Xponential Fitness, Inc.

Greetings and welcome to Exponential Fitness Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Estrigan. Thank you. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' first quarter 2023 financial results. I am joined by Anthony Geisler, Chief Executive Officer, Sarah Luna, President, and John Malone, Chief Financial Officer. A recording of this call will be posted on the Investor section of our website at investor.exponential.com. We remind you that during this call, we will make certain forward-looking statements including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that we issued earlier today prior to this call. Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Exponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our first quarter earnings conference call. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak further about our progress against our core growth strategies with an emphasis on our growing B2B offerings. John will conclude with a review of our first quarter financials and an update on our 2023 outlook. It was another strong quarter for Exponential as our business has continued to perform across our key performance metrics. Exponential franchisees now operate over 2,750 studios globally, an increase of 24% year over year, with more than 5,600 licenses sold across our 10 leading fitness brands. We now have franchise, master franchise, and international expansion agreements in 18 countries. Also encouraging, our mature studio cohorts are again exhibiting strong same-store sales growth with profiles similar to our younger studios. For the quarter, North American studios over three years old comped at 21% same-store sales. Turning to our membership levels. Total members across North America increased by approximately 31% year-over-year to a total of 665,000 at the end of the first quarter. Over 90% of these customers are actively paying members. Along with growth in our membership base, North American Studio visits for the three months ending in March increased by 38% year-over-year, reaching a total of 12.6 million. The increasing foot traffic and utilization of the studios drove record North American system-wide sales, which increased 42% year-over-year in the first quarter. Freezes on memberships are also at their lowest level since prior to the pandemic. Q1 North American AUVs of 542,000 were up 21% from 450,000 in Q1 of 2022, our 11th straight quarter of AUV growth. We believe that AUV growth is the most direct measure of the health of our franchise system, and I am pleased to report the momentum in AUV growth has continued to build in the second quarter. We also saw same-store sales growth of 20% in the first quarter, up from 17% in the previous two quarters. This improvement is particularly impressive when considering the difficult comp in the first quarter of 2021 when our studios were back running at full capacity and performing solidly post-pandemic. These numbers also bode well for our studio's growth prospects for the remainder of the year and into the future as more members are visiting our studios. Furthermore, the acceleration and growth in our North American AUVs and same-store sales, in combination with a growing membership base, demonstrate that consumers continue to view their health and wellness as a vital part of their budgets and not discretionary spend. Turning to revenue. For the quarter, net revenue totaled $70.7 million, an increase of 40% year over year. Adjusted EBITDA totaled $22.9 million in Q1, or 32% of revenue, up 58% from $14.5 million, or 29% of revenue, in the prior year period. The resiliency of Exponential's business is best demonstrated by our franchisees opening new studios while driving additional business to their existing locations. Exponential franchisees continue to have ample access to the capital required to open studios by leveraging our relationships with several lenders. Despite higher interest rates, we have a healthy pipeline of franchisees with pre-sold licenses seeking and receiving funding. In addition to franchisees continuing to open studios, studio members are continuing to show that they are spending on experiences. As Sarah will speak about shortly, many view their fitness memberships as part of their overall entertainment budgets. Let's now turn to our four strategic growth areas. I'll discuss the first three and then turn the call over to Sarah to discuss the fourth. Beginning with the increase of our franchise studio base, we ended Q1 with 2,756 global open studios, opening 115 net new studios in the first quarter. We sold 188 licenses globally in Q1, bringing the total sold licenses to 5,638. Our pipeline of over 2,000 licenses sold and contractually obligated to open on a global basis offers us multi-year visibility into our growth. Note this number does not include our master franchise agreement obligations, which I will speak to shortly. I am also happy that we are now conducting classes on all 15 of the cruise ships that make up the Princess Fleet. Sarah will speak to this achievement in greater detail later in today's call. Turning to our second growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be open under master franchise agreements, and we continue to gain traction. Just last week, we announced a master franchise agreement in Japan to franchise up to 40 Stretch Lab studios over the next 10 years. Exponential has five brands operating in Japan, including Club Pilates, Rumble, Cycle Bar, AKT, and Stretch Lab. In addition, we recently signed master franchise agreements with Club Pilates in Ireland and Switzerland, and in Q1, we opened our first Club Pilates in Frankfurt, Germany. As a reminder, our MFAs are structured to provide Exponential with high margin flow-through, given that we structure them as a revenue share model and require minimal incremental SG&A to support MFA growth. Our third key growth driver is to expand margins and drive free cash flow conversion. As our business continues to grow, we see further benefits of our asset-light scalable operating model, which shows up in our margin performance. Adjusted EBITDA margins again improved to 32.4% during the first quarter as we continue to increase our operating leverage. We remain confident that our adjusted EBITDA margins will expand into the 35% to 39% range in 2023, and are on track to achieve our adjusted EBITDA margin target of 40% in 2024. With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales in AUVs.

