Peloton produces profit for the first time amid pandemic-demand spike, stock pushes toward new record


Peloton Interactive Inc. reported fiscal fourth-quarter earnings Thursday afternoon.


MarketWatch photo illustration/iStockphoto

A year after its initial public offering, Peloton Interactive Inc. is pedaling toward new highs amid a pandemic that is forcing people into their homes and away from gyms, creating demand for at-home fitness equipment.

Peloton
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on Thursday wrapped up its fiscal year by reporting that sales and subscribers roughly doubled in the 12-month period, and revealed its first profitable quarter as a public company and record quarterly revenue a little less than a year after its September 2019 IPO. Shares fell 3.8% Thursday from Wednesday’s record closing price of $91.17 — more than three times the IPO price of $29 a share — but pushed back toward record highs in after-hours trading following the release of the report, with gains of more than 7%.

Peloton reported fiscal fourth-quarter profit of $89.1 million, or 27 cents a share, on sales of $607.1 million, up from $223 million a year ago. Peloton reported a net loss of $47 million in the fiscal fourth quarter a year ago, just ahead of its IPO. Analysts on average expected earnings of 10 cents a share on sales of $586 million, according to FactSet.

“It has been another staggering year of growth, and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services,” Chief Executive James Foley said in a conference call Thursday. “The strong tailwind we experienced in March as the COVID-19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.”

While still attempting to catch up to a flood of orders amid the COVID-19 pandemic — Peloton said Thursday it does not expect order-to-delivery times to normalize until around the end of the calendar year — the company is also looking to expand its customer base. On Monday, Peloton announced that it will reduce the price of its standard exercise bike and introduce a lower-priced treadmill, which could clear a path for potential buyers who were not willing to pay the large upfront costs for its products. It will also introduce a premium bike for fans who want top-of-the-line equipment.

Wedbush analysts noted that in a previous survey of 1,200 people, they found that Peloton could “dramatically improve” sales at a lower price point, especially in treadmills.

“42% of non-Peloton owners that were interested in fitness and familiar with the brand showed some level of interest in a $2,500 Tread, compared to just 30% showing interest in the current Tread,” the analysts wrote in a Sept. 9 note, after Peloton announced its new lineup. “Among existing Peloton bike owners, the number of respondents saying they would be ‘very interested’ in owning a treadmill from Peloton doubles based on the lower price, from 14% based on the $4,295 price point to 28% assuming a theoretical (at the time) $2,500 price point.”

While lower sales prices could hurt hardware margins and average selling prices, much of Peloton’s long-term prognosis focuses on the subscriptions for interactive workout media that owners continue to pay after they have received the equipment. Peloton announced Thursday that it now has 1.09 million subscribers, nearly doubling the 511 million that it reported at the end of its last fiscal year, topping its forecast of 1.04 million to 1.05 million.

In total for the fiscal year, Peloton collected revenue of $1.46 billion from the sale of equipment and $363.7 million from subscription services, up from $719 million and $181 million, respectively, in the previous fiscal year. Combined with other revenue from merchandise and other offerings, Peloton ended the year with $1.83 billion in sales, up from $915 million.

“By the end of FY 2020 our Peloton membership base grew to approximately 3.1 million, compared to 1.4 million members in the prior year,” Peloton detailed in a letter to shareholders Thursday. “Fueled in part by the challenges associated with COVID-19, member engagement reached new highs with 164 million Connected Fitness Subscription workouts completed in FY 2020.”

For the current fiscal year, which began in August, Peloton predicted htat subscribers and revenue would roughly double yet again. The company guided for revenue of $3.5 billion to $3.65 billion, with connected subscribers swelling to 2.05 million to 2.1 million. Analysts on average were predicting revenue of $2.74 billion and subscribers of 1.78 million ahead of the report, according to FactSet.

Peloton stock has gained more than 260% since its IPO; the S&P 500 index
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has returned 17.7% in that time. In after-hours trading Thursday, shares topped $94 following the release of the report.



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Apple countersues Epic Games for breach of contract


Apple Inc. countersued Epic Games Inc. on Tuesday, claiming the maker of “Fortnite” breached a contract when it introduced a new in-app payment system within the popular videogame.

