so we had a higher percentage of members buy out their rentals in the quarter. And then we've also been benefiting from the fact that we have been able to use a large portion of refurbished bikes for that program over time.
I think the second part of your question was related to a shift to using more new bikes. So certainly, the economics of our Bike rental model are better when we can use refurbished inventory to support that program, makes sense. And if we have to shift to using a larger portion of new inventory, if nothing else changes about our business, our payback period will be worse. So we're focused on a couple of things there, both improving the retention of our rental members and also improving the buyouts, because when they buy out then they shift to being a regular All-Access member and the low churn associated with that as well.
Now that being said, we do see the opportunity to continue to offer the Bike program and achieve an attractive return on investment using a higher mix of new inventory than we're using today. But I want to be clear, if the economics bear out that, that doesn't make sense for us to do, we can always pause the Bike rental program until we rebuild the supply of more refurbished inventory and temporarily pause it and then bring it back if we need to.
Nathan Feather
Okay, great. Now one more one on FaaS. And so churn in the segment has continued to track a little bit above the normal business, thinking about a touch below 5%, I think it's the last update you gave on that. And so why do you think that churn has been a little bit higher and how do you close that gap over time?
Elizabeth Coddington
Sure. So again, I want to come back to incrementality first, because this is really the important thing about our Bike rental program and why we believe and it's important. As I mentioned, over 60% of the people, who joined, would not have joined Peloton without offering this program, and we are attracting different audiences to Peloton as a result. Our Bike members are younger, they are more female, they're more diverse. And in Q2, we actually saw that they were slightly lower household income than our overall member base. So that's really important.
They also see value in low commitment and flexibility, right? So naturally, those things will suggest that there will be higher churn for that program. And I think it would be difficult for us to see a world where our churn rate for the Bike rental was the same as our overall All-Access Membership is. But what are we focused on? So we are focused on improving all the KPIs that we talked about: incrementality, retention and then also buyouts. We are seeing that our Bike rental members are doing fewer workouts and are less engaged with our app than our overall rental space. So we're looking at ways to improve that.
And one of the things that we're realizing is that we need to help them improve, find the workout experiences that are right for them. And whether that's either on their bike or using our app and the 16 modalities that we offer across our app, including things like strength and yoga and whatnot. And our personalization work that we are trying to do to get a better understanding of each individual user's preferences and goals will help us be able to do that. So that is a key area of focus and a key area that's important for us to be able to be successful.
Nathan Feather
Okay, great. That's really helpful. Now I want to flip over to the refurbished side of the business. And that's proven to be a pretty strong complement to the full price offering. And given the lower price point, what has that shown about the price elasticity of new customers and the potential opportunity for more budget options within the offering?
Elizabeth Coddington
Yes. So first of all, what we have seen that is that over the holidays, we did see some strong interest in our refurbished products. And we are continuing to see that price is important. And so it's nice that we have that offering, as Barry has talked about the good, better, best strategy that we have, to be able to offer a lower price point to customers, who are willing to get a used bike. So that has proven there has been some benefits in the market there.
Again, we also have the Bike rental offering that gets that both the price -- a lower price point or a lower investment with the flexibility, lower commitment and then the refurbished for the most price-sensitive. And then even more price sensitive, again, we've seen that growth in the secondary market where the prices are even lower than what we offer, but that we aren't facilitating that sale, but those customers are going there. So yes, that's what we've seen around price elasticity.
Nathan Feather
Okay, great. And you largely worked through most of the excess inventory from COVID. And so is there any possibility you may have to pause the refurbished offering due to limited refurbished inventory, especially given you're allocating some of that to the FaaS channel?
Elizabeth Coddington
So our 30-day home trial is a key component of our customer acquisition strategy. Even though our return rate for the 30-day home trial is pretty low, it does result in the fact that we do have a steady stream of returns by coming back to our warehouse over time, which we are then able to refurbish and offer as a refurbished product offering. So I don't see a scenario where we would completely run out of refurbished inventory because of that.
That being said, the question becomes a bit more complex when you consider the fact that I talked about before, which is that our Bike rental business, the economics are better when we're able to use refurbished inventory for that program. So the trade-off that we have to balance is, is it better for us to sell a refurbished bike to someone or to use that refurbished inventory for a Bike rental program? And my team, one of the things that we do is we regularly evaluate the economics of both aspects of that business using an LTV to CAC lens, and we use that to optimize how best to allocate that inventory.