Thank you, Anthony. At Exponential, we understand the importance of empowering customers to exercise where and when they want. We also acknowledge that customers are looking to work out and to have a full experience while doing so. In other words, They're looking for a place where they can work out and socialize, and it's not just exponential customers spending on experiences. In a recent spending report by MasterCard, the credit card company found that consumer spending on experiences rose by double digits in February. Compared to the year-ago period, consumers spent 42.7% more on lodging, 15.6% more on airlines, and 14.2% more on restaurants. consumers are shifting their spending and exponentials benefiting from the spend on experiences, as is evident from the increase in our visitation rates and membership count. During the first quarter, North America visitation rates grew 38% year over year, and our North America membership base has grown to over 665,000 members. While we often see some seasonality in membership following the new year, Q1 is typically our strongest quarter for membership growth. These results are further proof points that more individuals are visiting our boutique fitness studios. Importantly, these trends have continued into the second quarter. To keep this momentum going, Exponential is consistently innovating, finding new ways to connect with our members, increase retention and reduce churn, all of which are vital to growing our same-store sales and AUVs. Our XPAS offering is one such example of a novel way in which we are providing our members frictionless access to all 10 of our brands on a single recurring monthly membership platform. In addition to providing our customers with greater flexibility, XPath serves as a lead generator for our franchisees to drive in-studio memberships. Not only have we been able to sell traditional XPath memberships to those frequenting our studios on land, but we now are actively offering our XPath to individuals who work out with one of our boutique brands on Princess cruise ships. We are excited that Pure Bar, Yoga 6, and Stretch Lab have already launched across the entire fleet of Princess cruise ships. We are happy to already see social media posts from franchisees discussing signing up new members post-cruises. Beyond taking our live classes on board, cruise guests also have the opportunity to stream our digital offering X-Plus across Princess's more than 23,000 state rooms. X Plus helps enable our members to work out whenever and wherever is convenient for them, even if on board a cruise ship. At the end of the first quarter, we had over 140,000 subscribers on X Plus, many of whom also hold in-studio memberships, including those who have subscriptions through their Club Pilates or Stretch Lab membership. X Plus is also a key driver of our B2B partnerships. Recently, we announced the launch of X Plus on LG electronic smart TVs, which will provide on-demand access to Exponential's family of brands to millions of LG smart TV owners in over 250 countries. Our previously announced partnership with Active Solutions is progressing well. Active is leveraging our world-class digital content through our X Plus platform in one-of-a-kind immersive exercise experiences tailored specifically for amenities located within leading hotels and resorts, corporate campuses, universities, and high-end multi-family housing properties. We've installed about 90 active bays so far and expect that these will all be activated at the end of June. Our strategic B2B partnerships with industry-leading companies are made possible by the strength of the exponential brand, as well as our expanding omnichannel fitness capabilities. We look forward to benefiting our franchisees even more with these tools and partnerships in the future, helping drive individuals into the exponential ecosystem, whether virtually or through our brick-and-mortar locations. Thank you again for your time. I'll now turn the call over to John to discuss our first quarter results and 2023 outlook.

