Xponential Fitness, Inc.

Good afternoon, ladies and gentlemen, and welcome to Exponential Fitness, Inc. First Quarter 2025 Earnings Call. At this time, note that all lines are in the listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for an operator. Also note that this call is being recorded on Thursday, May 8, 2025. And I would like to turn the conference over to Patricia Neer, From Addo Investor Relations, please go ahead.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' first quarter 2025 financial results. I am joined by Mark King, Chief Executive Officer, 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 conference 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 GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was 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. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting methods since IPO, we present all KPIs on a fully pro forma basis, meaning for full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended March 31st, 2025, this includes BFT, Club Pilates, Cycle Bar, Lindora, Pure Bar, Rumble, Stretch Lab, and Yoga 6. I will now turn the call over to Mark King, CEO of Exponential Fitness.

Thanks, Patricia, and good afternoon to everyone. The business performed as expected this quarter. We demonstrated solid KPIs. completed our updated financing agreement, and filed our franchise disclosure documents, all while continuing to focus on optimizing operations, franchisee health, and setting up the company for long-term success. In the first quarter, North American system-wide sales of $467 million were up 18% year over year. North America quarterly run rate Average unit volumes of $659,000 were up 8% year-over-year. Total members stood at 865,000 at quarter end, up 12% year-over-year. And same-store sales were up 4%. Our core focus remains optimizing our operations. As part of this effort, last month we welcomed our new Chief Marketing Officer, Luis Ocasian. Louise brings 25 years of experience in marketing and business operations, having previously served as president, North America, and global CMO for Instant Brands, where she led and executed marketing commercialization strategies. Prior to that, she held leadership roles in the toy and entertainment industries at companies such as Warner Brothers, Spin Master, and Mattel. At Exponential, Luis hit the ground running. One of the first areas she is focusing on is a review of media strategies to ensure marketing funds are managed efficiently. We have also brought on Fabian Lopez. Fabian has been supporting us as interim chief human resource officer since earlier this year, and we are thrilled to welcome her into the role full time. The CHRO function is at the heart of reorganizing the company. Fabian brings 25 years of leadership experience across multiple industries and organizations, from startups to Fortune 100 companies. With exposure to public company environments and franchising, she has a proven track record in organizational transformation, strategic human resources, talent strategy, and scaling HR infrastructure to support rapid growth. In addition to these two senior management appointments, we have undertaken a comprehensive reorganization of our resources and remain highly focused on strengthening our operations so that we can more effectively serve our franchisees. Notably, we are launching a new field operations function with plans to have 12 field managers in place across North America by quarter end. This is the first for the company, marking a significant development in operational support. These individuals will work closely with our franchisees to drive best practices across studios and support new studios in launching successfully. These field roles are reallocated rather than new hires, meaning that for every employee in the field, we are eliminating a headcount at HQ. Turning to franchise sales and new studio openings, we are making good progress on the Franchise Disclosure Documents, or FDDs. We filed all FDDs except Lindora at the end of the first quarter, and we have had them available in all 36 states that don't require registration. We are also actively selling in the majority of the 14 registration states under FDD registration or exemption. On the international front, we are continuing to support our established and growing master franchisee base. We now have boots on the ground in London with plans to have physical presence in Asia later this year. Some of the international markets where we're seeing particular success include Spain, Portugal, France, Japan, and Australia. Exponential is very focused on providing a high level of support to master franchisees and ensuring that we have the right relationships in place for long-term international success. In summary, we are making significant efforts to optimize operations, and we are executing with urgency to better support and serve franchisees. While we acknowledge there's more work ahead, We're confident that we have the right strategy, team, and infrastructure in place to adequately support our franchisees and drive long-term sustainable growth. We look forward to sharing more about our key initiatives and operational enhancements at our upcoming Analyst and Investor Day on May 29th. With that, I'll turn it over to John.