The iPhone maker
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asked U.S. District Judge Yvonne Gonzalez Rogers for punitive damages and to block Epic from continuing what it calls unfair business practices, in the escalating skirmish between the two companies. Late Friday, Epic sought an injunction to force Apple to put “Fortnite” back on the App Store, disclosing that roughly a third of “Fortnite” players access it through the App Store.

“Although Epic portrays itself as a modern corporate Robin Hood, in reality it is a multibillion-dollar enterprise that simply wants to pay nothing for the tremendous value it derives from the App Store,” Apple said in a filing Tuesday.

An Apple spokesman declined further comment, but pointed to a company statement on the Epic case called “Free Fortnite.” Epic was not immediately available for comment.

Apple shares plunged nearly 7% in trading Tuesday in another rough day for tech stocks.

The latest legal jousting comes nearly a month after Epic introduced the payment system within the “Fortnite” to side-step the 30% fee Apple and Alphabet Inc.’s
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Google charge for in-app purchases. Epic’s gambit prompted both companies to boot the game from their app marketplaces. Epic eventually sued Apple and Google in federal court in Northern California, accusing the computing giants of anticompetitive conduct.

Epic’s stand against Apple has prompted voices of support from Microsoft Corp.
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, Spotify Technology Inc.
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, and others.

The Apple-Epic case has set evolving battle lines on market definition, according to antitrust attorney Paul Swanson.

“Market and product definition may end up being the central battleground in this case. Does Apple have to open up the app-purchasing and in-app purchasing space to competitors, or are those intrinsic parts of Apple’s products that it can rightfully control?” Swanson told MarketWatch.



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Apple’s ‘dark side’ led these brothers to launch the AppRising


Ben and Dan Volach are unlikely candidates to lead a developer insurrection against Apple Inc., a company whose products they deeply admire.

But the chatty Israeli brothers, who have a knack of finishing each others’ sentences, find themselves at the vanguard of an “AppRising” against Apple
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and its increasingly controversial App Store.

“We like Apple as a company, but they have a really dark side,” says Ben, explaining the motivation behind a David-vs.-Goliath lawsuit that has given antitrust scrutiny a kick in the behind and set the stage for Epic Games Inc.’s lawsuit against Apple following the eviction of mega-popular game “Fortnite” from the App Store. The brothers claim Apple outright copied a feature from their email app, BlueMail, and then immediately booted it from the App Store with no warning.

Read more: ‘Fortnite’s’ impact could be Epic on antitrust investigations of Big Tech

“Apple is a monopoly. It dictates what it wants, and how it wants to shape it,” adds Dan. “It’s about the way they behave — not their products. The practice is troubling. They should allow for competition.”

Ben, 37, and Dan, 43, decided to take on Apple, and challenge its 30% commission fee for developers on the App Store, when no one else would. Now, they find themselves on the front lines of a digital insurrection against the iPhone maker, shoulder-to-shoulder with Epic, Microsoft Corp.
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, Facebook Inc.
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, Spotify Technology Inc.
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, and other big names. An Epic spokeswoman said the company has no comment on the Volachs’ suit.

The Volachs’ company, Blix Inc., is the only other private company to file antitrust litigation against the iPhone maker, in October 2019, which led them to work closely with the staff of Rep. David Cicilline, D-R.I., chairman of the House Judiciary Antitrust Subcommittee, in advance of the July 29 hearing on Big Tech. Apple Chief Executive Tim Cook was briefly grilled on the business practices of the App Store, but defended its cut and insisted all of the store’s 1 million-plus developers were treated fairly. A spokesman for Cicilline declined comment on the Volachs’ participation.

At the hearings, Rep. Hank Johnson, D-Ga., pressed Cook: “Has Apple ever retaliated against or disadvantaged a developer who went public with their frustrations with the App Store?”

“Sir, we do not retaliate or bully people,” Cook said flatly. “It’s strongly against our company culture.”

Read more: Antitrust questions bruise but don’t break Big Tech CEOs in historic hearing

What got Cook and the Volachs there was Apple’s decision to introduce an app called Sign in With Apple, at the Worldwide Developers Conference in June 2019 that bore striking similarity to a feature on Blix’s email app BlueMail. Apple’s new feature lets users generate a random email address for apps when signing in, so they never need to hand over personal information to a third party.