Thanks, Sarah. It's great to speak with everyone and discuss Exponential's first quarter 2023 results. First quarter North America system-wide sales of $317.8 million were up 42% year-over-year. The growth in North American system-wide sales was largely driven by the 20% same-store sales in the existing base of open studios that continued to acquire new members, coupled with 82 net new North American studios that opened in the first quarter. On a consolidated basis, revenue for the quarter was $70.7 million, up 40% year-over-year. Each of the five components that make up our revenue grew during the quarter. Franchise revenue was $33 million, up 29% year over year. This growth was primarily driven by an increase in royalty revenue as member visits and associated system-wide sales reached all-time highs. In addition, we saw increased instructor training revenues and higher monthly tech fees that will continue to increase as we open more studios domestically. Equipment revenue was $13.1 million, up 68% year-over-year. This increase in equipment revenue is the result of continued higher volumes of global equipment installations. Merchandise revenue was $7.2 million, up 18% year-over-year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic when compared to the prior year. Franchise marketing fund revenue of $6.2 million was up 40% year-over-year, primarily due to strong system-wide sales from a higher number of open studios in North America. Lastly, other service revenue, which includes rebates from processing studio system-wide sales, B2B partnerships, XPath, and XPlus, amongst other items, was $11.3 million, up 71% from the prior year period. The increase in the period was primarily due to increased rebates from the processing of studio-level system-wide sales and our increased revenues from our B2B partnerships. Turning to our operating expenses, cost of product revenue were $14 million, up 46% year-over-year. The increase was driven by a higher volume of equipment installations for new studio openings and merchandise revenue in the period. Cost of franchise and service revenue were $4 million, down 5% year-over-year. The decrease was driven by fewer license terminations and studio transfers in Q1 of 2023. Selling, general, and administrative expenses of $34.9 million were up 3% year-over-year, which in the period included the cost of the secondary offering that was completed in February. As a percentage of revenue, SG&A expenses were 49% of revenue in the first quarter, down from 67% in the prior year period, demonstrating the continued leveraging of SG&A as we continue to grow revenues. As I have noted on prior calls, costs related to company-owned transition studios are included in our SG&A. We are focused on growing the sales in these studios optimizing operating costs to achieve four-wall profitability, and then finding new franchisee owners to which to sell them. We also expect to see legal costs decline in the second half of the year as a result of increased deficiencies. Further, in the first quarter, we announced the hiring of Andrew Hagopian, who will serve as our chief legal officer. We are thrilled to see that Andrew has hit the ground running and has already started working towards optimizing legal expenses. Depreciation and amortization expense was $4.2 million, an increase of 20% from the prior year period. Marketing fund expenses were $5 million, up 15% year over year, driven by increased spend afforded by higher franchise marketing fund revenue. Acquisition and transaction expenses were $15.7 million, primarily related to the non-cash contingent consideration as part of our acquisition of Rumble. As I have noted on prior earnings calls, the Rumble contingent consideration is driven by movements in our share price. We mark to market at each quarter and accrue for the earn out. We recorded a net loss of approximately $15 million in the first quarter compared to a net loss of $15.2 million in the prior year period. The decrease in net loss was the result of $2.8 million of lower overall profitability, a $6.2 million increase in non-cash contingent consideration primarily related to the Rumble acquisition, and a 9.2 million decrease in non-cash equity-based compensation expense. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the first quarter was 1.3 million, which excludes the 15.7 million change in fair value of non-cash contingent consideration and a 0.6 million liability increase related to the first quarter remeasurement of the company's tax receivable agreement. This results in adjusted net loss of two cents per basic share on a share count of 30.8 million shares of Class A common stock after accounting for income attributable to non-controlling interest and dividends on preferred shares. Adjusted EBITDA was 22.9 million in the first quarter, up 58 percent compared to 14.5 million in the prior year period. Adjusted EBITDA margin grew to 32 percent in the first quarter compared to 29 percent in the prior year period. As a reminder, our 2023 outlook anticipates adjusted EBITDA margins reaching the 35 to 39 percent range, and we expect this number to grow to 40 percent in 2024. Turning to the balance sheet, As of March 31, 2023, cash, cash equivalents, and restricted cash were $28.1 million, up from $15.8 million as of March 31, 2022. Total long-term debt was $266.7 million as of March 31, 2023, compared to $132.5 million as of March 31, 2022. The increase in total long-term debt is primarily due to the repurchase of 85,340 shares of convertible preferred stock at a price of $22.07 per share announced in January. These shares prior to the repurchase would have been convertible into 5.9 million shares of Class A common stock. Now turning to our outlook. After a solid first quarter and a continued positive momentum in the second quarter, we are confident in our growth trajectory. With that said, based on current business conditions and our expectations as of the date of this call, We are increasing our full year 2023 guidance for system-wide sales, revenue, and adjusted EBITDA, and we are reaffirming guidance for net new studio openings as follows. We expect 2023 global net new studio openings to remain unchanged in the range of 540 to 560. This range represents the highest number of studios opening in our company's history and an 8% increase at the midpoint over 2022. We are increasing North America system-wide sales to range from $1.37 billion to $1.38 billion, up from the previous $1.34 billion to $1.35 billion, or a 33% increase at the midpoint from the prior year. Total 2023 revenue is now expected to be between $290 million to $300 million, up from the previous $285 million to $295 million, a 20% year-over-year increase at the midpoint of our guided range. Adjusted EBITDA is now expected to range from $102 million to $106 million, up from $101 million to $105 million, a 40% year-over-year increase at the midpoint of our guided range. This range translates into roughly 35.3% adjusted EBITDA margin at the midpoint. In terms of capital expenditures, we anticipate approximately $10 million to $12 million for the year, or approximately 4% of revenue at the midpoint. Going forward, capital expenditures will be primarily focused on the BFT integration, XPath, and XPlus new features, and maintenance on other technology investments to support our digital offerings. For the full year, our tax rate is expected to be mid to high single digits, Share count for purposes of earnings per share calculation to be $32.6 million and $1.9 million in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release as well as on our corporate structure and capitalization FAQ on our investor website. Thank you again for your time today and for your support of Exponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Jeff Van Centeren with B Reilly. Please proceed with your question.

Hi, everyone. Thanks for taking my question. Just wanted to check on promotional activity, pricing, any thoughts on, well, I guess, are there any changes happening there at all in promotional activity or pricing? And then how might those elements evolve this year as you're thinking about the remainder?

Hey there. No substantial changes in our business in terms of how we're approaching pricing and promotions. Of course, each of the brands focus on various marketing promotions throughout the quarters and throughout each month to make sure that we're attracting new customer base. Tons of focus on our B2B activity and driving negative CAC back to the studios with the leads that we're bringing in. And that's so far performing very well. A lot of those partnerships are starting to stand up this year, so we're starting to see the fruits of that labor, which we're excited about.

Okay, great. And then as a follow-up, just I know you mentioned VFT, but any update you can provide on the VFT integration process, how that's going?

Yeah, it's going according to plan. So we're, you know, we're integrated with VFT. So, you know, we're continuing that process. But, you know, it's operating today. just like our normal domestic business and our normal MFAs operate.

