So it was originally designed to be an Edge-on to a CFU membership, not as a freestanding app. So we continue to evolve the design and interaction. Lastly, we need to continue our current investment in personalization, both for the app and on consoles for Connected Fitness unit. So that great content that we create is discoverable by members who would enjoy if they only knew that it exists same challenge that Spotify facing challenge that Netflix-based, the better we are at personalization we’re engaging the user experience will be the stickier the user experience will be the lower the churn will be more satisfied, the members will be, the more organic growth we’ll have the lower the stack (ph) will have the higher the LTV, so that’s the playbook for success.
Operator: Thank you. One moment for our next question. Our next question comes from Andrew Boone with JMP Securities. Your line is open.
Andrew Boone: Good morning, and thanks for taking my questions. The 1Q ’23 gross profit margin guidance seems to imply that Connected Fitness margins are very near to breakeven. As you guys think about pricing and bringing down the price of the Tread in the row, is the right way to think about managing hardware gross profit margins breakeven or how do you guys think about this strategically?
Barry McCarthy: Liz, why don’t you take that?
Liz Coddington: Yeah. Sure. So you’re actually — you’re about right that for Q1, it implies a roughly neutral Connected Fitness gross margin. When we look at our unit economics for the business, all of our unit economics aside from guide show that we have the ability to keep our gross margin in the positive territory. But what that means, we do have — that’s based on a variable cost kind of a contribution margin structure. And it doesn’t include things like promotional activity and which we will continue to have some of. But it also — it requires us to have a certain level of volume. Otherwise, we do have some — we have fixed costs that we also have to cover. So as our volume growth and our volume scales, we do have the ability to achieve positive gross margin.
But in Q1, we’ll be challenged a bit in terms of [indiscernible] weak hardware sales that we’re expecting to have and have the — that is impacting our gross margin — Connected Fitness gross margin guidance in the quarter. But the key thing to note here is our goal is to really grow our subscriber base and we’re going to continue to work on ways to do that, and we’ll evaluate our hardware margin really through the LTV to CAC framework. As we’ve said before, and we said it multiple times, our focus is driving efficient subscriber growth through the lens of LTV to CAC. And if you think beyond Q1, we’re going to look at the trade-off that we have on reducing price or offering promotion activity, those sorts of things which reduce LTV in relation to efficient marketing spend.
And so, we’ll continue to make those trade-offs in each quarter evaluate what is the best strategy for us.
Barry McCarthy: Let me jump in and add a slightly different perspective, if I could, Andrew. When I — I’ve been here about 18 months, give or take. And when I walked in the door, it seems to me, we had a limited number of tools in the toolbox in order to grow the business. And price promotion was about the only thing we had. We have a commercial business, but it was needed to be re-architected from a cost perspective, like everything else, Peloton related. I don’t mean that in a derogatory way. It just — we had things we needed to fix and we had price promotions as a tool to drive growth. That’s very different than where the business sits today. We have a lot of irons in the fire. I’ve got a lot of tools in the toolbox. I mean, I’m I don’t mean to sound like one of those CEOs is completely disconnected from the stock price because it’s not lost on, I walked in the door when it was 39%, and it was hanging out about $5 at the start of this call.
But I have never been more optimistic. We’re excited about the future of the business and there is this enormous disconnect between the stock price and the energy and the building around all of the partnerships and co-development things that are cooking. So if I’m right about that and we are, in fact, less dependent on price promotions in order to drive growth, then that should have positive implications for hardware margins, which is why I went through that long-winded explanation.
Andrew Boone: For my second question, I wanted to ask about the corporate opportunity. Do you guys need to make any investments on the sales and marketing side to be able to support that or what else needs to happen to really drive growth for hospitality for everything else that’s included there? Thank you so much.
Barry McCarthy: Super good question. We just added to the team on the commercial side a Senior Exec from American Express, who led strategic partnerships there, Greg Hybl to help build out our sales capability to drive growth in commercial and corporate wellness. So yes, there’ll be some investment. But from a macro basis, it won’t be a big impact on margin.
Operator: Thank you. One moment for…
Liz Coddington: I just going to add one more point. Another thing that we’re excited about for the business that’s going to help drive growth there. Is that we are working on commercially launching our Bike+ and our Row and that should be coming really soon and that will give more opportunities for businesses to have our hardware in their settings. So it will be great when we’re able to offer that soon.
Barry McCarthy: And Tread+ once it’s reintroduced in the market as well, so yeah.
Operator: One moment for our next question. Our next question comes from Shweta Khajuria with Evercore ISI. Your line is open.
Shweta Khajuria: Okay. Thank you for taking my questions. I’ve got a couple. Barry of all of the three things, getting to positive free cash flow in the back half of next year, your product initiatives and your growth initiatives that include marketing spend, international expansion, corporate partnerships, where would you say your highest level of confidence and where do you think there’s a greater level of uncertainty? And then I have a question on forecast. In terms of your first quarter forecast, how different is your methodology this time than it was last time, in terms of your — given the level of visibility and perhaps uncertainties? So how confident do you feel in your current guidance and how different was your method this time? Thank you.
Barry McCarthy: Liz, do you want to take the second part of the question?