Nathan Feather
Okay. Well, I think it's really helpful. And I want to look at the hardware portfolio in a little more depth. So you've got 5 core products across 3 different modalities. And despite the high market share, that is a relatively small portfolio compared to a lot of peers within the space. And so how are you thinking about the potential to launch additional hardware products? And do you see much additional white space to portfolio for modalities or various SKU count within modalities you're already in?
Elizabeth Coddington
Yes. So I want to offer a slight correction to what you said about 5 modalities or 5 products and 3 modalities. So we actually have 6. We have our Bike and our Bike+, our Tread and our Tread+, our rower, and then we also have our Guide. And we aren't just across a few modalities. If you include our app, we actually have 16 modalities when you consider our app. But it does -- your comments do bring up an important point in that there are a lot of consumers that don't know or aren't aware of the fact that we have such a breadth on our Peloton Fitness platform.
We offer everything from the bike workouts and the treadmill workouts to things like running, outdoor running and yoga and strength and cardio, dance, and Barre and Pilates, and I could just keep going on. There are 16 different modalities in all that we offer. And we see that as a huge opportunity for us actually in terms of being able to grow awareness of all that Peloton has to offer across our platform.
Now you had mentioned hardware innovation. At this point, we have nothing to say about any new products, no plans to share about adding any new products to our portfolio, but we are continuing to innovate on our existing products, because we do see opportunities to improve those products and in addition to offering the incredible content and overall fitness experience with the connection of the hardware and the software.
Nathan Feather
Okay, great. Now I do want to touch a little bit more on the app. And so since relaunching the app, there's been a few quarters a row of sequential digital subscriber declines, granted certainly some contribution from the price increase in December. What didn't work within the initial app relaunch? And then what changes you made that have led you to believe that 2Q '24 maybe in the bottom for digital subscribers?
Elizabeth Coddington
Yes. So there are a couple of different aspects to our app relaunch. First, we launched -- we created 2 paid tiers. We used to only have one. We have our App One tier that is focused on workouts that don't require using Peloton hardware or a limited number of classes that use our Bike, Tread, or Row content. And then we have our App Plus, which is broader, gives you access to everything and presumably the consumers who are selecting that option are using -- are doing the workouts related to bike, treads or rowing on somebody else's hardware. And that has proven to be successful, because we are seeing customers select the right offering for them, and we are benefiting from the fact that we are getting more revenue from the customers, who are getting more value out of the platform through App Plus and also higher gross margin from them in that respect.
But another aspect of our app relaunch was creating a free tier. And that free tier was intended to be a way for people to try Peloton in -- with less friction. You don't have to put in a credit card to get access to a subset of our classes. And what we quickly found out was that, that free tier was cannibalizing our funnel and conversion to free trial and then to pay. So what did we do? We've redirected our traffic more towards free trial in order to drive higher conversion of the app.
But it's important to know that our app is still a work in progress. We still have a lot of opportunities to improve it. We are focused on improving the app user experience. I talked about -- a little bit about personalization there. We see a lot of opportunity to improve both by understanding a little bit more about user preferences and goals, to improve the content discovery and the ability to engage members with our app because what we found is that we need to figure out ways to better engage them during the trial period, that they convert to paid and then also keep them engaged over time, so that they will retain at a higher rate.
When we do that, we believe that our marketing efficiency will improve, both because we'll have better retention and better conversion rates. Even though we saw our app subscribers decline in Q2, we still believe in our app strategy and that it is an important part of the business, and we're going to continue being focused on ways to drive growth in that business.
Nathan Feather
Okay, great. Now you expanded into 3P distribution, a couple of select partners over the past few years. You're also narrowing the owned store footprint. And so interested to hear what the combination [indiscernible] effect, how incremental do you believe 3P has proven to be over that time frame? And then thinking longer term, how do you think about the possibility of further spending the 3P distribution strategy, at least in terms of in-person trial?