Okay, great. Thanks for taking my questions. I'll get the rest offline.

Thank you so much.

Our next question is from Alex Parry with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions, and congrats on a strong quarter here. I guess just first, you kept the Net Studio opening number the same, even in this higher rate environment. Can you talk about the feedback you're getting from your franchisees? Are they accelerating development, developing sort of in line with schedule? Are you seeing any pause? And then just on the 540 to 560 openings, how much visibility do you have on that? And maybe some help on how much is sort of domestic versus international. Thanks.

Yeah, I mean, still we're at about 90-10, you know, domestic versus international on openings. We're selling 75 to 25. So eventually that 75 to 25 will continue to pour in on the 90-10. We will see it open studios, you know, expanding there. The domestic business is, you know, continuing to be steady. And then the international openings are what are piling on top of the domestic business. But as far as interest rates go, you know, we reached out to our lenders, rates are up. quarter percent or half a percent or something like that. And it's, you know, it's not against a lot of opening dollars when you think about, you know, I know, you know, people are asking the question around, you know, planet and stuff like that. And they're, you know, they're opening dollars are about 10 X what ours are. So, you know, interest rate has a bigger effect, you know, in those large box type businesses than it does in small boutiques. just because of the overall dollar amount it is to get open.

Perfect. That's really helpful. And then just how do you think about the royalty rate increases from here? Is there an AUV that you sort of target by concept where you feel comfortable taking a royalty fee increase? And I guess maybe as for context, sort of what permitted you to take this sort of increase in the club Pilates royalty rate to 8%? And is there any other brands where you think you may be able to do that?

Yeah, I'm not sure if you've seen our recent FDD filings, but we did increase StretchLab to 8% as well. And, of course, there's a certain AUV threshold, but there's really a profitability threshold and sort of a sales threshold. So just like you see supply and demand, you know, kind of take its course from the customer level, You know, you saw it at Club Pilates where we basically sold out of the brand domestically, began to get a lot of those open, and then continued to see great demand in that brand, you know, given the AUV and its increases. And so the same was true with Stretch Lab. And so we've, you know, increased that in our new filing to 8%. And, you know, typically, like I've said in the past, is that, you know, we will – take price effectively with our franchisees based on supply and demand prior to increasing the royalty rate. The royalty rate has kind of the highest optic to it. And so it's really the last thing that we do.

Perfect. That's really helpful. Best of luck going forward.

Great. Thanks, guys.

Our next question is from John Heinbacher with Guggenheim Securities. Please proceed with your question.

Hey guys, I want to start with, so per member visitations continue to go up and I think are pretty close to a record level. What are you looking at in your dashboard, maybe across the network, to see if the consumer in some respect is pulling back? I don't know if it's engagement or change in composition of membership. And I guess, is there any place where you're seeing anything or, you know, hasn't shown up yet?

Look, I mean, it's not that there's one silver bullet, right? We're looking at KPIs across, right? So we're looking at foot traffic. We're looking at utilization, you know, volume and demand, right, really kind of shows that, you know, this is nondiscretionary. spend for our members and that are still going and still continue to grow. And as we look at our customer base, we're actually continuing to see younger customers that cohort grow, you know, a lot faster than even some of our older demographic. And so, yeah, This is where, you know, people today get their entertainment dollars, their health dollars, their community. And so, you know, it's the volume that we see coming through that's great. The foot traffic, not necessarily price driven. We've said in the past is 95% volume and the rest really being price. And so, you know, we look at all those metrics for the health of the business, right? So there's not one, one sort of silver bullet that we stare at, but we kind of look at them all. And, you know, where we sit today, all of them are continuing to perform. As a matter of fact, if you look at, you know, what we comped in Q4, you know, people kind of thought, well, that's not sustainable. And then, you know, if we went from 17%, 18% respectively on our, you know, less than 36-month mature stores and 36-month plus stores and went to 20%, right? And so, you know, we're continuing to perform. The business is continuing to perform. And all of that is a recipe, right? That's not just the class or the leadership or the industry that we're in. Like anything great, it's a recipe and a metric of a lot of things working all at the same time.

Well, as a follow-up to that, because I think you're right, the average household income is $130,000. How low do you think you can take that and play where there's an awful lot of perceived value for what you're providing? I assume it can go lower than that. Maybe that's not your target, right? There's still a lot of the market you're not covering, but How do you look at that accessibility and, you know, ability to tap into a somewhat lower household income base?

