Q3 2021 Xponential Fitness Inc Earnings Call
Greetings and welcome to exponential Fitness, Inc. Third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during todays conference. Please press star zero on your telephone keypad as a reminder, this.
Conference is being recorded I would now like to turn this conference over to your host Ms. Kimberly estrogen Investor Relations. Thank you Ma'am you may begin your presentation.
Thank you operator, good afternoon, and thank you all for joining our conference call to discuss exponential fitness, Inc. Third quarter 2021 financial result, I.
I am joined by Anthony Geisler, Chief Executive Officer, and John Malone, Chief Financial Officer.
They are not president will also be available during the question and answer portion of this call.
A recording of this call will be posted on the investors section of our website at Investor Dot exponential Dot 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 obligation to update this information provided on today's call.
Please note that the third quarter 2021 financial results discussed today do not include contributions from acquisition and our partnership made subsequent to the third quarter, including the company's newest brand BST, which was acquired in October 2021, and its partnership with La fitness and city sports clubs and which Judy.
<unk> build out will not begin until Q1 2022.
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 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.
I will now turn the call over to Anthony Geisler, Chief Executive Officer of exponential.
Thanks, Kimberly and good afternoon, everyone. We appreciate you joining our third quarter earnings Conference call X Mitchell fitness as a curator of 10, leading boutique fitness brands across multiple fitness modalities. Our mission is to make boutique fitness accessible to everyone and we are accomplishing this through our global network.
<unk> Studios.
For the third quarter exponential posted strong results with net revenues of $40 9 million, increasing 60% year over year, adjusted EBITDA totaled $6 8 million or 17% of third quarter revenue as compared to $1 5 million or 6% of revenue in the.
Year period brick.
Brick and mortar gyms are back and our boutique fitness customers dedicated fitness enthusiasts, who enjoy the community aspect of a smaller size Jim are excited to return to in person fitness.
In the third quarter, our business saw actively paying members in visitation increase by approximately 60, and 70% respectively year over year.
In some ways you can say that this past quarter was the grand reopening of the global fitness industry and we're excited to continue building on this momentum.
Our strong financial performance combined with our operational excellence has paved the way for continued momentum in the fourth quarter, including our acquisition of our 10th brand B ft at a new strategic partnership with La fitness, both of which I will discuss in more detail shortly.
During the third quarter, we sold 248 franchise licenses, bringing us back to pre Covid franchise license sales levels. In addition, we opened 68, New studios and increased our North American system wide sales, 93% year over year for a total of 100.
And 92.4 million, our fifth consecutive quarter of increased system wide sales.
Proactively managing the health of our franchise system is key to our ongoing success and a characteristic which differentiates exponential from any other franchise or today.
We track our core kpis continuously by leveraging our unique technology capabilities and data analytics tools to better understand real time business performance.
Should we begin to see any shift in membership trends. For example, we have mechanisms in place such as targeted marketing programs to respond immediately and ensure that our franchisees drive continued engagement whether through in person classes or through our digital platform go.
Speaking of the go platform during the third quarter, we officially launched our upgraded production studio out of our headquarters in Irvine.
The studio features a 70 by 14 foot led well, creating a fully immersive experience for our customers. We transform this studio four to five times per day to accommodate the filming of multiple brands and now have an online fitness library of more than 2007 hundred workouts.
With hesitancy is around the in person workouts due to COVID-19, subsiding, we have started implementing a bundled at home in studio offering our ex Paas offering which provides access to all our brands under a single monthly reoccurring subscription also continues to gain traction.
Next month will officially be the one year anniversary of the launch of X pass we have conservatively been testing X pass over the past 12 months and more recently, we have optimized marketing tactics pricing and product features that benefit both our franchise partners and end subscribers with COVID-19 restrictions lifting in class.
Inventory, becoming more available we have gradually onboard and franchisees testing and implementing feedback from our early adopters to build an even stronger platform.
X pass continues to be a great funnel for new customers with more than 15% of account holders, having never interacted with one of our brands prior to joining ex pass.
23% of the leads that joined decks past, where previously deemed inactive by studios sales staff.
Today ex pass reaches over 1400 studios across 48 states.
As we've rolled out ex pass we have seen strong adoption by franchisees with participation at over 80%.
We have doubled subscriber accounts since last quarter and we are tracking toward continued growth between now and the end of the year. When we anticipate that ex pass will be fully deployed across our entire north American studio base.
