Peloton Puts Its Own Spin on Accounting Metrics Ahead of IPO

(Bloomberg) -- Home-exercise startup Peloton Interactive Inc.’s pitch for its initial public offering includes the good news that its average net monthly connected fitness churn has shrunk over the past three years from 0.70%, to 0.65%.

That may indeed be good, but potential investors could be left scratching their heads as to what exactly that metric -- let’s call it ANMCFC -- means. That’s not the only unique measurement of performance and growth included in Peloton’s filing and the company isn’t the only IPO-bound startup that’s attempted to frame its business with new metrics.

Peloton cites ANMCFC 28 times in its prospectus filed Tuesday with the U.S. Securities and Exchange Commission before defining it on page 66 as “connected fitness subscriber cancellations, net of reactivations, in the quarter, divided by the average number of beginning connected fitness subscribers in each month, divided by three months.”

The company similarly cites a metric it calls “connected fitness subscriber lifetime value,” which it defines in the filing as “our monthly connected fitness subscription fee of $39; multiplied by connected fitness subscribers added in a period; multiplied by months of subscription lifetime implied by our average net monthly connected fitness churn in the period (calculated by dividing one by our average net monthly connected fitness churn); multiplied by (subscription contribution plus content costs for past use) divided by subscription revenue.”

Peloton cites those metrics to support its core contention, that its service is sticky. Of the WiFi-connected fitness products it has sold, 92% of them still had active subscriptions tied to them as of June 30, though many of those subscriptions were generated in recent months.

That metric isn’t quite as head-spinning as it sounds, said Jay Ritter, a finance professor at the University of Florida’s Warrington College of Business. The company has been growing so rapidly that giving monthly numbers provides more information to investors than annual numbers alone, he said. Such metrics help show that Peloton’s customer retention ranks favorably compared to gyms and other subscription-based business models, he said.

“It’s a very high retention rate compared with fitness clubs,” Ritter said. “Having that low churn rate is the envy of just about every other business in terms of retaining customers. At $39 a month, that’s pretty attractive. Blue Apron, Spotify, cable TV, or for that matter, gyms, would be very happy to have retention rates of over 90%.”

A representative for New York-based Peloton didn’t immediately respond to a request for comment.

Beyond P&L

The invention of company-specific measurements isn’t unique to the cycling company. Technically, these types of metrics are what’s known as non-generally accepted accounting principals, and a lot of companies use them. The idea being that they can provide a more accurate gauge of performance beyond straightforward profits and losses.

Peloton also has good reasons for closely tracking how long its customers stick around. Subscription-based companies have a strong incentive to pay close attention to their churn-rate.

But creative, non-GAAP metrics have become particularly popular with tech unicorns in recent years, straining investors’ willingness to take them seriously.

WeWork, now called the We Co., has cited a variety of unusual metrics, including “community adjusted Ebitda,” a measure of earnings that excludes some additional costs. The measurement, which notably did not make an appearance in the company’s IPO filing this month, and others like it are offered partly to support WeWork’s contention that its more of a tech company -- and should have the valuation that comes with that -- than merely a landlord that leases and buys offices and then sublets the space at a mark-up, typically to short-term tenants.

Before WeWork, plenty of other tech companies have tried to crunch numbers in new and unique ways while going public. Uber Technologies Inc., in the lead-up to its $8.1 billion IPO in May, highlighted its “core platform contribution margin,” a metric under which it turns a profit, instead of billions in quarterly losses. Groupon Inc. at one point showed it was in the black with its “adjusted consolidated segment operating income,” while it lost millions under traditional metrics.

Loss Quadruples

Peloton disclosed less rarefied numbers, too, including conventional metrics showing that it’s unprofitable. The company lost $196 million on sales of $915 million during the 12 months ended June 30, according to its filing. That compared with a loss of $48 million on $435 million in sales during the same time period a year earlier.

Founded in 2012, Peloton describes itself as the “largest interactive fitness platform in the world” with more than 1.4 million members, according to its filing. The company sells exercise bikes and treadmills that have television screens connected to the internet for showing its own workout programs. Its basic “connected fitness” subscription -- the basis of its ANMCFC metric -- costs $39 a month and the bikes start at about $2,000.

The company listed its offering size as $500 million, an amount that is typically a placeholder that will change.

The offering is likely to place in the top tier of a strong year for IPOs. About $39 billion has been raised in 125 listings on U.S. exchanges in 2019, according to data compiled by Bloomberg. That’s on track to be the best year since 2014 when Alibaba Group Holdings Ltd. set the all-time global IPO record with its $25 billion offering including the greenshoe allotment.

People familiar with Peloton’s plans have said it is seeking a valuation of $8 billion or $10 billion. Peloton was valued at about $4.15 billion when it raised $550 million last year from backers including the venture capital firm TCV, Kleiner Perkins, Tiger Global Management and GGV Capital.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are leading the offering. Peloton plans to list its shares on the Nasdaq Global Select Market under the symbol PTON.

To contact the reporters on this story: Hailey Waller in New York at hwaller@bloomberg.net;Michael Hytha in San Francisco at mhytha@bloomberg.net

To contact the editors responsible for this story: Liana Baker at lbaker75@bloomberg.net, Anne VanderMey, Matthew Monks

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