Yeah, I think sometimes it's a less of, you know, dollars that they make and more shifting a priority of the dollars. When you see in a post-COVID world, people are really taking their health and wellness seriously. And I've said before in boutique, especially in our brands, that you know, like a rumble or row house or AKT or stride or something like that, where, you know, they're working out in a nightclub in essence. Um, you know, there's a lot of entertainment dollars there and a lot of community that's very hard to replace. That's where they're, you know, club Pilates in the morning and, you know, 8am or club Pilates on Tuesday at five, that group that's there, that's their community, right? Those are the people they look forward to seeing. Um, so this is where friendships are formed and, um, know where people get entertainment dollars so this is not something that's easy to replicate um you know since 95 percent of his volume and five percent is price um you know they are getting more perceived value right because they're you know as inflation happens and other things happen they're still continuing to enjoy their original price that they came in at and so it makes it stickier because we're not raising rates on past members. We're raising rates on new members coming in as the old ones expire and cancel, and we go up a tier in our, you know, kind of five-tier pricing. But we're not going back to, you know, kind of customer number one and taking price on them.

Okay. Thank you very much.

Our next question is from Randy Connick with Jefferies. Please proceed with your question.

Thanks, guys. I guess, Sarah or Anthony, can you give us some perspective on drivers? We heard about drivers of AUV going forward, but maybe curious around, as you think about drivers across the portfolio as an opportunity to continue to drive AUV higher. We know that Club Pilates is the highest AUV concept, but maybe give us a little bit of perspective on on the other concepts where you see kind of a massive ramp opportunity or they're already high AUV to kind of continue to lift total company AUV higher by just moving across the portfolio. Thanks.

Thanks, Randy. I'll give you a quick point of clarification. Club Pilates is not the highest AUV at the company. It's kind of the highest AUV with the highest sample set, right? Kind of the highest volume. That's why we point to that. But Brands like BFP or like Rumble actually come out, you know, at some higher AUVs, which is a lot less locations than we have across the country. So that makes us really excited. What I like to talk about the difference between Club Pilates and some of the other brands is what I call the born on date, right? And when you look at Club Pilates, when we first bought that brand, the AUV was 250. And, you know, today it's over three times that, right? You know, seven, eight years later. And so what I'm excited about is brands like BFT and brands like Rumble, the brands that we're selling and opening the most up today, given the most white space in those brands, they're actually coming out at $500,000, $600,000 more AUVs. So they're kind of born on date. They're kind of being born twice as smart as Club Pilates was originally. So there's still a lot to build off those brands as they're in their infancy. And we've got a lot of contributors to AUV, right? We've talked about this concept of negative CAC and as we drive. People on the cruise ships, I saw, you know, a posting on our Stretch Lab Facebook page for franchisees where they said, hey, I got my first princess lead and I closed them, right? And, you know, that's proof of concept that People can go on a cruise ship, get associated with Stretch Lab, and then, you know, go home, get marketed to, and get closed by the franchisees. So, you know, as we continue to increase, you know, the customer lead base for our franchisees, and, of course, we always continue on our closing ratio to try and, you know, close higher and close at higher dollars, but we're able to deliver more leads than we have before. And we look at the cohorts of, you know, 2023 versus 2022, you know, and we do it by quarter, you continue to see quarter over quarter, you know, these cohorts and these ramps continue to increase. And so, you know, as we put stores next to each other, as we put store, you know, in neighborhoods, it kind of, you know, rises all ships. And so, you know, same is true with Princess, same with, you know, Lululemon Mirror being on LGTV. I mean, our Hyatt and Hilton hotels with, you know, with Active, 11,000 locations that Active has. And so it's really our goal that by the time, you know, what I like to call our Starbucks mom is on her way to grab her coffee in the morning and she sees Pure Bar next door, Rumble next door. She doesn't know, you know, it's not having to wonder what it is. She saw it on her television. She, you know, saw it on an app. She saw it on Mirror. You know, I have to remember too, those mirrors are, you know, being played as equipment in a lot of high-end hotels, right? I was in a high end hotel the other day and the mirror sitting there playing our content inside the hotel gym while people are working out. So there's a lot of ways that people are becoming associated with exponential and its brands. And so the idea is that by the time they actually see us in our kind of brick and mortar four wall state, they're not having to wonder, you know, who we are, what we stand for and what the value prop is that, You know, they walk in, and then hopefully we have a very well-qualified salesperson at the desk that, you know, is able to close that sale.

Super helpful. And then just to follow up, what does the AUV kind of look like, maybe perhaps on a constant currency basis, when you think about your international units, what you've learned so far and how they, you know, perform similar or dissimilar to their concept counterpart in the U.S.? ?

Thanks. You know, John and I were actually talking about this this morning, you know, on an international basis. So, for instance, if, you know, if AUVs are 500 here in the U.S. and they're, you know, Rumble doing 500 in Australia, right, in AUD, you know, on a country-for-country basis, the AUV is about the same. So, you know, we're getting... better and better data on our international side for system wide sales and AUV and things of that nature. And we're continuing to, you know, to kind of hone in on that. Um, obviously, you know, our big international regions, APAC and inside APAC BFT is kind of the big driver there. Um, you know, much like club Pilates in the early days and, you know, had the most volume and AUV here was sort of the, the biggest driver, but, uh, we do have club Pilates operating and rumbles operating, you know, we just opened a, uh, rumble boxing in Bondi Beach in Sydney, which is kind of like the premier location in Australia is doing very well. So, you know, we're constantly encouraged by what we're seeing both from the brand level AUVs and kind of overall system-wide sales in the countries.