X pass is a differentiator for exponential as X pass unites all of our brands on one platform.
We are optimistic about the revenue potential ex pass could represent over time and are currently searching for an executive to lead this effort full time.
Yeah.
Turning now to studio growth today, we have over 1600 licenses contractually obligated to open in North America. If we were to never sell an additional license, we'd still be able to nearly double our north American studio count over the next several years on these license obligations alone.
Our in House real estate Department is in regular contact with our franchisees across the U S. Helping them identify optimal studio locations and lease terms. So that we can convert these obligated licenses into open studios as efficiently and quickly as possible.
With strong franchisee demand for new licenses and strong sales our backlog of studios obligated to open is continuously replenished and offers us solid visibility into our long term growth.
In addition to growing organically, we have a disciplined M&A strategy, we constantly evaluate brands that could complement our current roster of modality is that align with our company's mission and that have strong growth potential on a global basis.
To this end in October we welcomed our 10th brand B F T. A community based high energy functional training offering <unk>.
<unk> T has transformed our global growth trajectory, adding over 130 franchise studios across Australia, New Zealand, Singapore, and the U S. Along with an additional 150 studios previously sold and contractually obligated to open in the next 12 months.
With <unk> addition, we have officially achieved the X and exponential and we are thrilled to bring this new highly complementary offering to our customers as of September 30th our master franchisees, we're contractually obligated to sell licenses to open over 730 studios across nine countries internationally.
With the addition of B F. T. We now have over 1000 studios opened or obligated to open internationally and we're excited to watch our growth continue to accelerate.
As part of the transaction exponential has entered into a master franchise agreement with the existing DFT management team, who will be running day to day operations in the Asia Pacific region with exponential providing the team with full support.
Similar to our other international franchise agreements. This MFA is structured to provide exponential with 100% margin flow through over the term of the agreement.
The transaction has already been accretive to our EBITDA in the fourth quarter.
Following the acquisition, we have seen strong interest in B F T licenses, both from existing and new potential franchisees.
We anticipate to start selling B F T licenses before yearend as soon as we have completed the franchise disclosure document filing requirements the.
The integration of B F. T is underway and we will make use of exponentials playbook to seamlessly manage the process we.
We have a proven history of integrating new brands into our portfolio and just like with our other acquisitions, we anticipate very little additional overhead costs from this acquisition.
We will be able to leverage our shared services platform, including key back office functions to <unk> benefit with minimal additional hires or expenses to grow the business both internationally and domestically.
While we remain focused on integrating B F T and supporting our current portfolio over time, we will explore acquisitions strategically and thoughtfully ensuring that the brands, we add to our portfolio fit with our long term growth strategy.
Another growth driver for exponential as our nationwide partnership with La Fitness also announced in October through this partnership we have the exclusive right to expand our exponential fitness brand studios through a minimum development commitment of 350 franchise locations over five years, we are providing existing France.
<unk>, who have an la fitness location within their protective territory the opportunity to open another exponential studio within that specific gym location.
Franchisees will be able to increase our sales generation and reach with another studio that is free of initial franchise fees and reduced marketing fund fees and whose build out costs are significantly less than those of our traditional studios.
While the average unit volumes or <unk> of these studios are expected to be lower than traditional studios. They will also carry lower operating costs. This is a win win for all our franchisees instantly expand their potential customer base with limited effort in cost La fitness Springs, new customers.
<unk>, who are interested in boutique fitness, while retaining current customers with an innovative membership offering an exponential expands its new studio potential while bringing its brand of best in class boutique fitness to an even greater addressable market.
We expect to begin building out in Jim Studios in the first quarter of 2022 and anticipate we will start seeing some P&L benefits from the partnership next year.
As we continue to execute on our long term growth strategy. We recognize the importance of also building our expertise with the expansion of our board of directors I'm. Therefore pleased to note that we recently welcomed a new independent director to our board Chelsea Grayson, who is also serving on our audit committee effective in October Chelsea.
He is an experienced board member and public company CEO, having previously headed global retail companies, including true religion, and American apparel. We are excited to add chelsea's perspective to exponential and leverage her brand expertise as we continue to build out our own retail and merchandise sales across our current network of over 2000 <unk>.
Global Studios.
In summary, we are very pleased with our third quarter results and the continued momentum of our business. We are excited to continue seeing the benefits of applying franchising easy to scale asset light business model to a fast growing industry.