Thanks, Mark, and thank you to everyone for joining the call. Let's now turn to an overview of our first quarter results. We ended the quarter with 3,298 global open studios, opening 116 gross new studios during Q1, with 93 in North America and 23 internationally. There were 51 global studio closures in the first quarter, or about 1.5%, representing an annualized closure rate of 6%. The elevated closures in the period were mostly in Cycle Bar and Stress Lab. We sold 21 licenses during Q1, which were all international and largely concentrated in Club Pilates. During Q1, there were no North America license sales while we completed the 2025 annual renewal of our franchise disclosure documents. Our base of licenses sold and contractually obligated to open is over 1,500 studios in North America, and we also have over 1,000 international master franchise obligations. These licenses will provide a foundation for future new studio openings. However, as noted last quarter, we anticipate that approximately one-third of our global licenses contractually obligated to open are lagging over 12 months behind the applicable development schedule. As a result, we have begun an active campaign to give these franchisees an opportunity to open the lagging studios, or alternatively, these licenses will be terminated. The termination of these licenses will result in a recognition of additional EBITDA as they occur, which is consistent with our historical practices. There is no cash flow associated with the termination of these licenses as we receive payment upfront at the time of sale. Under U.S. GAAP, we are simply required to accelerate the recognition of the license fee revenue and associated commissions that we would normally amortize over the term of the license, typically 10 years. First quarter North America system-wide sales of 467 million were up 18% year-over-year, with growth driven primarily by the 4% same-store sales increase within our existing base of open studios, coupled with growth from our net new studio openings. North America run rate average unit volumes of 659,000 in the first quarter increased 8% from 609,000 in the prior year period. The increase in AUV was largely driven by a higher number of actively paying members, higher pricing for new members, and the continued favorable trend of proportionate studio openings coming from our scale brands, which make up 95% of the system-wide sales and 94% of our open studios in North America. On a consolidated basis, revenue for the quarter was 76.9 million, down 4% from 79.7 million in the prior year period. which included $1.4 million in revenue from company-owned studios, 80% of revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues, given these materially occur upfront before the studio opens. Turning to the components that make up revenue, franchise revenue for the quarter was $43.9 million, up 5% year-over-year, This growth was primarily driven by an increase in royalty revenue as system-wide sales were supported by year-over-year memberships and visits, increasing 12% and 14% respectively. In the period, we had offsetting lower revenue recognized from franchise license sales as we temporarily paused our normal maintenance on terminating franchise licenses, which accelerates revenue recognition while we organized the activation campaign previously mentioned. Acquirement revenue was $11.1 million, declining by 20% year-over-year. This decrease was primarily the result of a 22% year-over-year lower volume of North American installations in the period compared to the same period prior year. Merchandise revenue of $6.3 million was down 25% year-over-year. The decrease year-over-year was due to lower sales volumes, vendor rebates, and price discounts as the company focused on reducing inventory levels. We continue to explore alternatives for our retail operations that will result in greater profitability for exponential, improved service levels for our franchisees, higher frequency of inventory turns, and merchandise offerings that more closely align with our members' interests. Given the current discussions on tariff impacts, I wanted to point out that we typically apply a cost-plus markup in the purchasing, setting prices, and reselling of equipment and merchandise. Directionally, we do believe there will be some higher costs in the procurement process, but as designed in the way we set pricing, we believe we can largely mitigate the impact on margin percentages. Franchise marketing fund revenue of $9.3 million was up 18% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales, brand access partnerships, company-owned studios, XPath and XPlus, among other items, was $6.4 million, down 19% from the prior year period, The decline in the period was primarily due to lower brand access fee revenues and from lower package and membership revenues due to the company shifting its strategy in 2023 to no longer operate company-owned studios. Turning to our operating expenses for the quarter, costs of product revenue were $12 million, down 18% year over year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period. Merchandise inventory levels at quarter end remain in line with the prior year end, which we believe is now a more manageable position to turn inventory over more frequently. Costs of franchise and service revenue were $4.1 million, down 19% year over year. The decrease in franchise sales commission was largely due to the temporary pause of franchise license terminations and associated commission expense acceleration while we organized the previously mentioned activation campaigns. Selling, general, and administrative expenses of $45.5 million were 24% higher year over year. The increase in SG&A was primarily driven by an increase in legal, judgment, and settlements. In the period, we recorded an incremental accrual of $15 million in addition to the $10 million previously accrued in Q4 of 2024 for a total of $25 million related to the potential settlement of a threatened franchise class action. subject to entry into a definitive settlement agreement. After this amount will be paid upon court approval and the remaining half will be paid out in even increments annually from 2026 through 2028. We currently expect at least 5 million of the settlement to be recovered from our professional insurance policies. At present, we have entered into lease settlement agreements of approximately 30.7 million and have paid approximately 30.5 million through the first quarter. As of March 31, 2025, we have approximately $14.5 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025. Moving on to depreciation and amortization, expense was $3 million, down 33% compared to the prior year period. Marketing fund expenses were $9.4 million, up 44% year-over-year, driven by higher system-wide sales and the associated marketing fund revenue contributions. In the period, we did accelerate approximately $1 million in marketing expenditure that was planned in future periods to drive increased leads and ensure that the year has gotten off to a good start. As the number of studios and system-wide sales grows, it is expected that our marketing fund spend will increase. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expense over time. Acquisition and transaction credit was $8.6 million compared to an expense of $4.5 million in the prior year period. As I have noted on prior earnings calls, this includes the contingent consideration activity, which is related to the rumble acquisition earn-out and is driven by the share price at quarter end. We mark to market the earn-out each quarter and adjust our accruals accordingly. We recorded net loss of $2.7 million in the first quarter or a loss of $0.10 per basic share compared to a net loss of $3.8 million or a net loss of $0.29 per basic share in the prior year period. The change in net loss was the result of $1.2 million of lower profitability, $15.5 million increase in litigation expenses, a $1.9 million increase in impairment of goodwill and other assets, a $0.9 million increase in transformation initiative costs, and a $0.7 million increase in other miscellaneous costs, offset by a $13.2 million decrease in acquisition and transaction expense, which includes non-cash contingent consideration primarily related to the Rumble acquisition, a $7.3 million decrease in restructuring and related charges, and a $0.9 million decrease in equity-based compensation and related taxes. 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 and loss to adjusted net income and loss is provided in our earnings press release. Adjusted net loss for the quarter was $7.7 million, which excludes $8.6 million in acquisition and transaction income, a $1.1 million expense related to the remeasurement of the company's tax receivable agreement, $1.9 million related to the impairment of Goodwill and other non-current assets, $0.1 million loss on brand divestitures and wind-down, $0.6 million of restructuring and related charges. This results in an adjusted net loss of $0.20 per basic share on a share count of 33.9 million shares of Class A common stock. Adjusted EBITDA was $27.3 million in the first quarter, down 9% compared to $29.9 million in the prior year period due to the accelerated marketing fund spend that was pulled into the quarter. Adjusted EBITDA margin was 35.5% in the first quarter, down from 37.5% in the prior year period. Turning to the balance sheet. As of March 31, 2025, cash, cash equivalents, and restricted cash were $42.6 million, up from $27.2 million as of March 31, 2024. For the quarter, net cash provided by operating activities was $5.8 million, which includes $0.6 million in lease settlements. Net cash used in investing activities was $1 million, with $0.9 million for purchases of property and equipment and intangible assets, and $0.1 million for issued notes receivable. The cash generated from financing activities was $5 million, which included a $10 million borrowing on long-term debt, offset primarily by $1.5 million in a payment on long-term debt and debt issuance costs, $1.8 million payment on preferred stock dividends, $0.9 million related to the share settlement of restricted stock units, $0.5 million in payments of contingent consideration for the Lindor acquisition, and $0.3 million payment for distribution to pre-IPO LLC members. Total long-term debt was $379.1 million as of March 31, 2025, compared to $331.4 million as of March 31, 2024. The increase in long-term debt is primarily due to the company drawing $10 million in additional debt in the first quarter of 2025 for general working capital purposes and $25 million in additional debt in the third quarter of 2024 to address the lease termination payments on previously owned studios and for general working capital purposes. Let's now discuss our outlook for 2025. Based on current business conditions and our expectations as of the date of this call, we are lowering guidance on global net new studio openings and reiterating guidance for system-wide sales, total revenue, and adjusted EBITDA for the current year as follows. We project North America system-wide sales to range from 1.935 billion to 1.955 billion, representing a 13% increase at the midpoint from the prior year. We expect 2025 global net new studio openings, which is net of closures, to be in the range of 160 to 180, representing a 29% decrease at the midpoint from the prior year. We now expect the number of closures to be 6% to 8% of the global system this year as a percentage of the total open studios, with a longer focus to reduce global closures to the low to mid single digits as a percentage of the total global system. Total 2025 revenue is expected to be between $315 million to $325 million, representing no change year over year at the midpoint of our guided range. Adjusted EBITDA is expected to range from $120 million to $125 million, representing a 5% year over year increase at the midpoint of our guided range. This range translates into roughly 38% adjusted EBITDA margin at the midpoint. We expect total SG&A to range from $145 to $155 million. When further excluding the one-time lease restructuring charges and regulatory legal defense expenses, we are expecting SG&A of $115 to $120 million and a range of $99 to $104 million when further excluding stock-based costs. In terms of capital expenditures, we anticipate approximately $10 million to $12 million for the year, or approximately 3% of revenue at the midpoint. 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 $34.8 million and $1.9 million in quarterly cash dividends related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the end of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website. We anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business. We expect that our anticipated interest expense in 2025 will be approximately $49 million, tax expenses to be approximately $10 million, including the cash usage for tax receivable agreement and tax distributions for pre-IPO LLC members, and approximately $8 million in cash dividends related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of 37%. This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for questions. Operator?