Super helpful. Thanks, guys.

Our next question is from Joe Altabella with Raymond James. Please proceed with your question.

Thanks. Hey, guys. Good afternoon. I want to go back to the franchisee financial health sort of topic. If we look at the cash-on-cash returns that your franchisees are earning today, what does that look like versus when you went public? I would imagine it's actually gotten a little bit better the last couple years.

So, Joe, I think when you go back to, you know, what it was kind of around IPO, it's kind of an unfair measurement given they were in kind of the COVID recovery period, right? So I think if you talk about pre-COVID when, you know, we were just under, you know, kind of a 500K AUV, and then now you fast forward, we've met that and now exceeded it. Obviously, the cash on cash returns and the overall profitability and strength of the franchisee is better today than it was pre-COVID. At IPO, it's kind of an unfair measurement given studios were still recovering as restrictions lifted and members returned back to the studios. But overall today, you would argue franchisees are much healthier, more profitable than they have been ever in the company's history.

And has their access to capital been impacted at all given what's going on in the banking sector?

No, actually, I partner with our lender on a daily basis reviewing incoming franchisees getting loans. The access to capital has not slowed. There is a healthy backlog of franchisees that are in the process of getting financing and or opening studios. As Anthony mentioned, the rate has gone up, you know, a quarter to a half percent. I talked to the lender this morning and just wanted to get feedback on anything they're seeing related to the most current interest rate hike. and franchisees are not really balking at the fact that interest rates have gone up. They understand it, but it's not a material portion to them, given the investment is fairly low. So the financing is there. They're getting it, and studios will continue to get open. It's not becoming a headwind for the business.

Okay. Just one last one for you. If I look at your revenue and EBITDA guidance, it looks like you're applying the low end to that 35% to 39% EBITDA margin spectrum. What would have to happen for you to get to the high end of that range, say 39% margins this year?

Yeah, I mean, there's two levers, right? High margin flow through on revenue and SG&A costs, right? So controlling OpEx, you know, we raised guidance in this quarter purely on the fact that we just saw an acceleration of same store sales in Q1, very strong Q1. We take a conservative approach given the macro and uncertainty as you look out into the future quarters. So when we set guidance originally, but when Q1 came in with an acceleration of system-wide sales, same-store sales, the additional royalties it provided in the quarter, that's high margin flow-through for us. So as we continue to see that kind of performance, that will give us the ability to push that margin expansion higher. And obviously focusing on OPEX is key for us. We mentioned bringing in Andrew Hagopian, who's focused on legal. So from that perspective, OPEX, we are laser focused on that and trying to cut costs wherever we can.

Great. Thank you.

Our next question is from James Hardman with Citi Group. Please proceed with your question.

Hi, this is Sean Rooney on for James Hardiman. Thanks for taking my question. So a question on the SG&A part. Excluding equity-based comp, it looks like SG&A as a percent of revenue came down about 70 basis points sequentially. I believe on the last call, John spoke about an SG&A ramp down to around 35% to 36% for the year and low 30s in the second half. Is that still a fair target and any color on the potential risks to that ramp down?

Yeah, so that's still the way we're seeing it. You know, from our perspective, we were going to be in the high 30s in the first half and then trend down into the low 30s, excluding stock-based comp in the second half. So we're still seeing that trend continue. So the business will leverage. We don't need to add a lot of SG&A there. You know, for us, we're more focused on removing SG&A versus adding SG&A. So the business should leverage into the low 30%, excluding stock-based comp in the second half.

Okay, and are company-owned studios still a headwind there, or what's the status on that and transferring those to franchisees?

Yeah, there are costs in Q1 related to the company-owned studios. You know, we've taken a more investable approach related to company-owned studios and focusing on, you know, the tailwinds we're having around system-wide sales growth and AUV growth. we're really focused on getting these corporate studios to the desired AUV level while really focusing on getting the OpEx efficient and from a four-wall perspective the way they're designed to be. And then when we get them to a healthy point, that's when we're actually going out and trying to re-franchise them. The intent there is to make sure that when they do launch, they're successful and we don't have challenges with them going forward. So in Q1, you know, there was higher SG&A related to company-owned studios. you could expect that to decrease in Q2, Q3, and Q4 and get back to what we believe is a more normal run rate from where we are today.

All right.

Thanks a lot for the color. Our next question is from Warren Chang with Evercore. Please proceed with your question.

Hey. Good afternoon, guys. Great quarter. I just had one more follow-up on this franchisee health question and exposure to macro. So obviously you kept the new unit guidance unchanged there. You did a really good job of articulating some of the differences between your franchisees and planets. And I think the AUV going in the right direction for you has clearly been an insulating factor for your cash flows and your unit economics. But if we had to sort of just rank all of the macro factors that have the potential, if macro conditions were to worsen, have the potential to be an impact for your franchisees? Is there a way to, uh, to rank or what would be at the top of that list?