Our modality and brand diversification adds stability to our model, while increasing the addressable market for our offerings.
I am, particularly looking forward to the energy a renewed spirit at our upcoming annual franchise convention in Las Vegas.
We have taken all appropriate COVID-19 precautions and are excited to return to a 1500 plus in person event with people attending from all over the World. Our annual convention provides the exponential community an opportunity to come together and share best practices provide training celebrate achievements and lay out our growth strategy for the year.
To come.
Thank you again for your time I'll now turn the call over to John Malone to discuss our third quarter results in 2021 guidance John.
Thanks, Anthony and good afternoon, everyone, it's great to speak with you today.
Anthony mentioned, we had a strong third quarter with 248 licenses sold in 68 studios opened compared to 50 licenses sold and 80 studios opened during the prior year period the.
A significant improvement in licenses sold during the quarter provides visibility into new studio growth. We are seeing consumers excited to return to brick and mortar gyms and as Anthony mentioned actively paying members and visits are up approximately 60% and 70% respectively.
Third quarter, North American system wide sales of $192 4 million were up 93% from $99 6 million in the third quarter of 2020 importantly, this was our fifth consecutive quarter of sequential system wide sales improvement and exponential highest system wide sales quarter ever.
Anthony highlighted this continued momentum is a reaffirmation of the effectiveness of the exponential playbook.
Third quarter, North American same store sales increased 65% from the prior year period, reflecting improved membership as pandemic restrictions lessened.
Our month of September run rate average unit volume for North America, which is calculated by Annualizing. The monthly sales for all studios that are six months and older was 421000 and equated to a nearly 90% recovery when compared to pre COVID-19 levels at the end of January 2020.
Our franchise business model provides us with highly predictable and reoccurring revenue streams on a consolidated basis revenue for the third quarter was $40 9 million up 60% from $25 6 million in the prior year period.
Breaking this figure down further into the five individual components franchise revenue was $20 million for the quarter up 68% from $11 9 million in the third quarter of 2020, the significant year over year increase was largely driven by higher royalties. Our system wide sales have continued to grow and surpassed pre COVID-19 levels.
Equipment revenue was $6 8 million in the quarter up 39% from $4 8 million in the prior year period.
This increase in revenue was largely driven by a higher concentration of installs within equipment intensive brands with most equipment revenue being recognized in the period the new studio opens.
Merchandise revenue was $4 9 million in the third quarter of 2021 up 35% from $3 6 million in the prior year period.
The improvement during the quarter was primarily driven by increased foot traffic in the studios.
Franchise marketing fund revenue of $3 7 million was up 107% from $1 8 million in the third quarter of 2020, primarily due to system wide sales growing above pre COVID-19 levels through additional new studio openings and average unit volume recovery.
In addition, we have reduced the marketing fund fee in 2020 to lower operational breakeven levels for the franchisees during the pandemic.
Lastly, other service revenue was $5 5 million in the quarter up 63% from $3 4 million in the prior year period.
The increase in other service revenue in the quarter was primarily driven by revenue generated from studios, we took over because of the pandemic.
As communicated on our last earnings call. Our primary strategy is to be a pure franchise model and the company remains committed to refranchising or shutting down all non strategic corporate own studios by year end. We are on track to achieving this goal and expect that by year end, we will only hold a small number of strategic transition studios in la.
With our historical pre COVID-19 levels.
Turning to our operating expenses cost of product revenue were $7 6 million during the quarter up 41% from $5 4 million in the prior year period the.
The increase during the quarter was driven by higher levels of merchandise revenues and by a higher concentration of installs within the equipment intensive brands in the current period.
Cost of franchise and service revenue were $3 2 million in the third quarter up 34% from $2 4 million in the prior year period. The increase during the third quarter was primarily driven by costs related to technology fee revenues because of the higher number of studios operating.
Selling general and administrative expenses of $24 3 million were up 46% from $16 6 million in the prior year period.
This increase was largely due to expenses of being a public company temporarily operating company owned studios and higher noncash equity based compensation expenses.
Previously shared our core strategy is for all of our studios to be owned and operated by franchisees.
In addition, $3 1 million of the $7 6 million increase in SG&A was driven by an increase in equity based compensation due to transitioning from a private to a publicly traded company.
This however is a noncash expense as a percentage of revenue SG&A expenses were lower at 59% in the third quarter compared to 65% in the prior year period.
