Peloton announced Thursday that CEO Barry McCarthy will be stepping down and the company will lay off 15% of its staff because it “simply had no other way to bring its spending in line with its revenue.”

McCarthy, a former Spotify and Netflix executive, will become a strategic advisor to Peloton through the end of the year while Karen Boone, the company’s chairperson, and director Chris Bruzzo will serve as interim co-CEOs. Boone most recently served as the CFO of Restoration Hardware while Bruzzo was a longtime executive at Electronic Arts. Peloton is seeking a permanent CEO.

The company also announced a broad restructuring plan that will see its global headcount cut by 15%, or about 400 employees. It plans to continue to close retail showrooms and make changes to its international sales plan.

The moves are designed to realign Peloton’s cost structure with the current size of its business, it said in a news release. It’s expected to reduce annual run-rate expenses by more than $200 million by the end of fiscal 2025. About half of those savings are going to come from payroll reductions, while the rest will come from lower marketing spending, a reduced retail store footprint, and reduced IT and software spending, said finance chief Liz Coddington.

The departments hit the hardest from the restructuring will be Peloton’s research and development, marketing and international teams, Coddington said.

“This restructuring will position Peloton for sustained, positive free cash flow, while enabling the company to continue to invest in software, hardware and content innovation, improvements to its member support experience, and optimizations to marketing efforts to scale the business,” the company said.

Peloton’s shares surged more than 12% in premarket trading but opened lower after the company’s conference call with Wall Street analysts concluded. Shares closed about 3% lower.

McCarthy took the helm of Peloton in February 2022 from founder John Foley and has spent the last two years restructuring the business and working to get it back to growth.

As soon as he took over, he implemented mass layoffs to right size Peloton’s cost structure, closed some of the company’s splashy showrooms and enacted new strategies designed to grow membership. He overhauled Peloton’s executive team, oversaw its rebrand and created new revenue drivers like the company’s rental program.

The last round of cuts, affecting 500 employees, was announced in October 2022. McCarthy later said the company’s restructuring was “complete” and it was instead pivoting to “growth.” 

“We are done now,” McCarthy had said in November 2022 of the layoffs. “There are no more heads to be taken out of the business.”

Contrary to Peloton’s founder, McCarthy redirected Peloton’s attention to its app as a means to capture members who may not be able to afford the company’s pricey bikes or treadmills but could be interested in taking its digital classes.

In a letter to staff, McCarthy said the company now needed to implement layoffs again because it wouldn’t be able to generate sustainable free cash flow with its current cost structure. Peloton hasn’t turned a profit since December 2020 and it can only burn cash for so long when it has more than $1 billion in debt on its balance sheet.

“Achieving positive [free cash flow] makes Peloton a more attractive borrower, which is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in the memo.

In a letter to shareholders, the company said it is “mindful” of the timing of its debt maturities, which include convertible notes and a term loan. It said it is working closely with its lenders at JPMorgan and Goldman Sachs on a “refinancing strategy.”

“Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more about this topic.”

In a news release, Boone thanked McCarthy for his contributions.

“Barry joined Peloton during an incredibly challenging time for the business. During his tenure, he laid the foundation for scalable growth by steadily rearchitecting the cost structure of the business to create stability and to reach the important milestone of achieving positive free cash flow,” Boone said.

“With a strong leadership team in place and the Company now on solid footing, the Board has decided that now is an appropriate time to search for the next CEO of Peloton.”

During a conference call with analysts, Boone said Peloton’s board is looking for a leader who can “architect and lead the next phase of growth for the company.”

Peloton has tried a little bit of everything to get the company back to sales growth. It removed the free membership option from its fitness app, expanded its corporate wellness offerings and partnered with mega-brands like Lululemon to grow membership, but none of the initiatives have been enough to grow sales.

For the ninth quarter in a row, Peloton’s revenue fell during its fiscal third quarter, when compared with the year-ago period. It hasn’t seen sales grow compared with the year ago quarter since December 2021, when the company’s stationary bikes were still in high demand and many hadn’t yet returned to gyms amid the Covid-19 pandemic.

The business is continuing to bleed money and hasn’t turned a net profit since December 2020. 

For its current fiscal year, Peloton lowered its outlook for paid connected fitness subscriptions, app subscriptions and revenue. It reduced its connected fitness subscription outlook by 30,000 members, or 1%, to 2.97 million as it looks toward its current quarter, which is typically its toughest because people tend to work out less in the spring and summer months. 

“Our Paid Connected Fitness Subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations for seasonally lower demand,” the company said. 

Peloton now expects app subscriptions to drop by 150,000, or 19%, to 605,000. 

“We are maintaining our disciplined approach to App media spend as we evaluate our App tiers, pricing, and refine the Paid App subscription acquisition funnel,” the company said.

As a result of expected downturns in its subscription sales, Peloton now projects full-year revenue to come in at $2.69 billion, a reduction of about $25 million, or 1%. That’s below expectations of $2.71 billion, according to LSEG.

However, the company raised its full-year outlook for gross margin and adjusted EBITDA. It now expects total gross margin to grow by 50 basis points, to 44.5%, and adjusted EBITDA to grow by $37 million, to negative $13 million. 

“This increase is largely driven by outperformance from Q3, combined with lower media spend and cost reductions from today’s announced restructuring plan,” the company said.

Last February, McCarthy set a goal of returning Peloton to revenue growth within a year. When it failed to reach that milestone, McCarthy pushed it back and said he now expects the company to be back to growth in June, at the end of the current fiscal year. 

McCarthy had also expected Peloton to reach positive free cash flow by June — a goal the company said it reached early during its third quarter. It’s the first time Peloton has hit that mark in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow but it’s unclear how sustainable that number is.

Last month, CNBC reported that Peloton hadn’t been paying its vendors on time, which could temporarily pad its balance sheet. Data from business intelligence firm Creditsafe showed that Peloton’s late payments to vendors spiked in December and again in February after improving in January.

The company didn’t provide specific guidance on what investors can expect with free cash flow in the quarters ahead but said it does expect to “deliver modest positive free cash flow” in its current quarter and in fiscal 2025.

“While we firmly intend to return the business to growth, with today’s announced cost reductions, we’re lowering our cost base and we see a path to positive free cash flow without requiring a significant improvement in growth to get there,” Coddington said on the conference call. “I also want to clarify that we have carefully reviewed these cost measures to make sure that we do still have the capability to invest in innovation so that the business can grow profitably.”

Part of the reason why Peloton had failed to reach positive free cash flow is because it’s simply not selling enough of its hardware, which is costly to make and has become less popular since the Covid-19 pandemic ended and people returned to gyms.

“Looking at the numbers in more detail, the biggest problem lies in the part of the business where Peloton first made its name: exercise equipment. Revenue for connected fitness products plummeted by 13.6% over last year in a sign that consumers are still cooling on equipment that, while aesthetically and technically pleasing, is very expensive,” GlobalData managing director Neil Saunders said in a note. “A lot of people who want Peloton equipment already have it and are not likely to upgrade anytime soon; the balance of the market is either not interested or needs a lot of persuasion to buy into Peloton.”