Yeah, I think if you kind of look at it, it maybe might cause some hesitancy related to franchise sales. We haven't seen that yet, but you know, I think if consumers get scared, would people be less willing to want to invest a lot upfront and a more longer term, um, you know, franchise. I think that's, Possibly. We haven't seen that yet. In regards to, again, the investment around equipment or getting a new studio open, most people have already paid for their license up front. They're committed. They know they have a build-out schedule that they have to operate to. When it comes to the up-front investment, not much has changed there. Our franchisees continue to open their second and third units per schedule. Haven't seen any any impact related to future development around openings. I'll say as of yet, we haven't seen any signals that it's coming, but that would probably be the one that comes to the top of my mind.

Gotcha. Thanks, John. And a follow-up question on a different topic. The 1-2 AUV, 542,000, that's a pretty big step up if we look at where you stand with pre-COVID levels compared to what you've been doing. And if I overlay sort of the historical seasonality onto that, you know, just progress that one true number, let's say flat, flat, and then give a bump for holiday. I'm getting to some upside to the system-wide sales guidance. Just curious if there's anything worth noting about the seasonality this year or if that's just some conservatism baked in.

Yeah, I mean, when you look at the Q1, same store sales going from, you know, Q4 at 17 to Q1 at 20. there obviously was a real strong surge of new members and growth at that level. And obviously that impacts AUV and drove it up quite a bit. You know, historically when you look at like last year, the AUV growth, you know, was still there from Q1 to Q2. And, you know, we expect to see similar patterns, you know, this year, even though Q1 was really strong. In response to upside in same-store sales compared to guidance, Yeah, again, as I've mentioned, you know, we always take a more conservative approach to our guidance. You know, we don't want to over, you know, over promise and under deliver. You know, we have some hesitancy for our conservatism built into, you know, our guidance around the outer or second half of this year, given a lot of the headline, a lot of the macros. You know, so we'll continue to perform, you know, and in Q2, if we do see favorable outcomes as we did in Q1, you know, we'll adjust guidance then. But at this point, we did take up guidance by the upside we realized in Q1 and what we're seeing as we, you know, to date in Q2 and made that reflective in our guidance. So conservative is still a yes, but we're doing that knowing that, you know, we can't predict the future and the second half could face headwinds, although we haven't seen it yet.

Understood. Thanks, John. Thanks, Anthony. Good luck.

Our next question is from Ryan Myers with Lake Street Capital Markets. Please proceed with your question.

Hey, guys. Thanks for taking my question. First one for me, just curious if you could comment on what sort of demand you've seen here domestically for BFT?

I mean, demand has been in line with our other brands, right, with Rumble and those types of things. The first 18 to 24 months is primarily selling of the territories And then, you know, called six to 12 months into that, you're, you know, beginning to see openings. So right now we're in the selling and lease signing kind of process of that and construction. And then you'll, you know, you'll start to see openings in the first couple dozen openings of BFT domestically this year. And then it'll continue to increase, of course, in 24 and 25.

BST was our third highest-selling brand in the first quarter from a license perspective, and it's tied for fourth with Rumble as far as openings in the first quarter.

Got it. That's helpful. And I was wondering if you could just quantify what the B2B contribution was during the quarter, as obviously this business has gotten larger and larger over the past couple of quarters. I think it would be helpful to kind of understand what the contribution was.

Yeah, so the way to kind of look at it, I've got a lot of questions on the other service revenue over the last couple months. The B2B will be about 25% of the revenue of the other service revenue. So if you just took other service revenue for the quarter, you know, B2B represented around 25% of that revenue.

Got it. We expect that to hold.

Yeah, and we expect that to hold consistent, you know, over time.

Sure, got it.

Thank you. Our next question is from Jonathan Komp with Bayer. Please proceed with your question.

Yeah, hi, thanks. Good afternoon. I just want to maybe follow up on the strength in the same-store sales you're seeing and just curious if you're willing to share any observations when you look across the concepts or across regions or any trends that stand out to you.

Yeah, so, I mean, in regards to same-store sales, when you look at Q1 compared to Q4, virtually 100% of the growth in system-wide sales came from volume. So from a same-store sales perspective, the growth that you saw, the 20%, was really driven by new members coming into the system. When you look at, you know, even at 36 months, older studios, those studios that have been open for three years plus, they still count at 21%, which is, again, new members coming into existing locations. As Anthony mentioned, brand-aware, negative CAC. You look regionally, there's not much differentiation when you look across the U.S. from what same-store sales. You are seeing really strong same-store sales in Club Pilates. Obviously, it's our largest brand, but it has done really well. I think if you look at all the other brands except Club Pilates, you're still seeing mid-to-high teens in regards to how their same-store sales is performing. So in my opinion, when you look back pre-COVID, most of our brands comped at 8% on average per quarter. We're twice that even in the brands that are in the mid-to-high teens. So there's no regional focus. There is a little bit of brand focus related to Club Pilates. But when you look across the other brands, you're still seeing really strong comps.