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. If using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. First question will be from Randy Connick at Jefferies. Please go ahead.

Yeah, thanks for taking my questions. I guess, Mark, we heard a lot, and John, we've heard a lot during the call, a lot of numbers, but can we just kind of boil it all down to just broad strokes of what we're trying to get done here over the next few months before the analyst day coming up, actually? What do you want us to kind of take away from all these actions that are occurring? Are we basically at a point where the closure rate is starting to subside? The openings are going to start to stabilize. You know, you're talking about more efficiency in the headquarters. I just want to get a real kind of, if we had to kind of just boil this down without the numbers, just kind of the big overarching themes coming out of this quarter and into the next few quarters that you're going to be focused on. That would be super helpful. Thanks.

Hey, Randy. This is Mark. I'll take the first part of it. Maybe John can follow up. I think what we're in the middle of, Randy, is really a transformation of our business from a very aggressive sales-focused company to one that's building a foundation of efficiency and effectiveness, starting from the way we sell licenses to the way we help the choosing of franchisees to the opening to of studios, putting people out in the field, these ops people, to help franchisees get open, get started, audit their operations as we go forward. So I think it's building... the foundation for long-term sustainable growth. I think that's what we're trying to get accomplished here, and it's affecting everything that we do. We've taken more time on the FDD, so we were out of the market for quite a few months, which will affect license sales. It'll affect openings the back half of the year because we were out of circulation for four or five months in license sales. But I think all of these steps are necessary for us to prepare the company to be a very solid growing company as we go forward.

Yeah. And just to add to that, Randy, I think what you're seeing in 2025 is this going to be more of a stabilization of the business. You know, when you look at the guide on revenue and EBITDA, it's relatively flat to 2024. But the one thing that as we go through this transformation, you're not seeing a degradation in the overall financial health of the business. It's just more of a stabilization. So as some of these things Mark has spoke about, and as we start to improve the operation of the overall business, but also the health of the franchisee, that's when the company itself will return to growth. So 25 is more of a stabilization, and we'll elaborate some of the more detailed information around that at analyst day, which will eventually lead to how we look at 26 and 27 beyond where the company returns to growth. But the key walkaway for 2025 is the business is healthy, we are executing we know we continue to open up studios and you know, the franchisee health is, you know, should only get better with some of the things that we're trying to do you know, here in 25.

Thanks. And then just on the revised openings for the year, how many of those are club Pilates? And then maybe Mark, when you've kind of started to continue to get a set different concepts in the portfolio, you know, maybe kind of, is there a way to kind of get some color on where you have, obviously beyond club wise, where you have probably the most conviction and confidence in, you know, where are the, where's the other highest level of confidence and conviction thus far that you've kind of sorted through when you're looking at the different concepts? Thanks.

Well, I'll take the second part of that question first, Randy. Uh, We're very bullish on Yoga 6. We've had a really good quarter on Yoga 6 on same-store sales. We have more interest in openings, so we feel really good about Yoga 6. Pure Bar also has had really great tailwinds in Q1, same-store sales, memberships, visits, all the things that would indicate the health of those brands. Stretch Lab is struggling. That's not new. We've talked about that the last couple of quarters. We have all hands on deck with Stretch Lab. We believe very much in the concept. We're looking at everything from the size of the studio. We're working with franchisees hand in hand to look at the size of the studios. How do we train people? flexologists more rapidly at lower costs, looking at a pricing strategy, looking at the labor model. So we really like Stretch Lab because the consumer feedback is so good, but we need to fix that model.

And to follow up on the openings, you know, Club Pilates will be over half of the openings this year. It will also reflect most of the license sales as well, over half the license sales. And then, as we've talked about on previous calls, you'll see good growth in – Stress Lab, BodyFit Training, and then Yoga 6. So those are kind of the four core brands that are really contributing to the increased new studio or gross new studio openings. And largely where you'll see the license sales come from as well.