In 2018, BlueMail added a patented feature that does precisely the same thing. Fueling the Volachs’ anxiety, Apple removed BlueMail from the Mac App Store a few days after debuting Sign in With Apple, underscoring their claim that Apple has manipulated the App Store to promote its own apps over competitors.

A few months later, Blix sued Apple in a Delaware court, claiming patent infringement and violation of U.S. antitrust laws.

Among their arguments: Developers of iPhone apps over the years have repeatedly discovered that Apple had integrated technology similar to theirs into its devices, often at no charge to users. For example, flashlight apps that once flourished on the App Store were eliminated after Apple integrated them into iPhone screens.

An Apple spokeswoman said BlueMail was removed from the macOS store because of security concerns. Apple attempted to work with Blix to bring the app back to the store and offers developers a “fair and level playing field,” the company said in a statement.

Such are the vagaries of doing business on vast digital platforms, where the operators like Apple and Google often incorporate the best ideas that developers come up with, says James Currier, managing partner at venture-capital firm NFX.

“We are developers. All we want to do is bring applications to consumers,” says Ben Volach, who has 20 patents and applications. “We are really worried about bringing innovation to the market. [Apple] is ruling the world, and making it more difficult than ever to compete. They are acting more like gate keepers, and need to behave more like innovators.”

Their decision didn’t come lightly. Ben and Dan, who grew up in Haifa and split time between London and New Jersey, are not just unavowed Apple fans but they understand the vast influence of Apple’s App Store and Alphabet Inc.’s
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Google Play.

Blix, which claims it has data showing Apple suppressed App Store rankings of products that compete with Apple’s own apps, also believes Apple and Google are working in concert on pricing, which led Google to abruptly kick its BlueMail email app off its Play Store — 36 hours after Blix developers revealed they cooperated with House lawmakers.

“Google retaliated against us for outspokenness on antitrust issues,” Volach said.

A Google spokesperson said in a written statement that the BlueMail app had been reinstated to the store. Volach countered that unfavorable media coverage forced Google’s hand after only 15 hours.

What has emboldened the Volachs beyond outrage is their ability to devote the resources, time, and effort it requires to take on a corporate behemoth like Apple, which has a market value of more than $2 trillion.

While other small developers shrink from the financial obligations, the Volachs have a cushion of sorts: In 2006, they sold their mobile messenger company, Followap, to a company called Neustar for about $140 million.

Still, most app developers live and die with the Apple because most of their revenue comes from being distributed and sold on the store.

“Going public against the App Store is viewed as biting the hand that feeds you and few developers are so bold,” Adam Landis, CEO of mobile-analytics company AdLibertas Inc., told MarketWatch. “No store means no distribution, which means no new users, which means no growth.”

But the Volachs — the standard bearers of an ideological campaign with the hashtag #fairness2020 and a website — are doubling down and calling on other developers hurt by Apple to join them and tell their story. Indeed, they haven’t ruled out a class-action lawsuit.

“We are optimistic, and we are going to keep fighting they are going to change,” Ben says. “A lot of smaller companies just don’t have the resources, time and effort to fight Apple.”



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You might use Zoom for free, but companies are paying for it — pushing the stock to new heights


Zoom Video Communications Inc. has become a household name during the coronavirus pandemic, with millions of people using its online-video service for free — but it still needs companies to pay for it in order to survive.

On Monday, it proved that is happening — and then some. Zoom
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reported another amazing quarter as consumers, schools and all types of businesses continue to use the service while sheltering in place, sending shares up 22% in after-hours trading. While most individuals are using Zoom for free, more companies are signing on for big-money deals.

Zoom Chief Executive Eric Yuan touted some major new customers — Exxon Mobil Corp.
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and Activision Blizzard Inc.
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— during a conference call Monday afternoon. Exxon is using Zoom as its communication platform for its teams, customers and partners around the world, while Activision plans to replace its legacy videoconference products with Zoom. 

Zoom said that it added 219 customers in the second quarter that spent more than $100,000 each in the trailing 12-month period, its best quarter ever for attracting big-revenue customers. Zoom is approaching 1,000 customers of that size, reaching 988 as of the quarter’s end on July 31.

