EFTA00807328.pdf

HONEYCOMB ASSET MANAGEMENT HONEYCOMB ASSET MANAGEMENT LP Potential Opportunity: BUY Peloton PELOTON Price Target (June 2020): $38 / +60% Price Target (June 2021): $53 / +126% Purchase Price: $23.58 March 7, 2019 STRICTLY CONFIDENTIAL. NOT FOR DISTAIOVRON EFTA00807328 IMPORTANT LEGAL DISCLOSURE HONEYCOMB ASSET MANAGEMENT The case study presented herein regarding a potential investment in Patton Interactive. Inc. ("Peloton") has been provided to you for informational purposes only, is based on your expression of interest in participating in the investment and is not an advertisement. The case study is confidential. intended only for the person to whom it has been presented and under no circumstance may a copy be shown, copied. transmitted. or otherwise given to any person other than the authorized recipient without the prior written consent of Honeycomb Asset Management LP (the "Investment Manager"). The case study is not intended to provide any certainty of the profitability of the PeMon investment. There can be no guarantee that the PePolon investment will be consummated or. even if consummated, that you will be permitted to participate in the investment or participate in the amount you indicate to the Investment Manager. Much of the information contained herein is subjective and/or reflects the Investment Manager's beliefs, estimates or lorecasts, or has been provided by third parties. Such information is not a prediction or guarantee of any particular outcome (including positive investment performance) as such beliefs, estimates and forecasts are based on assumptions. information or claims that could prove to be incorrect. In particular. target return information is provided as general guidance only and there can be no guarantee that such returns will be achieved or that the Peloton investment will be profitable. The information contained herein is as of the date hereof except as otherwise specifically stated. No representation or warranty is made, whether expressed or implied, by the Investment Manager or any of their partners. employees, members. or agents as to the completeness or accuracy of the iNormation provided herein. This document may be amended at any time. There is no express or copied obligation to update you of any changes to the information set forth herein. The information contained herein should not be relied upon as the basis of any investment decision. You should instead conduct your own independent legal, tax and investment due diligence. This document is not intended to be. nor should it be construed or used as an offer to sell, or a solicitation of any otter to buy. interests or shares in any fund managed or advised by the Investment Manager (collectively. the "Funds"), including the Fund through which the Peloton investment will be made. No otter or solicitation may be made prior to the delivery of complete offering materials for the Funds (the 'Offering Materials"). which will contain additional information about the Funds. including disclosures relating to risk factors. conflicts of interest. lees and expenses to be home by investors, and other important information. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it and is qualified in its entirety by the Offering Materials. In the event of any discrepancies between the information contained herein and the Offering Materials. the Offering Materials will control. The information herein is not intended to provide. and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Each recipient of this document should make an independent investigation as to all matters concerning an investment in the Funds. inducing consulting with its own tax. legal, accounting or other advisors. In making an investment decision. investors must rely teen their own independent due diligence and the terms of the ollering. including the merits and risks involved. An investment in the Funds is not suitable for all investors. An investment in the Funds will be suitable only for certain financially sophisticated investors who meet certain eligibility requirements. have no need for liquidity in their investment, can bear significant investment losses, and can bear the risk of an investment in the Funds for an extended period of time. No guarantee or representation is made that and Fund's investment program, including. without limitation. its investment objectives. diversification strategies, or risk monitoring goals. will be successful. Investment results may vary substantialy over time, and substantial losses may occur. Nothing herein is intended to imply that any Fund's investment methodology may be considered "conservative". "safe". 