Depreciation and amortization expenses was $2 4 million in the third quarter, an increase of 21% from $2 million in the third quarter of 2020.
Marketing fund expenses, which include expenses related to corporate marketing were $3 8 million in the quarter up 136% from $1 6 million in the prior year period.
The increase was driven by costs associated with higher marketing fund revenue and because we limited marketing funds spend in 2020 when studios were required to be closed due to the pandemic.
Acquisition and transaction expenses totaled $2 9 million during the quarter compared to an income of $5 1 million in the third quarter of 2020.
This increase in acquisition expenses as it related to the already completed acquisition of the Rumble brand and bringing the contingent earn out liability up to fair market value.
Contingent consideration requires exponential to accrue an expense overtime as our stock price hit certain thresholds.
The terms of the agreement include divesting of approximately 2 million shares of class a common stock if our stock price ranges from approximately 51 to $76.
We value this contingent consideration on a mark to market basis, each quarter and accrue for the earn out net income is reduced as the consideration increases over time. However, the share count does not increase until the shares actually vest.
We view this noncash transaction expense as an adjustment to EBITDA as it will on a quarterly basis be adjusted to fair value.
We recorded a net loss of $8 9 million in the third quarter compared to a loss of $1 9 million in the prior year period.
The change in net loss is primarily the result of $4 1 million of higher overall profitability.
Offset by the previously mentioned $3 1 million of increased noncash equity based compensation expense and $8 million of noncash contingent consideration as compared to the prior year period.
On an adjusted net loss basis for the third quarter, excluding the $2 9 million of noncash contingent consideration along with zero point $2 million related to the TRA Remeasurement adjusted net loss totaled $5 8 million or 31 cents per share on a share count of 22 million shares.
Ours.
Compared to an adjusted net loss of $7 million in the prior year period, adjusted EBITDA was $6 8 million in the third quarter compared to $1 5 million in the prior year period.
Adjusted EBITDA margin grew to 17% in the third quarter of this year compared to 6% in the prior year period.
We expect to realize improved margins over time, as we expand our franchise studio base and leverage our shared services platform across each of our boutique fitness brands.
We believe adjusted net income or loss and adjusted EBITDA better reflects our underlying operating results and so we have provided a reconciliation of adjusted EBITDA to GAAP net income or loss in our earnings release issued earlier today.
Turning to the balance sheet as of September 30th 2021, cash and equivalents were $25 5 million up from $11 3 million as of December 31, 2020.
Total long term debt was $94 million as of September 32021, compared with $181 8 million as of December 31, 2020.
Moving to our outlook for the remainder of the year based on current business conditions.
T acquisition and our expectation as of today, we are raising our full year 2021 guidance as follows.
We are updating our total 2021 global new studio openings to be in the range of 230 to 250 <unk>.
We continue to expect North America system wide sales to range from $690 million to 700 million, which at the midpoint would represent a 57% increase from the prior year.
Total 2021 revenue is now expected to be between $147 million to a $148 5 million an increase of 39% from 2020 at the midpoint.
Adjusted EBITDA is now expected to range from 25 million to 26 million, a 160% year over year increase at the midpoint of our guidance range.
We continue to anticipate that our capital expenditure budget for the second half will remain in the range of one 5 million and $2 million for the remainder of 2021, primarily focused on our go digital platform and other technology investments to support our digital platforms and building out a rumble studio.
We do anticipate elevated SG&A expenses in the fourth quarter as compared to Q3 and compared to the fourth quarter of 2020 due to our upcoming franchisee convention, which will return to Las Vegas in December and as we complete the process of Refranchising. The company owns videos to franchise videos.
For the full year, we expect our tax rate to be approximately 5%.
Share count for purposes of earnings per share calculation to be $22 1 million and $3 million to $5 million in quarterly dividends to be paid related to our 200 million convertible preferred stock.
A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations for the third quarter and first nine months of 2021 can be found in the tables at the back of our earnings press release.
In summary, we are pleased with our third quarter results and the overall return momentum to the fitness industry.
Based on our outlook today, we are confident in the growth trajectory of exponential.
Thank you again for your time today and for your support of exponential in fulfilling our mission to make boutique fitness accessible to everyone. We look forward to updating you on our progress on our next quarterly earnings call.
We'll now open up the call for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star to move your question from the queue for participants using speaker equipment. It may be necessary for you to pick up.
Your handset before pressing the star keys, one moment, while we poll for questions.