Super helpful. Thanks, guys.

Thank you. Next question will be from Joe Altabella at Raymond James. Please go ahead.

Thanks. Hey, guys. Good afternoon. I guess the first question on the closures, I think, John, you mentioned you're expecting 6% to 8% closure rate this year. If I use the midpoint, I think that's around 225 closures versus 165, which I think was the midpoint of your prior guidance. So where's the additional closures coming from? Which brands are they coming from?

Yeah, the closures that we saw in Q1 were largely in Cyclebar and Stretchlab. You know, and we look at kind of a portfolio. That's probably where you'll still see some of the concentration. And I think BFT will probably be the third spot, and that's on the international front. So the Q1 kind of distribution will largely look like the full year based off how we're seeing it today.

All right. And just to follow up on that, the license sales you mentioned, I think it was 21 in the quarter. How do we model the ramp this year for that metric?

I think you'll get to, you know, based off of, I mean, license sales are always based off of, like, what you could sell, right? But I think, you know, we'll target probably about 100 a quarter, you know, going forward. So as we get into market and start being able to sell across all the states domestically, plus you're international, you're probably looking at about 100 license sales a quarter.

Perfect. Thank you.

Yeah. Joe just added that the distribution will obviously have a pretty high concentration in Club Pilates, both domestically and internationally.

Thank you. Next question will be from John Heinbockel at Guggenheim. Please go ahead.

So, Mark, I know the 12 field ops, right, so they're going to work, I think, across multiple brands. You know, maybe, and obviously I'm not sure they have to spend a lot of time on Pilates, but how do you envision them spending their time impacting the business? And then I guess is there something to be said for, you know, skinning down the portfolio further? right, so that they're not diluted, or the reference are not diluted as much?

Yeah, thanks for the question, John. I think they're going to have a huge impact. One, it was surprising that we didn't have field ops people, and I understand that we had them in the past, but anyway, when I came, we didn't have any. I think there's multiple things they're going to help franchisees with. Specifically, I think they will help new franchisees as they prepare for to open their studios, the presale, training the staff, really helping these franchisees, new franchisees, understand what it takes to operate a successful studio. So I think that's number one. Number two, then, is as they go forward, those first six months to a year, what are really the watchouts? And we're also going to have the field ops visit probably once a quarter. So it will be a really active group. So I think they're going to really help them get started on a positive note. Going forward, I think we really need to audit every one of our studios to make sure they're following the playbooks. If they're not, why aren't they? Can we help them? So it's not only training them, it's coaching them, and it's also auditing the studios so that we make sure that they're following the playbooks.

Okay. And then when you think about the thousand that are the thousand studios that are sort of in arrears, so to speak, right. They're, they're delayed. I mean, how do you assess how many of those are viable? Right. And I would assume very few of those are club Pilates, but what, what is the process, right. For, you know, getting in touch with franchisees, you know, getting a resolution, terminating them, you know, re-franchising seems like that, you know, that would, you know, kind of a laborious process that might take a while.

Yeah, I'll take that one. You know, we hired Tim, our new COO, and that's why we kind of took a pause on terminating licenses in the first quarter, because he wanted to really evaluate and go through that laborious kind of process to understand what does that backlog look like. You know, the first step is obviously going to be assessing who's behind and why. And then two, there's going to be an active campaign to start communicating with these franchisees and finding out what is the hurdle and the reason why they're not moving forward. I do believe that some of these will be activated. Some of these franchisees may simply just not be moving forward because in Club Pilates, these things require work. You just don't open them up and they run themselves. So if they bought three licenses and they got two and they're financially doing well and they're choosing not to open the third one because there's no real rush, they're making enough money, like that's one end of the spectrum. And then there's the other end of the spectrum where they opened up one and they're not profitable and hence they don't want to open up their second or third. So there's varying reasons as to why these franchisees haven't moved forward. And Tim will need to go through that portfolio of delinquent franchisee licenses and determine what we need to do. But the one thing that we need to do, all good franchise systems should do is make sure that the snow is current that we are actively maintaining it because the last thing we want to do is tie up dirt that could be productive with a franchisee if indeed we can get one open if the existing franchisee who owns the space doesn't want to. So it's going to take some time. It is a process that we're going through. I probably could elaborate more on that at the analyst day and the progress that we're making. But right now we're taking the time to make sure we do it strategically and think about it the right way and create a process that we can continually maintain our backlog every quarter. Now, to that point, we have historically and routinely gone through and done terminations in our historical numbers as well as practices, so we just chose to take a pause in Q1 while Tim kind of got his feet on the ground and stepped into his role.