'risk tree' or 'risk averse'. Economic, market and other conditions could also cause the Funds to alter their investment objectives. guidelines and restrictions. Certain information contained in this document constitutes "lawarchlooking statements". which can be identified by the use of forwarchlooking terminology such as "may'. "will'. 'should". "expect". 'anticipate'. "larger. "project". "estimate". intend". 'continue' or believe' or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties and assumptions made by the Investment Manager. actual events or results may differ materially from those reflected or contemplated in such lorwarcflooking statements. Past perlonnance is not indicative nor a guarantee of future returns. STRICTLY CONFIDENTIAL. NOT FOR DISTRI0VRON EFTA00807329 KEY INVESTMENT POINTS HONEYCOMB We see potential for Peloton to become the Apple + Netflix of Fitness ASSET MANAGEMENT WHY INVEST IN PELOTON? • Offering: With a leading hardware, software, and media-integrated offering, we believe Peloton can be a disruptor in the $1006 global fitness market We see Peloton as multiple companies in one which widens the competitive moat NETFLIX Media Software salesforce servicenow 0 SPotifY A ATLASSIAN Equipment S • Growth: We forecast a >60% revenue CAGR through 2022, supported by the signature cycling product, new product roll-outs, and international expansion We believe Wellness is a long-term secular trend and see Peloton using technology to connect the world through fitness • Attractive Return: We see potential +126% upside to our June 2021 PT and a potential 42% gross IRR, with high growth and a low-churn subscription component driving value creation Peloton has indicated plans to go public in 2019' Source: WSJ 'Peloton Interviews Banks for IPO' (Feb 11, 2019); WSJ "Take a Ride With Peloton CEO John Foley (Nov 5, 2018) STRICTLY CONFIDENTIAL. NOT FOR OISTRSUTION EFTA00807330 PELOTON OVERVIEW: COMPANY BACKGROUND Disruptive hardware. software. and media-integrated fitness offering Backaround 0 HONEYCOMB ASSET MANAGEMENT • Founded in 2012 by CEO John Foley and headquartered in NYC • 1,200+ employees and growing, including a >200 person software engineering team • Over $800M of revenue. growing 100% YN (per CEO Yahoo Finance interview) Product Offering • Peloton started with its signature Bike product (>300K sold) and recently launched a Treadmill • Peloton offers monthly subscriptions, both with the physical products and as a standalone app. Peloton has -300K subscribers and -1M members. with multiple members of a household able to share a subscription Engagement • Over 2.5M rides taken monthly by the Peloton community (as of Apr. 2018). The average rider uses Peloton 12-13 times per month • Peloton riders rode 165M miles in the year ended August 2018. with 600M+ calories burned per month • Net churn for the subscription business is <1% per month, and 96% of Peloton Bikes and Treadmills sold have active memberships attached Media • Up to 14 daily live Bike rides, with instructors who gain 'celebrity status. Average of -500 riders per class • Library of >10K on-demand classes across major fitness verticals. 10% of classes are taken live versus 90% on-demand • Peloton is spending $45M to develop a new digital media studio in NY. with an additional studio planned in Europe Distribution • Peloton operates its own retail stores (70+ currently) and its own logistics network Source: Honeycomb, Company website, CEO interviews (WSJ, Strategy Business Interview, Yahoo Finance, CNBC) STRICTLY CONFIDENTIAL. NOT FOR OISTRBUTION. EFTA00807331 PELOTON OVERVIEW: PRICING OPTIONS HONEYCOMB Equipment packages (incl financing options), plus membership subscriptions O ASSET MANAGEMENT • Base price of $2,245 for the Peloton Bike, including delivery, setup, and a 1 year warranty. Additional packages include accessories Option to finance the purchase at 0% APR for $58/month for the base Bike package • Subscriptions for both bikes and treadmills are $39/month