Question comes from the line of Randy Connick with Jefferies. You May proceed with your question.
Hey, guys. How are you thanks for taking my question.
Anthony I wanted to start off with you.
Get your perspective, now that Youre, a quarter has come out and you showed us.
Very strong numbers you've talked about.
He is getting towards pre COVID-19 levels, we've seen a couple of.
At home fitness.
Businesses report less than stellar results in their quarter. So I just want to be very helpful for us.
On the call as to get your perspective on how you think this all plays out.
The push the push and pull of in.
In person boutique.
<unk> fitness and Jim fitness compared to at home over the next that's next quarter, but let's just think about over the next one two and three years just wanted to get your perspective on how you think this all kind of shakes out.
Yes, Thanks Randy.
I've said, it before and I said it pre COVID-19 right.
And home kitchen wasn't going to kill the restaurant industry and I think that is true where communal animals, we love to work out with other people, we love to be around other people and so that will always be.
The way that we are and you're seeing the world has returned to that.
With that said at home fitness has been around a very long time.
So at home fitness is not anything new I think what it does given our go network and what we have digitally across 10 brands. What it does do is give people the ability to take a yoga class at 805, a M on Saturday when they wake up if they wanted to do that for 30 minutes or whatever it.
Might be so I think what we'll see going forward is this omnichannel approach, but exponential had that pre COVID-19 right.
We acquired our video on demand and streaming production.
Facility in June of 2019, and so we were already very prepared to launch into that digital business pre COVID-19. So that was our view pre COVID-19 and of course during Covid is being set up that way allowed us to shift our members from physical to digital and now back into the physical.
Kind of Omnichannel approach.
Super helpful and then.
Very interesting moves during the quarter the agreement with La fitness.
Give us some perspective on.
We expect to see more traditional.
Companies want to proceed with these types of.
<unk> for their for their members could you could you expand kind of strategy to other types of <unk>.
Fitness gyms out there.
Both domestically and internationally and then while I'm on the international front, just update us on where we stand with international development. Thanks, a lot.
Yes, it's two parter I'll take the first one first Randy.
So we have an exclusive.
With la fitness, so we will be.
Opening our locations.
Inside of La fitness, and we specifically chose them because.
They are the largest.
Business of that type so with that said there are corporate.
Owned business and so it makes it a lot easier for us to put our franchise business inside of something that is corporate owned.
As opposed to trying to put something that is franchise owned inside of something franchise <unk> and if you look at other brands it could be out there like 24 hour fitness or lifetime or equinox or anything like that they don't have.
The amount of open doors in units that la fitness has.
No.
I am sure others may try to duplicate this type of approach potentially.
But we will continue on this path here domestically and then we will see how we do internationally.
So speaking to your international.
Plus international stores that are open are obligated to open in 12 countries, including the U S and Canada.
And so <unk>.
Also that deal that we did expanded our international footprint with 130 open about.
15 times, what it was prior to that acquisition. So we are pushing on the international piece of the business as well.
Okay, just sneak in one last little question I don't want Hog the call, but when you gave us during the IPO process, you talked about I think 6900 door count.
Our unit count kind of potential in the United States that some brands seems like Oh.
The consumer is coming back in a big way.
So in person fitness, if you will and then when we have all these international development you just talked about so how do you spoke about the conservatism or realism of that of that number you said with the <unk>.
Started the IPO thanks, guys.
Yeah, I still think the you know the Tam we shared at the IPO is a valid plus the the acquisitions we've done.
B ft after that Tam and so we will continue to go at it from a scientific approach.
We don't look at it on units on a population basis or something like that we use buxton and scientifically approach what our Tam is which by nature makes it conservative and the way we do that is by looking at our current membership and how they act and behave and what metrics. They have that are <unk>.
More than did they go to college and do they make money. So we actually create very specific profiles for the brands and then once we have that very specific profile. We go back out to the U S map and we say, okay, where do all these profiles live within two mile Radiuses that can hit our targets and then from there it gives us.
How many stores, we could open in what areas with longitude and latitude.
Points that would give us that member profile within that radius at that AAV. So obviously as you you sell more and you expand.
That brand and you expand that modality the Tam expands.
And if you are willing to take a lower <unk> by let's say 25000 year 50000, a year you can still have a very profitable store in a secondary market with a bit less a UV and increased cam that way as this as the brand starts to head toward maturity and something like a club Pilates for instance.