Thank you.

Thank you. Next question will be from Chris O'Call at Stifel. Please go ahead.

Yeah, thanks. Mark, I had a question on Stretch Lab, and I was just curious if you think they've been underinvesting in marketing to kind of generate leads and whether you think franchisees could afford to increase their marketing budget or if the company might need to support them.

Yeah, thanks, Chris. Anyway, hello, Chris. How are you? It's a really good question, and we've done several things in Q1 to help the franchisees. We've actually doubled their local marketing spend in one of the months. I think it was March to help drive leads. We are considering investing more money of our own as we go forward. We also have some reserve unspent marketing funds in Stretch Lab that we will deploy this year to help them. And I also think that the addition of our new CMO, who's really looking at how we're spending money locally and the agencies that we're using to make sure that we're maximizing the amount of that local spend. So all of that, Chris, is under review. And I think we're finding some low-hanging fruit that I think will impact the business but probably won't be until next the second half of the year. But I think there is some light at the end of the tunnel in terms of starting to get Stretch Lab going in the right direction.

It was interesting you mentioned that you're considering a different pricing model for the brand. And I was just wondering if you're considering like a monthly membership model where members maybe receive a discount per session. And I'm kind of thinking like a massage envy type model. Is that something you might consider for the brand?

Chris, we're considering a lot of things. That is definitely one of them. We're also considering a membership fee where there's other activities inside that you generate revenue through the membership, and they can stop in for a five-minute stretch, ten-minute stretch, some other things that we are looking at adding to the studio, but definitely looking at a monthly membership.

Okay. That's great. Thanks, guys.

Thanks, Chris.

Next question will be from Jonathan Kump at Baird. Please go ahead.

Yeah, hi. Good afternoon. Can I just follow up on the change in the unit outlook for the year? Can you maybe just highlight if there's some factors that are impacting the ability to forecast on a near-term basis? Or I'm just curious what's driving the change in outlook there.

It's two factors. One, it's not having license sales in Q4 and Q1 has created a little bit of a bottleneck as you get towards the end of the year because there was some expectation to get more units open in the fourth quarter that you may have sold that license in Q4 of 2024 or in Q1 of 2025. So not having those license sales, that does impact the growth funnel in the short term. So as we've kind of gotten through Q1 and looked at, you know, who and the movement and who's active and not active, we wanted to make an adjustment for that. And then we did see slightly higher closures in the first quarter than we had anticipated. So that being said, we made an adjustment for that. So, you know, over time, I think as some of the, you know, more the unprofitable franchisees that, you know, exist in the portfolios, those kind of fall out, you should see a deceleration in closures. But, you know, the guide is, A change in this quarter was simply just said, listen, let's just be a little bit more conservative, take down the guide based off of these two factors, one being the higher closures in Q1 and then just the ability to get some of these franchisees open by the end of the year. We just didn't want to put pressure on the system and force studios to get open faster than they're ready to.

And when you think about the visibility today to the new outlook, the 160 to 180 on a net basis, any way to just quantify your confidence or your visibility to that level today?

Pretty good. I think the confidence – I mean, you'll see the way the cadence is going to be, it's going to be about 50-50. About 50% of the gross net openings will be in the first half and 50 in the second half. You know, we are looking at – at it on a brand by brand basis and on a studio by studio basis, assessing financial performance and health and really trying to assess where we think we could, um, you know, help franchisees out and, and, and save them, I guess is the right way to put it. And where are the ones where it's probably not likely that there'll be able to persist. So confidence, I would say is pretty high at, you know, at the one 60 to one 80 guide, you know, I think it's a pretty high level of confidence that that's, that's where we'll come in for the year.

Okay. And then just last one for me, when I'm some, John, a follow-up on the, you know, when you terminate the licenses and recognize for the accounting purposes the revenue and profit from that, is that a material number on an annual basis? Is that something you include in the guidance typically, or would that be sort of out of model upside? Thanks again.

Yeah, I mean, when you look at our historical numbers, it's been in our historical numbers, it's probably a couple million dollars of revenue a quarter typically. and then you get, you know, a million and change or so of EBITDA, you get, for every license, there is revenue and there is an offsetting commission. So there is a net, let's call it roughly 50% margin that flows through. But it has been in our historical numbers. You know, don't have a number for this year because, you know, we're actively going through the backlog. But, you know, typically in our prior quarters, it's been about, you know, a couple million each quarter of revenue and a million or so in EBITDA.