Elizabeth Coddington
Yes. So the incrementality of our 3P channel has kind of 2 aspects to it, both seasonality aspect as well as our promotional strategy. For example, when Amazon had a promotion for Peloton on their site during Prime Day, we see really high incrementality because of the traffic that they are driving to their site. From a seasonal perspective, we found that when we offer third -- when we offer the same promotion on a third-party channel as we are offering on our site at the same time during a key seasonal moment like the holidays, our incrementality of that channel is reduced. So our overall goal with our third-party channels is we want to grow them, but we also want to optimize our LTV to CAC across the business. So that is really important for us.
Another thing that is also quite important for us about our third-party partners is potential to use them if we want to expand internationally using an asset-light model. There's nothing specific that I want to say about that today, but they have proven to be great partners for us in multiple markets and could be a vehicle for us to expand into additional markets in a much more cost-effective way than if we went and did everything ourselves.
Nathan Feather
Okay. Now I want to also shift over to the expense side. You went to a brand refresh last May. With almost a year since that launch, how has that been received by consumers? And any key learnings you're integrating with into your marketing strategy going forward?
Elizabeth Coddington
Sure. So I would say our brand launch has -- brand relaunch, excuse me, has proven to be successful with what we were trying to accomplish. We have started to reach new audiences. If you look at our audiences today, they are younger, more male and more diverse than they were before the relaunch. That being said, with Lauren Weinberg, just joined us in January as our new Chief Marketing Officer, and she sees opportunities to sort of take what we've done and do it in a more targeted way and kind of focus in on the audiences that we are most interested in.
For example, if we were to see that younger men were engaging more with Peloton, how can we develop better focused messaging for them to get them to convert? That would be an example of what we're trying to do. And so we're leaning in and we're focusing on specific audiences. And men and Gen Z -- or sorry, men and LatinX, more so than Gen Z, but not ignoring Gen Z, are the ones that we are most focused on.
Nathan Feather
Okay. Now also, we've talked a lot about LTV to CAC across a couple of different facets. So would be really interested to hear if you can provide an update on how ultimately CAC has trended over the past few quarters. And [indiscernible] what the target range is and the steps needed to achieve and then stay within that range?
Elizabeth Coddington
Sure. Our target range that we have stated for our LTV to CAC is to be in the 2 to 3x range. The last few quarters, we have been in more like the 1 to 1.5x range. One area that has been kind of a drag on our LTV to CAC has been our retail showroom footprint. At the peak, we were spending over $100 million annually on retail showrooms, and those are a fixed cost base for us. And while we've made significant progress in exiting some of our retail showroom, we still have a ways to go with that either by terminating leases or subleasing the spaces. And so those -- that continues to be a bit of a drag on our LTV to CAC in the near term.
And then also, Lauren, as I mentioned, just recently joined us, has seen a lot of opportunity to improve our marketing efficiency, both in terms of media efficiency as well as optimizing our brand and creative spend. So we expect to see some improvements there over time as well.
Nathan Feather
Okay. Now thinking about how that translates to inventory, your inventory balance is now 70% below peak levels. And with inventory purchases restarted over the past few quarters, have you reached a normalized inventory balance now? And with rental continuing to grow as a percentage of the mix, to what extent will that impact the inventory levels that you hold on the balance sheet?
Elizabeth Coddington
Sure. So I want to clarify something, your last comment there about rental being considered inventory. When somebody rents a bike from us, it moves out of our inventory bucket on our balance sheet and moves into being a fixed asset, which we then depreciate over time. So we don't really consider that the same way that we would consider inventory. It's just a different model. And so it doesn't have any impact on the inventory on our balance sheet over time from the way that you were kind of commenting on it.
That being said, to your question about normalized inventory levels, I would say that our inventory levels are largely normalized today, although we did end Q2 with a slightly elevated inventory balance relative to where we would like to be. There are 2 aspects to that. Number one is we -- even though we just -- we started taking preorders for Tread+, we didn't start delivering any of those units until Q3. So those were still on our balance sheet as of Q2, and we'll start to work down that inventory balance over the coming months, and we hope to restart production of Tread+ as soon as we're able to do that, which will be helpful for us.
Another area is our Bike. So as we've mentioned, we saw softer Bike sales in the holiday season in Q2. And so we ended the quarter with more Bike inventory on hand than we had expected to. So even though -- well, first of all, we have long lead times for production cycle for our inventory. And even though we don't have any contractual commitments, we do have some expectations that have been set with our contract manufacturer around minimum production levels. And so as a result, our Bike inventory has positioned as the softness of the holidays has created a bit of a headwind to free cash flow in the back half of the year.