through the Peloton equipment or $19.49/month through Peloton's digital app Choose your Bike experience Get that ytit feed to scan trainng. whether its rust the %IMO., BAR A arrant), and Membership, welch gets yOu Wended access to PetotOfiClaSSeS or accessories to erat.To yOU arc yriK fanny PELOTON MEMBERSHIP )4 4th Oil elci r %ccess all classes via the Peg,' &Ice. Ttead and app Mitt, l! PACKA011 tssilitemirs PaCknell INCHEII• /MORASS FAMILY PACKAGE teee,10 Sniffle thapuless MOW MP a bye% SHOP tan,. sh Unlimited Pelelon Seem on MO Bea Tread to on the pa I 20 Me Owes doily inacrrei 10000 onKlema, r MCP mom Ma *Om tWlit Mow • Una/Piled use plat A varlets el class types including erring. includes Prolcaralt irsaaa 04M001 WI mole lad Its MSS hrctri e.e heeme Ste I Potwar. Nadal tIorberillip Oporto on KIS, Andros:I and Web) 'tt.1.•"-Mt ATM", 1 Yr imutee ormanty I Yr LI-•'Ha 0.3trar:, • InttrUCter (Waled Man.; programs .r, re Sets Ls: 0 :miry arc Sr-re Er. 0 Caney ant Seim aastl 0 Oefrary axi sea list I 0 Sums ash Sestet(IPeel Vett (2 Peril or tinworkout nacirKs prolsalong Mt-MCC heart AIM'S I" Wir WMWS 0110 Welts (/ Mee) lab. Me ue4 Wxe "ttOTMet ' >ir neNIPPOnell it Der) • Deleiled.oilicut perionnamy o NMI 1,Mt WT401 ye Ott and ersolemiosel cans I. Kul. itUN e•e `'• WW Settle" MI Source: Company website as of March 2019 STRICTLY CONFIDENTIAL. NOT FOR OISTRBUTION. EFTA00807332 PELOTON OVERVIEW: PRICING OPTIONS HONEYCOMB Equipment packages (incl. financing options). plus membership subscriptions ASSET MANAGEMENT • Base price of $4,295 for the Peloton Treadmill, including delivery, setup, and a 1 year warranty. Additional packages include accessories Option to finance the purchase at 0% APR for $179/month for the base Tread package • Subscriptions for both bikes and treadmills are $39/month through the Peloton equipment or $19.49/month through Peloton's digital app Choose your Tread experience Sr. este to: ^Ng t: 5! VI .5: :C• '•"! PELOTON MEMBERSHIP t•CeeSS all classes via the Pe r Bike, 'need and app Win Pil 42 1 4 I . ‘ 1:1 1.4 $39/mo atoetteg Pe101et NA* a Tier: SHOP EOM rtiet.7 EASELS PACKAGE ESSENTIALS PACKAGE M=IIEMIE EMMY PACKAGE T lionalled Inalolon claim on Me GA. Bead owl en the go SHOP HOW OC SHOP HOW SHOP ROW )C • • 20. Mt classes dolly Ina Orel 19000 on-demon, unlimited out Nobles SHOP HOW I A valet, a flats topes including [-Khoo ,,,,,, MalcamP. Oen *Mop and MOO e MASS IncluMIS lacludm ▪ Includes oigitai magertship Omni on 00.S. NIRO, 'Boo :444,417filiA Android and Web) 1 V. Nita»: eitrrte I V, na:WA analli • InStrUCtOr waled tresemg moments :ghee rt.:Sego Er 0 :Al.or, rc Sr.: Er 0 :ant" an* Saba Er , 0 ✓ lave woetout mem. acluang altugge aartsactE•-•cp I $e Eters-ea War :• tee oftilgettanc• ifet Z AV, Fee hers 4 :oar • DOIMMI mlitkOul perlamacOn I LWOW V1! Ewes* Mr. I ova tee tat Clettland(imi I ',CI. Sass Cale Boma Source: Company website as of March 2019 STRICTLY CONFIDENTIAL. NOT FOR OISTRSUTION EFTA00807333 INVESTMENT HIGHLIGHTS: LARGE TOTAL ADDRESSABLE MARKET (TAM) The Global Fitness market is large and ripe for disruption O ...„ HONEYCOMB ASSET MANAGEMENT • We see a $100B Global Fitness industry, with nearly $90B in Health Club revenue (per IHRSA) and over $10B in Fitness Equipment sales annually (per Zion Market Research) • The US Health Club industry is only -1/3° of the global total 4 International is a 2x larger opportunity • US health clubs have over 60M members, and the Global industry has over 174M members. We believe Peloton can grow their -300K subscriber base by 3x in two years, and Peloton would still represent less than -1% penetration of total fitness memberships • The 200,000+ Global health club locations are also potential customers for Peloton products Traditional Boutique At Home EQUINOX SOULCYCLE PELOTON. * BARRY'S FLYWHEEL Source: International Health, Racquet & Sportsclub Association (IHRSA); Jefferies; Honeycomb estimates STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION EFTA00807334 INVESTMENT HIGHLIGHTS: LARGE TOTAL ADDRESSABLE MARKET (TAM) HONEYCOMB Leading subscription businesses have very large user bases O0 ASSET MANAGEMENT \-z" • Leading subscription services across media verticals have achieved subscriber bases in the -100M range or higher, while leading gym companies have member bases numbering in the millions • With -300K subscribers by our estimates, we see a significant growth runway for Peloton as the premier Fitness-as-a-Service company For Peloton's app-based offering, we see a potential TAM of 100M+ households globally Global Subscriber Counts - Media (mn) Global Subscriber Counts -Gyms (mn) 160 17 '140 140 10 — 120 - 100 -96 S 100 1 SO 6 -s 60 4 40 2 20 0 0 Netflix Amazon Prime Sootily Planet Fitness LA Fitness Crossfit 24 Hour Fitness Gold's Gym Source: Jefferies, Honeycomb estimates STRICTLY CONFIDENTIAL. NOT FOR DISTRBUTION. EFTA00807335  INVESTMENT HIGHLIGHTS: BRAND RECOGNITION HONEYCOMB Survey shows high recognition plus runway for adoption ASSET MANAGEMENT • According to Jefferies Equity Research in an August 2018 survey, 53% of respondents indicated they are aware of Peloton • Over 60% of surveyed people plan to consume home workouts and 30% have canceled a health club membership o Only 12% of respondents indicated owning a Peloton, but 58% said they were either very likely to buy or considering buying one Chart 14: Which of the following statements are true, Chart 15: How likely are you to purchase a Peloton in the select all that apply. next 12 months? 100% 35% 90% 80% 30% 70% 60% 50% 40% 30% U 25% 20% 20% 10% 15% 0% I am aware of I own a Pdoton I take or plank, I cortsume or I have canceled I currently 10% Peloton take boutique plan to a health dub attend Planet fitness dasses in consume at membership is Fitness as a 5% the next 6 borne workouts the last 3 years member months in the next 6 0% months Very lkely I'm considering buying I'm not interested I don't know 'flue False one Source: Jefferies STRICTLY CONFIDENTIAL. NOT FOR OISTRIBUTION. EFTA00807336 INVESTMENT HIGHLIGHTS: BRAND RECOGNITION HONEYCOMB Peloton is outpacing peers in Google Trend results ■ ASSET MANAGEMENT • Peloton Google search interest in the US continues to accelerate, with higher peaks each year in the seasonally strong 4O, while SoulCycle and Flywheel search trends have flattened out • We believe this demonstrates the significant lead Peloton has over competing brands Google Trends for Premium Cycling Brands 100 90 Consumers increasingly 80 searching for Peloton 70 60 50 40 30 20 10 0 ,*? " <7' 4' t (0 No.A ebv 4) N. "‘ .y0 'Y0 4<bc >•>\. —Peloton SoulCycle —Flywheel Source: Google Trends (for searches in the U.S.) STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION 9 EFTA00807337 INVESTMENT HIGHLIGHTS: BRAND RECOGNITION HONEYCOMB Peloton has a passionate social media following ASSET MANAGEMENT 750K+ Facebook / Twitter / Instagram Followers Followers Show a Passion for Peloton e Peloton has more followers than current subscribers O Scott Bell @wmsbell • 3h facebook If you don't have it get it ride it. and Love it....peloton v Community See All a 448.198 Geode kme oils O trlccla ramos etricoaramos • Feb 28 N., s\ 430.628 oeNde bow Ms Broke a new record today! Celebrating small wins and enjoying the growth that is happening here Peloton 0 al Deanersca ,Deanerzzzz - 1Sh I've committed to 30 Kpuloton rides in March. Who's in?? O The Peckish Raven @thepeckishraven - Feb 26 v I started this day with a invorkout by Ipeloton jsimsfit that was SO challenging lw•el, I n31...ng Lan 7.266 1.256 37.9K 9.398 but just what I needed. Never underestimate what you can achieve in just 30 Tweets Tweets & replies Media Peloton 0 410 KilmbeTty Clow Wood el0rnberlyCWood • Feb 22 @AllymissLove got a ePetoton and you're my favorite- love the energy and OO irtstagraws encouragement! I never want to disappoint and I fellow all the instructions- I don't even do that for my run coach! cn ir:pe utc a 0 0 'scalene @jacicster_93 • Feb 28 `se foo, 203 folloolng Replying to ra'ericjpride Peloton I want the •Peloton bike so badly! Lol! Reinvent ng Owens not & on, derna-4 bo.neye studio dosses on the Pethoon gke, Penton tread & Pecoon Dign> oonopcioton linku.ee/onepekoton Source: Facebook, Twitter, Instagram websites STRICTLY CONFIDENTIAL. NOT FOR OISTRSUTION 10 EFTA00807338 INVESTMENT HIGHLIGHTS: HIGH-MARGIN SUBSCRIPTION MODEL HONEYCOMB Peloton = Not as expensive as it looks ASSET MANAGEMENT • The Peloton bike plus subscription model is different from most premium gyms, which can have lower upfront costs but either high monthly fees or a pay-per•class offering • Unlike gym memberships, the cost of Peloton can be spread