Very helpful and very thoughtful thank you so much.
Of course, thank you.
Our next question comes from the line of Alex Perry with Bank of Securities. You May proceed with your question.
Hi, Thanks for taking my questions and congrats on a great quarter.
Just first could you talk a bit more about the rationale for the acquisition of body for training and maybe give us a little more color on the domestic white space opportunity you see for everybody for training in terms of door count it.
It seems like the functional training spaces.
Pretty competitive in the U S with another player with.
Some pretty significant scale, maybe talk a little bit more about sort of what differentiates body for training versus the other players that's out there and and one more on that is maybe just remind us on in terms of the near term P&L impact of the acquisition. Thank you.
Yeah, I'll handle the operation part and I'll, let John.
I'll handle the P&L impact but.
There are other players.
Both in Asia Pacific and in the U S and the functional training space. We had said on the last earnings call that this was a modality that we would be looking at in terms of M&A.
So so thats were continuing on with that.
What we really loved about <unk> is that in the face of those headwinds in Australia. They returned.
Better <unk> than the market.
Sold more stores and open more stores than some of their competitors in the space.
So we really like that.
Like the the workout itself, the modality itself and what they do inside of the ft really liked.
Cameron rich and Heimish, the guys that are running it and so they'll continue to stay on as master franchisees of Asia Pacific.
While we develop.
The domestic footprint.
We don't have a specific number on Tam and we don't really report specific Tam numbers.
But we do believe it is in line with the Tam that we see on a brand basis in the other exponential brands in the portfolio.
We will continue to use.
That same sort of scientific data driven analysis to get the Tam that I just talked about in the previous question.
As we as we start to develop that.
And John do you want to speak to the <unk>.
Financial piece of it yes, so in regards to the financials from a balance sheet perspective, we disclosed that we paid $44 million.
For the IP and that was a mix of some cash off the balance sheet and some term loan.
We had drawn and then from a P&L perspective, the margin impact is very similar to all our other master franchise agreements, where we receive a percent of the revenue or the margin generated by the master franchise or from a P&L perspective revenue is recognized in the period.
And if you are usually comes from things like your license sales or royalties any equipment or merchandise sales and they have an immediate recognition in the period in which they're generated so high margin, 100% flow through and in Q4 as we as we disclosed on the release that <unk> acquisition has already had.
An accretive benefit to our P&L since acquiring it in late October.
That's really helpful. And then just a follow up it seems like run rate <unk> and license license and sold came in well ahead of expectations, maybe just talk through the key drivers there and when would you expect run rate <unk> visitations and actively paying members to sort of reach.
Pre COVID-19 levels is that.
Something you're targeting by like <unk> 22, or when should we expect those numbers to reach pre COVID-19 levels.
Yes, Greg.
Great question, and we disclosed on earlier calls that the.
A recovery back to pre Covid levels, we expect to happen in the first half of 2022, we continue to make progress as you see through our Q3 results on on grinding.
Grinding our way back up to those levels. So we're gonna remaining with our first half expectation that that's when we're going to get there if theres any factors outside of our control will be sure to update you guys, but at this point in time, we're sticking with the first half of next year to get back to pre COVID-19 levels and on a membership basis and visit basis. We've.
Already well surpassed pre COVID-19 levels, and we've done that based off those studios recovering but also the introduction of a lot more new open studios into our system.
Perfect. That's really helpful best of luck going forward.
Thank you so much.
Our next question comes from the line of Joe <unk> with Raymond James You May proceed with your question.
Thanks, Hey, guys. Good afternoon congratulate Joe thank.
Thank you.
Looking at the guide for this year.
Opening you raised revenue you raised EBITDA you left your system wide sales range.
Intact I'm just curious what the thought process was there.
Yes, so when we initially set guidance. It was mid August right. Its only about four months left in the year and from the perspective of the fact that we have pretty highly predictable reoccurring revenues and our ability to forecast. Those accurate is is pretty high we set that range with only four months left of the year. So there's not a lot of time risk associated with what.
He could happen around system wide sales so.
I felt we delivered both on a video opening and a system wide sales are fairly accurate.
A picture of where we thought we would land.
Openings has been a little bit better than we had expected. So we did move the guidance up there but system wide sales as falling within the range that we expected and again its pretty predictable and you're only at one quarter in regards to the revenue and adjusted EBITDA, We talked on the call that we wanted to be conservative freshly minted public company, even in a downside scenario we.