Nathan Feather
Okay. Now thinking back to the first question. You mentioned that a lot of what you did over the first 12 months was restructuring the cost base. Now fixed costs are now meaningfully lower on a run rate than they were. And now that you have more visibility into the forward revenue growth rate, how are you thinking about the right level of fixed cost relative to where it is today?
Elizabeth Coddington
So our approach to date has been to achieve positive free cash flow for the business. They're a mix of cost reductions that I've talked about that we've done some as well as through growing and reaccelerating the growth in the business. Again, while we've made a lot of progress on the cost reductions, the growth has -- we haven't accelerated growth as quickly as we had hoped. Our return to growth is taking longer than we had hoped that it would.
So we continue to evaluate our cost base, and we do see opportunities to find additional cost efficiencies. And we will take the actions that are required in order to achieve positive free cash flow in fiscal '25, while still being focused on growing the business. And we'll have more to share about the details of that when we're ready, which will likely be around the time of our next earnings call.
Nathan Feather
Okay, great. Now I just want to refresh a little bit on the B2B side. Long term, how are you thinking about the market opportunity there? And then what are the key constraints to really unlock that opportunity?
Elizabeth Coddington
Sure. So for B2B, I think you're referring to our Peloton for business, right? So there are 2 aspects to that. I briefly mentioned them previously. There is our commercial offering, which is selling hardware and then also subscriptions into hotels, gyms, multifamily residential. We see that as a great opportunity for us in terms of lead generation, again, because people try our hardware and then they hopefully enjoy it and engage with it and want to be Peloton members. And we have seen success in higher conversion from those offerings and having those.
There are also opportunities for us to sell a lot of hardware. For example, last year, we did a deal with Hilton where we sold over 5,000 bikes in 1 deal, which is great for us. We see lots of opportunities to do more deals like that, although the sales cycles do take time to materialize.
The other side of it is our corporate wellness business. I described that also a bit earlier, which is basically either directly with employers or through PEO partners offering Peloton benefits as part of company employee benefits. And that could take the form of offering a discount on hardware or a discount on our subscription, either for All-Access Membership or app, whatever flavors they choose to want to offer to their employees. And we've seen some great successes with that. And we see really high renewal rates from our corporate wellness partners.
I do want to call attention. Yesterday, we actually announced, I guess, yes, yesterday, on the 6th in Australia, I would get confused, because Australia time is like a day ahead from us. We announced a partnership with AIA, which is an insurance provider, where they're going to offer through their insurance program, 25% discount on a Peloton Bike. And then also, you get to earn what they call their vitality points when you use our hardware and you use our app. And those points, over time, can contribute to lowering your insurance costs.
So that's like -- it's not necessarily a huge partnership, but it's great because it's in that international market. And it gives a flavor of the types of partnerships that we are trying to create and the benefits that we can drive both for lowering insurance costs, driving health and wellness for customers.
Nathan Feather
Great, great. Now I want to end it on one of the real bright spots from last quarter, which was the Tread+ relaunch. And that's been tracking well ahead of expectations. Can you talk through the early learnings there? And then are you seeing any, what you believe to be pent-up demand, given that product has been off market for a while? What does it look like to start on kind of a sustainable growth?
Elizabeth Coddington
Well, the first thing we learned from our Tread+ relaunch is that it's a great product. But we already knew that, but it was met with great enthusiasm. And it makes sense, because flat-based treadmills are a superior treadmill experience. And even given our premium price point for Tread+, it is an incredible value for someone, who is looking for a really best-in-class running experience on the treadmill. Of course, there was also pent-up demand when we had to stop selling our Tread+ in May of 2021. Ever since then, we've had members reaching out to us asking when we were going to bring it back to market, because it really is such a beloved product.
In addition, we're seeing that our -- the relaunch of our Tread+ is bringing more awareness to us in the treadmill category in general. And we could see that with the growth in Tread that we saw in Q2 with that 17% growth, even excluding the preorders for Tread+. And our Tread+ also has been reviewed several times since it's been launched, and it was selected as CNN's Best Treadmill for 2024, which is really great.
Nathan Feather
Okay. We'll leave it there. Liz, thank you so much for joining us today.
Elizabeth Coddington
Thank you.