across a household (up to 6 memberships per subscription) As shown below, the two-year average monthly cost per rider for Peloton is below competitive premium fitness offerings Avg Monthly Cost Avg Monthly Cost Fitness Option Per Rider over 2Yrs Per Couple over 2Yrs 0 PELOTON (I) $143 $143 Cheaper per month than alternatives SOULCYCLE (2) $412 $824 ErARY'S (2) $400 $800 FLYWI IELL (2) $252 $504 O EQU I NOX (4) $250 $500 the bar method $300 $600 CLASSPASS (3) $160 $320 rangetheory' (3) $280 $560 Source: Company websites (New York prices) (1) Assumes average fully-loaded bike upfront cost of $2.494 + $39/mo subscription: (2) Assumes 12 classes per month (3 per week) at a 10-class pack + 2 single class rate: (3) Assumes most cost effective monthly membership: (4) Assumes global access membership STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION 11 EFTA00807339 INVESTMENT HIGHLIGHTS: HIGH-MARGIN SUBSCRIPTION MODEL HONEYCOMB As the subscription business grows. the margin profile improves ASSET MANAGEMENT • Low churn (estimated <1% monthly), supported by a high quality offering, multiple user profiles (like SpotifyThefflix). and in•home convenience We understand 96% of Pebton Bikes and Treads have active memberships attached, and used bikes sell for only a -10% secondary market discount given the high demand for the product High engagement with consumers averaging 12.13 rides per month, up from 7-8 in the earlier days of the company per CEO John Foley in a May '18 interview • Peloton's subscription revenue has the ability to eam very high incremental margins, which will have the effect of driving up total company margins • We believe other potential services like Advertising and Commerce would also be very high-margin revenue streams to leverage Peloton's fixed cost base (we do not underwrite these additional business opportunities. but see them as upside optionality) • By FY June 2024 on Honeycomb estimates, we believe over 50% of Peloton's gross profits will be from their Subscription business Peloton Total Gross Margin Peloton Gross Margin Mix 1 47.0% 100% 46.0% 80% 45.0% 1 11 44.E 60% 43.0% 42.0% 40% Efficiencies of scale & 41.0% subscription mix shift 20% 40.0% New product 39.0% 0% launch 38.0% Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 37.0% ■ Equipment %GP ■ Subscription % GP Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 Source: Honeycomb estimates, CEO interview (The Clip Out Podcast interview with John Foley, May 2018) STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION 12 EFTA00807340 INVESTMENT HIGHLIGHTS: GROWTH PIPELINE HONEYCOMB New products, new markets. and app offering support growth ASSET MANAGEMENT • New Products, Starting with Tread: Bike customers that buy a Tread have no additional monthly subscription cost Treadmill pre-sales were 3x management's estimates over the first six months We see opportunities for lower priced models and a potential 3rd product • New Markets: We see international expansion as a meaningful growth opportunity • App Offering • With talented instructors and loyal customers, we see Peloton as a leader in app-based • fitness subscriptions gum« • 1000AM Peloton content can be leveraged on the 17M treadmills in American homes today 45min Metrics Ride WON AftiON 0 Additional Monetization Opportunities (0. AM *JOAN rxw,w Media strategy could evolve to include targeted Advertising and e•Commerce Source: Honeycomb, Company website, CEO interview (Yahoo Finance) STRICTLY CONFIDENTIAL. NOT FOR OISTRBUTION. mr 13 EFTA00807341 INVESTMENT HIGHLIGHTS: COMMERCIAL PARTNERSHIPS HONEYCOMB Expanding past residential opens new markets and further builds the brand ASSET MANAGEMENT • We see growth potential from expanding commercial partnerships such as those with hotels, apartment buildings, and corporate offices • As an example, Westin Hotels has a partnership in place with Peloton, with bikes in Westin fitness centers and select guest rooms at 50+ locations across the US We think this is a win•win partnership, with travelers looking for fitness options and Peloton obtaining new users According to a survey by Studylogic, 83% of travelers said access to wellness programs while traveling is at least somewhat important when choosing a hotel PELOTON In particular, Millennials, those in their 20s and 30s who are starting t