Great piece! I'm curious what your thoughts are on the expansion of Operating Leverage as the company moves to a more variable cost structure? I haven't done the modeling, but my gut is that the improvement of operating leverage coupled with revenue mix shift to higher margin subs will result in some pretty incredible bottom line growth over the next 12-18 months. I'm interested if this comes out in the wash re: valuation in your model. Thx!
So far we have not updated our model, we are waiting for this week's call to see the beginning of all changes that they have been doing. Things like moving away from building their own equipment , making it easier for DIY installations and raising prices back seem to be good decisions. We will come back a few days after their call , we will post our thoughts and updated model on a future piece.
You missed Subscriber Acquisition Cost. It was running at $1K/sub, which would take 5-7 years just to recoup Sales & Mkt expenses. Even with a <1% monthly churn, the average sub will be gone before that. But wait, it gets worse. For this quarter, if they cut S&M expense to $200M, they are guiding to only 20k new subs! Do the math, that’s $10k SAC. Long story short, they lose $ on every sub. They will never recoup the S&M expense alone, never mind all the other expenses. This is a zero!
Great observation, we will make sure to give more detail into per sub basis on our update after their Q4 2022 earnings. We just went over the over all numbers in the one before, yet, it might be a bit better than 5 to 7 years to recoup S&M
For example, taking the quarter that ended in march 2022
- S&M 228m
- Net additions Connected Fitness 195K
- Gross additions for the quarter were about 250K taking into account their reported churn of 0.75% per month
- Taking the full s&m and dividing by these gross adds we get a cost per gross add of $912 (that assuming the full S&m for connected fitness, they also have gross adds in the digital app, that would bring than the cost further, but also the arpu, so for simplicity lets assume everything goes to connected fitness)
- They have an all access fee of $44 starting this year, at about 71% margin that would be $31.24.
- Time to recoup S&m per sub would be about 29 months.
- 29 months is not great, it has to improve and new management has to make that a priority. But it is better than 5 to 7 years, it is about 2.5 years
- In addition they have the digital app subs and now they are offering rentals so marketing could get diluted between all these
- They key is to bring constantly more than 150K net adds with reasonable marketing expense, nothing crazy like what they did in 2021. As for next quarter they are highly underestimating to the market in our opinion, they are assuming big impacts from the price increase for the subscription. We will have to wait and see how this impacted churn and also how the real gross adds behaved
But will make sure to add more information into that in our next article coming after their earning release. Thanks for the feedback
Great piece! I'm curious what your thoughts are on the expansion of Operating Leverage as the company moves to a more variable cost structure? I haven't done the modeling, but my gut is that the improvement of operating leverage coupled with revenue mix shift to higher margin subs will result in some pretty incredible bottom line growth over the next 12-18 months. I'm interested if this comes out in the wash re: valuation in your model. Thx!
So far we have not updated our model, we are waiting for this week's call to see the beginning of all changes that they have been doing. Things like moving away from building their own equipment , making it easier for DIY installations and raising prices back seem to be good decisions. We will come back a few days after their call , we will post our thoughts and updated model on a future piece.
Makes sense - thank you!
You missed Subscriber Acquisition Cost. It was running at $1K/sub, which would take 5-7 years just to recoup Sales & Mkt expenses. Even with a <1% monthly churn, the average sub will be gone before that. But wait, it gets worse. For this quarter, if they cut S&M expense to $200M, they are guiding to only 20k new subs! Do the math, that’s $10k SAC. Long story short, they lose $ on every sub. They will never recoup the S&M expense alone, never mind all the other expenses. This is a zero!
Great observation, we will make sure to give more detail into per sub basis on our update after their Q4 2022 earnings. We just went over the over all numbers in the one before, yet, it might be a bit better than 5 to 7 years to recoup S&M
For example, taking the quarter that ended in march 2022
- S&M 228m
- Net additions Connected Fitness 195K
- Gross additions for the quarter were about 250K taking into account their reported churn of 0.75% per month
- Taking the full s&m and dividing by these gross adds we get a cost per gross add of $912 (that assuming the full S&m for connected fitness, they also have gross adds in the digital app, that would bring than the cost further, but also the arpu, so for simplicity lets assume everything goes to connected fitness)
- They have an all access fee of $44 starting this year, at about 71% margin that would be $31.24.
- Time to recoup S&m per sub would be about 29 months.
- 29 months is not great, it has to improve and new management has to make that a priority. But it is better than 5 to 7 years, it is about 2.5 years
- In addition they have the digital app subs and now they are offering rentals so marketing could get diluted between all these
- They key is to bring constantly more than 150K net adds with reasonable marketing expense, nothing crazy like what they did in 2021. As for next quarter they are highly underestimating to the market in our opinion, they are assuming big impacts from the price increase for the subscription. We will have to wait and see how this impacted churn and also how the real gross adds behaved
But will make sure to add more information into that in our next article coming after their earning release. Thanks for the feedback