Got it. Okay. Thanks again.

Thank you. Next question will be from Corinne Wolfmeyer at Piper Sandler. Please go ahead.

Thanks. Good afternoon. Thanks for taking the question. First, I'd like to touch on just tariffs and, you know, what kind of exposure from equipment and, you know, pieces of the unit build could be exposed to tariffs and how how impacted could the franchisees be with that? Thank you.

Thanks, Corinne. This is Mark. I'll take that one. So there's really two impacts. We've been looking at tariffs, obviously, as every other company has for the past few weeks. And there's a direct impact, and there's also an indirect impact. So let me take the direct first. First of all, 80% of our revenue is recurring. So the only thing really affected in the direct is about 20% of our revenue, and that's on merch sales. and the equipment sales to the franchisees. Our supply chain team has been working diligently with all of our vendors to minimize the impact We have a pretty good view of the impact. It's minimal at this point. It's very fluid. It's actually getting better week in and week out because we're finding vendors that want to work with us, and they absorb some, and we absorb some, and we'll pass some of that along, as John mentioned in his opening remarks on the cost plus. So I think that'll be minimum impact. Like John said, half the studios that open are Club Pilates, and we're seeing almost no impact on those companies. in terms of affecting those. So we feel really good that we've got our arms around it and have very limited impact both on franchisees and on us. And then in terms of the indirect, You know, what's going to happen in the marketplace with consumers? You know, we've proven to be pretty resilient during COVID, inflation, and other macro challenging times. So, well, again, at this point, we haven't seen any impact of tariffs on memberships or visits or anything. So we're concerned about it enough to be looking at it every day. But at this point, we feel pretty confident we have our arms around it.

Thank you. And I guess kind of building off of that point, any call you can give us on kind of what's baked in at the low end versus the high end of guidance regarding the consumer and then any direction you can give us on how you're thinking about the same store sales cadence over the remainder of the year? Thanks.

Yeah, I'll take that. I mean, as far as the guide, the guide, we haven't seen any shift in like consumer behaviors. I mean, when you look at Q1 and even as of, you know, through April, you know, you've seen the visitation remain strong. The total members have continued to grow. There hasn't been a shift in consumer demand that we've seen. Typically, Q1 is one of your better quarters simply because there's a lot of New Year's resolution. And then you also benefit from the consumer kind of utilizing some of the promotions we do in the fourth quarter. So I haven't seen a drop off in consumer behavior. You know, as we said, you know, previously, you know, we still expect, you know, same store sales to stay in that mid single digit kind of range. So in that three to six, three to five kind of range, you know, throughout the rest of this year. So not expecting any material shifts. And you got to remember the majority of the system-wide sales, over 95% of it is coming from our scaled brands. So Club Pilates, Stretch Lab, you know, Yoga Six, so Pure Bar. So these are brands that, you know, have shown consistent same store sales performance. You know, we continue to open up, you know, more studios in those brands. So, There shouldn't be – we're not expecting to see any shift with the consumer.

Thanks so much.

Thank you. Next question will be from Jeff VanCinder at our – I'm sorry, B. Reilly Securities.

Hello. This is Richard Magnuson in for Jeff VanCinder, and thank you for taking our call. Regarding the franchise disclosure documents, can you remind us what the most important changes are that will affect the franchisees and talk about any feedback response you got so far and then also maybe a good estimate of the pent-up demand during that period?

Richard. Hi, Richard. This is Mark. Yeah, we did a really thorough job at looking at Specifically, the build-out costs. We worked with vendors. We took our time to really do the right job to be as accurate as we can. There was some increases across all the brands in terms of build-out costs, but we feel we're much more realistic. At this point, we haven't really had any negative feedback or pushback from franchisees or people that are opening. So we feel good about the work that we've done. And going forward, I think it will be more accurate for franchisees.

Okay. And then was there a time period that they had to wait for these documents? Was there any estimate of a pent-up demand on the part of the franchisees?

There was in Club Pilates. I mean, obviously, there's any opportunity to purchase one of the Pilates licenses. People will stick around for that. And a lot of the purchases also come from existing franchisees who own an existing studio in one of the brands. So, yes, there was some pent-up demand. We have filed all the FDDs except for Lindora, which we're in the process of doing that, largely in 36 of the states. We're actively selling, and then I think we disclosed in the call on the slide the brands and the states that are still pending review, which ones those are. So the good news is we are now actively selling again and returning to adding more licenses, the backlog. The hope now is that Q2 license sales will translate into new studio openings, probably more likely in the first quarter of 2026.