Wanted to make sure that we were delivering on our guidance from a performance perspective. So we took a more conservative approach on overall revenue and overall adjusted EBITDA, but for the system wide sales.
Only been four months out we felt that.
We had a pretty good forecast we are hitting it we continue to.
<unk>.
To perform to those levels so.
No no reason to change the guidance at this point.
Understood.
In terms of your openings for next year.
I think the expectation was you could potentially achieve your long term cadence of around 250 to 350.
Studios is that still the case and how should we layer in.
Openings for BMT for example, as well as the fitness the city Sports club openings as well are those wholly incremental to those numbers.
I mean from the from the guidance, we provided right now the 232 50 for this year that would exclude.
Any material benefit of the BMT or any of the la fitness.
Announcement that we made so as we move into 2022 there'll be incremental things associated with those two additional.
Our relationships that we formed.
Okay.
Can you quantify how many potential openings from those from the acquisition and the license agreement with the government agreement.
As far as <unk>, we haven't put anything out there yet in regards to the la fitness relationship there is a minimum development schedule.
We committed to a minimum 350 over five years that has a more backend weighted or.
Opening schedule, but that should give you some kind of indication related to that as far as <unk>. We are in the process of getting the financial disclosure documents filed with the states, where it's required and then from that point, we will begin the process of selling licenses.
Then.
As we discussed there was about a six month six to 12 month timeline for once you sell the license of getting it open. So if there is any impact related to <unk> in the U S market.
That will come in the later half of the year, but it should be noted that <unk> already has a portfolio of already sold licenses in the Asia Pacific region that there'll be continuing to open.
So those will be accretive so in 2019, we opened 400 studios, we guided to about 250. This year I think it's fair to say that will be well north of $2 50, but we're working our way closer into the three hundreds next year.
Okay, great. Thank you guys.
Thanks, Joe.
Our next question comes from the line of Brian <unk> with Morgan Stanley You May proceed with your question.
Yeah, Hi, guys hope you're doing well.
Maybe just one more quickly on the guidance. So it is the kind of increase in revenue and EBITDA guidance.
It's entirely due to B C or are there and is that kind of representative of what they usually do it in a given quarter or is there anything else that's changed within that that we should be thinking about.
The majority of the guidance that or the increase in the guidance was driven by the existing portfolio that we already had <unk> will be incremental and accretive to our P&L in 2021, but the majority of the increase was driven by the nine core brands, we had prior to BMT.
Okay got it.
Maybe one bigger picture question I think that it seems like the first quarter of 'twenty, two will shape up to be quite a strong season for sign ups for a lot of in person fitness concepts.
And all the indicators are kind of in the right direction is there anything you plan to do kind of outside of the norm in terms of marketing where in terms of supporting franchisees to help them really kind of capitalize on that and make it a great quarter for them.
Hi, Brian necessarily man and we have our annual convention coming up in just four weeks and it's a great opportunity for us to bring our franchise partners together and talk about those best practices and share ideas and make sure that we have a solid plan in place for next year. So you're right in that there are the traditional methods that will help us.
Lunch, the Cdos and get them in a great place for January but in addition to that it's just sticking to the tactics that we know are strong and bringing the franchise partners together in December to really celebrate all of the great achievements and get everyone's fully aligned for having a stellar 2022. So we've got that just.
A couple of weeks and look forward to seeing all of our franchise partners and at that time.
Thank you.
Our next question comes from the line of Jonathan Komp with Baird. You May proceed with your question.
Yeah, Hi, Thank you maybe just to follow up again, a couple of questions on the guidance.
Just curious is it first as you look at the SG&A, how that's sort of coming in versus what you thought if theres anything.
Incremental that youre accelerating there and when you step back and look at the guidance raise for 2021 is there anything we should think about that sort of.
Nonrecurring that's benefiting that we shouldn't flow through in our models looking forward or how should we think about that.
Profit rise.
Yeah. So in regards to the fourth quarter Theres one event that fair just mentioned the annual convention that has from an SG&A perspective are higher.
<unk> expense in the fourth quarter so.
But the benefit of that as we also provide or have sponsorship revenue that comes in related to offset the expense. So the you know the.
The investments in our annual convention.
Is nominal but there will be you will see SG&A increased by that but you also see a revenue increase virtually offsets that expense in the fourth quarter, so something to be aware of there.