Zoom also said that it expanded on its deal with ServiceNow Inc.
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, signing the cloud-software company to a deal for Zoom Phone, the company’s system to replace legacy PBX systems; with more employees working at home, those PBX systems are often sitting idle while employees use their own phones for work. Zoom expanded that service internationally in the second quarter and launched a hardware-as-a-service offering, which will allow it to sell large corporate clients on more services, and thus drive more sales.

“We continue to see growth in the period from both new customers as well as existing customers, and tremendous opportunity with webinar, especially, as well as Zoom Phone,” Zoom Chief Financial Officer Kelly Steckelberg told analysts. “We actually signed our largest Zoom Phone deal to date in Q2. So exciting to see that continued momentum.”

Smaller customers are growing fast at Zoom too, but they could have a more volatile effect on Zoom’s financials. Zoom ended the quarter with about 370,000 customers that have 10 employees or more, adding 105,000 of those in the second quarter, and pushing the smaller companies to 36% of Zoom’s revenue, up from 30%.

But executives admitted that those customers are showing a greater propensity to “churn” to other services, and they could more prone to price fluctuations by paying monthly instead of annually. They are also the most obvious targets for Zoom rivals — like Alphabet’s Google Meets
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, Microsoft Corp.’s
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Teams and WebEx from Cisco Systems Inc.
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— to poach.

By locking down more big-money deals, expanding offerings beyond videoconferencing and increasing the base of smaller corporate clients, Zoom continues to prove it is built to be a force even after the pandemic has run its course. Yuan predicted that even though everyone will be working from home for the foreseeable future, the nature of work when people return to the office is going to change dramatically in ways that will still make Zoom an important part of the daily routine.

“If you look at a lot of companies they have a very big [open] space, I think that may not work anymore in the future,” he said. He also said that employees may shift to two or three days a week in the office, working at home the other days, and there won’t be much need for a lot of small offices with few workers. “It’s very, very likely it’s hybrid,” he said.

Indeed, as the future of work is likely to be more of the same that many are experiencing now, Zoom is poised to continue to reap the benefits.



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Apple pulls Epic’s App Store developer account, removing all of its games beyond ‘Fortnite’


Escalating its war with Epic Games Inc., Apple Inc. on Friday canceled the videogame publisher’s account on the App Store.

The two companies are locked in a legal dispute over the fees that Apple
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charges app makers. When Epic came up with an unauthorized payment system that sidestepped the tech giant’s 30% commission on in-app purchases, the hugely popular game “Fortnite” was yanked from the App Store, and updates such as this week’s new season will not be available on Apple devices.

With Friday’s moves, the rest of Epic’s games will not be allowed in the App Store. As of Friday, a search for Epic Games in the App Store‌shows no apps.

“We are disappointed that we have had to terminate the Epic Games account on the App Store,” an Apple spokesman said in a statement to MarketWatch. “We have worked with the team at Epic Games for many years on their launches and releases. The court recommended that Epic comply with the App Store guidelines while their case moves forward, guidelines they’ve followed for the past decade until they created this situation.

For more: ‘Fortnite’s’ impact could be Epic on antitrust investigations of Big Tech

“Epic has refused. Instead they repeatedly submit Fortnite updates designed to violate the guidelines of the App Store. This is not fair to all other developers on the App Store and is putting customers in the middle of their fight. We hope that we can work together again in the future, but unfortunately that is not possible today.”

Apple shares were flat in after-hours trading Friday.

A judge on Monday ruled that Apple could not prohibit access to Epic’s Unreal Engine, a software kit developers use to build games.

An Epic spokeswoman pointed to a blog post this week that said in part: “Apple is asking that Epic revert Fortnite to exclusively use Apple payments. Their proposal is an invitation for Epic to collude with Apple to maintain their monopoly over in-app payments on iOS, suppressing free market competition and inflating prices. As a matter of principle, we won’t participate in this scheme.”

The exclusion of all Epic titles is sure to further puncture sales for the game maker, which started with the expulsion of “Fortnite.” That game has racked up just $19.3 million of in-app spending through the App Store and Google Play combined in August, compared with $52.5 million in July and $58.3 million in June, according to market researcher Sensor Tower Inc.



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