Thank you.

Thank you. Next question is from JP Willem at Ross Capital Markets. Please go ahead.

Great. Hi, guys. I appreciate you taking my questions. If we could maybe start with the field ops team. I think you said in there that the goal is to have them kind of rolled out by end of the month or end of the quarter. But if you could just kind of help us understand, like, how soon can they really get in and be impactful? And is there sort of an immediate focus as they get out of the gate? Are they immediately going to kind of your lowest 10% performers and you think that you could see upside by the end of the year? How are you thinking about how soon of an impact they can have?

Thanks for the question, JP. So we'll roll out 12 field ops people by the end of the quarter. We have another tranche of 12 towards the end of the third quarter, and then the final group will be out by the end of the year or January. So when we're fully built out, we'll have around 40 field ops people. I think the impact will be immediate, and you're very perceptive. Yes, I think they will start with the franchisees that are struggling the most to go in and really identify why they're struggling, build a plan out with them to get the franchisee and their business headed in the right direction. So I believe once all 40 are out working, it will have immediate impact on the system. But it's going to take us about three quarters to get everyone out in the field. But I think by the time we get through July and August, we're going to see an impact on the franchisees where these 12 initial field ops people will be deployed.

Understood. Appreciate the color. And then if I could kind of a bit of a follow-up to the conversation about license sales. You know, if we step out and sort of take a high-level view, you know, I understand that you guys kind of want to be a bit more selective and make sure you have the right franchisee partners, but can you just kind of talk about how inbound license leads are trending? Is there any changes that you're seeing out there with relationships to brokers or with how people view the relationship to Exponential as a whole? Any kind of high-level themes you're seeing there?

Sure. So first of all, we're not working through the broker network anymore. So we're building out our own team. We do our own marketing through different mediums to find people that are interested in being a franchisee. We work through a lot of the existing franchisees and their recommendations. And we have a very seasoned development team. Eric Simon, who's really brought a lot of expertise and experience to the process. Secondly, we're also looking at, with some of our scale brands, on reaching out to private equity. And there's quite a bit of interest from well-capitalized private equity that are looking at white space and how they would come in, which would really have capital benefits access to capital, access to operating, and really commitment to building out. So we're really looking at the entire process. But right now, we're just getting started, to be honest, and especially since the FDDs just are now out and we're able to sell. But the initial response from the team is, I would say, positive.

Great. Thanks for taking my questions, and best of luck. Thanks. Thank you.

Next question will be from Owen Rickett, Northland Capital Markets. Please go ahead.

Hey, this is Logan on for Owen. Thanks for taking our question. First, how should we think about new studio openings in 2025? What's that pace going forward, and when should we expect a pullback? Thanks.

New studio openings, what you'll see, as I mentioned earlier, it'll be about 50% in the first half and 50% in the second half. it'll be a pretty flat cadence quarter to quarter. In the first quarter this year, we had about 116 openings. Remember, we didn't rush openings in the fourth quarter, even though we got the equipment installed. So you did see a little bit higher kind of rollover from the prior year of openings. But from this point forward, you should see in that 80 to 90 range each quarter as far as openings. So it should be about 50-50 roughly. Again, the concentration is definitely going to be in Club Pilates with over half the openings. and then you'll see Stretch Lab, Yoga 6, and BFT primarily in the international space is where they'll come from.

Got it. That's helpful. Then last one from us. Can you provide some color on your international expansion plans, any updates there, changes in your methodology, or what markets are your top priorities? Thanks.

Well, the methodology really is to find really qualified master franchisees We require them to both own and operate some studios along with selling sub franchise agreements. We're focused on countries that we believe have big upside and opportunity, and right now we've done a really great deal down in Mexico, so we look for that to start to build out this year. We're really seeing some really good momentum in Portugal, Spain, Big interest in France and Germany. We're very, very strong in Australia, and we're really building the Club Pilates out in Japan. But those are the major markets right now.

Thank you.

And at this time, Mr. King, we have no other questions registered. Please proceed, sir.

Thank you again, everyone, for joining today's call. We look forward to seeing many of you at some of the upcoming marketing events, including our Analyst Investor Day, which will be hosted at the New York Stock Exchange later this month.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.