After reporting on another profitable quarter in which its revenues topped the $1 billion threshold, Peloton Interactive announced the launch of a convertible bond issue that may total $1 billion through a private placement intended to reduce any dilution of the shareholders’ current holdings. It will consist of an initial issue of new unsecured senior notes worth $875.0 million, due to be settled by Feb. 11, which may be followed by a 13-day option to buy an additional $125 million, depending on the demand. Both amounts are higher than a previously announced offering of $600 million, plus an overallotment option of $90 million.
The notes will mature between February 2024 and February 2026, but bondholders may convert them into Peloton shares from Aug. 14, 2025. They will be convertible at an initial price of $239.23 per share, representing a premium of around 65 percent on the latest share price of $144.99 on Nasdaq. They will not bear a regular interest, which would be payable twice a year.
Most of the proceeds will be used for general corporate purposes including working capital, capital expenditures, investments and acquisitions of other companies, products or technologies. As previously reported, Peloton announced on Dec. 21 an agreement to buy Precor for $420 million, but it has not yet reported its completion. The takeover would allow Peloton to access a U.S. manufacturing base.
In reporting its results for its second fiscal quarter, ended Dec. 31, Peloton said it plans to make additional investments in the near term to address its continuous delivery problems. In spite of an increased manufacturing capacity from its new Shin Ji factory in Taiwan, the company is still experiencing shipping bottlenecks and other coronavirus-related problems in its supply chain. In view of this, Peloton left its previous guidance for the full financial year unchanged. It calls for adjusted Ebitda of at least $300 million on projected revenues of $4,075 million.
In the latest quarter, Peloton booked adjusted Ebitda of $116.9 million, representing a margin of 11.1 percent on sales, which jumped to $1,064.8 million from $466.3 million in the year-earlier period. The gross margin shrunk by 3.8 percentage points to 35.3 percent because of higher shipping costs and price cuts on the original Peloton Bike to encourage customers to upgrade to a new premium model. The final result was a net profit of $63.6 million for the period against a loss of $55.4 million.
Sales of products generated 124 percent higher revenues of $870.1 million in the quarter. Most of them came from stationary bikes, but the company new Thread treadmill had its first sales in the U.K. Revenues from subscriptions grew at a faster rate of 153 percent to $194.7 million. The number of subscribers to Peloton’s connected fitness program increased by 134 percent to 1.67 million. The number of digital subscriptions, which do not involve the purchase of a Peloton product, jumped by 472 percent to 625,000. The gross profitability on subscriptions continued to progress, expanding by 2.4 percentage points to 60.3 percent.