Yeah, great. Thanks for sharing that color. Maybe just one follow-up then. I want to ask about the health of the license pipeline that you have. And I've noticed the last couple of years you've cleaned up some of the legacy licenses. So could you maybe just share any perspective on what drove some of the past terminations and sort of the health of the strong pipeline that you have of licenses sold?

Yeah, I mean, obviously during COVID, that was not a good time to terminate franchisees for not opening. So we took a big chunk of time off from doing that. But the reality is contractually, the franchisees have six months to get their store open. Obviously, if it's six months and they're painting their walls and about to open in four weeks, we're not going to terminate them. But if they're sitting on the couch and aren't making moves to continue with their development and somebody wants that territory, then we're going to terminate it and move on. It's really kind of whatever path is the most efficient to getting stores open because we're in the opening store business, not in the selling store business. We always have a backlog of of sold stores that are available for, you know, for us to develop. You know, said before in past quarters, you know, since we're at 10 brands, if we don't acquire an 11th brand, we're not going to oversell these brands regardless of how great they are, like a Club Pilates or Rumble or BFT or, you know, kind of any of our brands. You know, we're going to sell consistent with, you know, our scientific demographic approach, which tells us, you know, what stores go where so that we can continue to climb AUV like we're seeing for the health of our system, the health of all franchisees. So with 10 brands and not overselling, we have always said that we are going to see, you know, sequential sales of franchises go down. You know, we obviously have a four to five year backlog. And so, you know, we're trying to keep that backlog fresh of people that, want to open and want to develop and are seeing the opportunity. You know, we'll see in Q2 where, you know, we have to refile all the FTDs in Q2. So they're, you know, we're in a blackout period, you know, right now in most of our brands. So, you know, waiting to get, you know, all the different filings and all the different brands. I don't know if you're aware, but you file, you get 33% states with the FDD, and then you have to file 17 independent states. So you're talking about 18 filings times 10 brands. So the permutations there, there's 180 filings out there at the exponential level. And so as those clearances come back in per brand, per state, then we're able to, you know, start to go service the franchise sales part again. So, but, you know, we're still outselling our opening pace And so, you know, if we continue to sell 500, 600, 700 a year while we're opening 500, 600 a year, then we're kind of outselling our opening pace and our backlog of four to five years isn't even being burned. It's still staying together.

That's great. That makes sense. Thank you.

Yep. Our next question is from J.P. Wallum with Roth Capital Partners. Please proceed with your question.

Hi, everyone. Thanks for taking the question. I just want to focus on the increased engagement and maybe look at it kind of from a different angle, but I'm just curious if, you know, via the lens of the consumer, if the increased engagement has maybe caused any frictions in terms of not being able to get classes at peak hours or also whether, you know, you're seeing more usage during the day, and that gives you guys confidence that maybe there's even further room to grow AUVs. If there's any kind of trends you can point out, that would be great.

Yeah, I can take that one. You know, there may be the one-off consumer that can only go on, you know, Tuesdays at 5 o'clock and, you know, Thursdays at 5 o'clock, something like that. But our students are open seven days a week. We offer classes all over the map. And as we're starting to bundle in XPath and XPlus and give them different options so that they can take their fitness anywhere, anytime, they're able to take classes both virtually or on demand and in our studios. So that alleviates some of the pressure. So the truth of the matter is that if that backlog happens and what ends up happening at the franchise level is that you have some natural turn from those customers and we backfill with a more expensive member who is willing to either put up with the scheduling or has different scheduling demands. We are also putting together various challenges and other ways that members can engage with the studio and portfolio studios. So we're always looking at ways to engage and make sure that we don't see that turn, but if we do, then there's a member that's sitting right behind them to jump back in.

Great. That makes sense. And then just maybe switching to the partnership with LG TV. There's been a lot of headlines around Mirror and its performance under Lululemon. I'm just kind of curious, you know, maybe all of that doesn't impact kind of the benefits you receive from Mirror, but just maybe help me think through the partnership with LG TV, given what's going on at Mirror.

Yeah, so with all of our partnerships, you know, we really have three business models, and each model, you know, is kind of different depending on what the partner and EXO mutually agree upon. But, you know, in that case, we've already started to see thousands and thousands of downloads of the application. It's too early to see how those downloads will then convert into sustained subscribers. But we are seeing a really great take there with LG. On the Mirror front, things are performing very well. We just got KPIs over the last couple of days on how the brands are performing, and now members are consuming our brands. So from a content standpoint, things are good for us with Mirror in conversations of looking to distribute even more content to the Mirror platform. So regardless of where Mirror ends up, our content will likely go with it or will go with it, and things are looking good there. you know, in terms of developing additional content. So I don't think that conversation really affects Expo.

Okay, great. Thank you for your time. Best of luck.

Thank you.

We've reached the end of the question and answer session. I would now like to turn the call back over to Anthony Geisler, CEO, for closing comments.

Thanks again for joining today's earnings column for your continued support. I'd also like to acknowledge our franchisees and entire exponential fitness team for their strong operational execution in this first quarter. We look forward to seeing many of you at our upcoming marketing events this May and June, and we'll speak to you again in August on our second quarter call.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.