Mentioned on previous calls we do have our we did have a portfolio of company owned studios from the impacts of Covid.
We discussed that we would be refranchising those out and we've made really good progress and continue to make good progress on delivering on that commitment by the end of the year. So.
So you'll see SG&A ramped out associated with our company owned studios throughout the end of this year.
But outside of that those are kind of I would say, maybe a little more one time things you should just take into account as far as anything of flowing out of.
2021 into 2022, we believe our normal run rate business is very similar to our SG&A run rate is similar to 2019, excluding the impacts of stock based comp.
So we see excluding stock based comp around that 66% to mid $60 million range around SG&A and that's what we'll continue to operate now once the corporate studios have been fully re franchised.
Okay, Great. That's very helpful. Maybe then one.
Anthony or is there a bigger picture question about the industry. It sounds like that <unk> is a recovering roughly as we expected, but maybe the bigger picture question.
If if others don't see <unk> fully recover well into.
Until mid 2022, what's your general sense on sort of.
The state of others that you are competing against do you think we will see another wave of closures and financial pressure for others is there any risk of a more competitive pricing and industry environment, just any broader thoughts on your ability to continue to operate.
Against others in the industry.
No I mean, I don't I mean other than our core advantages we have like our digital network go and the X pass.
Thank you guys are all aware with but simply put you sign it but one of our brands and get to access all of our brands. So we think that is a.
A key differentiator in what we do.
So we.
We wish our competitors all the best we don't want to see anybody do poorly. So we hope that everyone is able to go to.
Work hard and obtain customers in this industry, but we will continue to compete with the things that we have and.
To return to our pre Covid numbers and so.
10 brands multiple revenue streams, the ax past digital's Theres a lot of Differentiators that we have that allow us allow us to compete against our our closest competitors.
Great and if I, if I could just flight and at the end here.
Comment on what you optimize in terms of the X past structure pricing and features.
Any comments there and that's it for me thanks.
Sure I can take that one as you know we've been very conservative with the rollout with the excess thinking about 25.
25% of our system and putting them on the ex pass each quarter. We're at 1400 locations currently on and we'll get the remaining of our studios on the act passed by the end of the year.
And really our first priority was to test the technology and watch consumer behavior, then to test our marketing campaigns.
And pricing and the point system, we have made tweaks along the way.
But we're in a very good place and we're starting to see that the ex passes servicing a new customer base that we werent currently.
Missing before.
15% account holders for ex Pats are brand new to the exponential ecosystem and about 23% of those that are account holders.
Did interact with our CEO prior to joining the X pass.
Where were deemed as heated cooled off we're not interested in the franchise base. So we're seeing that this is becoming a new service and product that is exciting and new audience and.
And it'll be great benefit to the franchise partners in 2022.
Okay. Thanks again.
Our next question comes from the line of Peter Keith with Piper Sandler You May proceed with your question.
Alright, Thanks, Bob your finger on for Peter.
Thank you taking my questions.
To look at.
Sales member trends Apache months, and the cadence of the ongoing rebound.
When you describe the progress Youre seeing is steady bill backwards there Ben.
Any inflection point in.
In the past few months.
Acceleration here and related to that.
I was wondering if you're seeing any notable differences.
Between brands or geographies that momentum has continued to build.
Yes.
Yeah, we've seen a steady build back with members coming back into the studio visits and membership sales. So there hasnt been volatility. It really has just been kind of slow and steady nice increases across the board and he asked about regional improvements and increases obviously as we saw in California, and New York.
Open.
There's no sales had started online again, and but there isn't really any sort of region across the country, which is performing.
Much better or much faster than others.
It's very consistent I think most importantly to call out there's no delta issue.
So we've seen really great increase in CDN traffic.
And great increase in other revenue streams across each of the Cvs.
Okay.
That's helpful.
Quick follow up are all the studios back to 100% capacity now or are there still.
Any measures, you're taking in and any classes or.
Eliminate amount of people for glass.
And we don't have a 100% of seniors back to the 100% of the capacity. However, the majority of our back to full capacity.
Of course, there's some regions and we don't track all the different states and local mandates.
Yeah.
So there is a little bit of it.
Inventory that we still have access to and that gives us excitement about putting more members and access in some of our other partners.
But we're very close to getting back to a 100% capacity and 100% of the CEO.
Okay, great. Thank you.
Our last question comes from the line of John and Michael with Guggenheim. You May proceed with your question.
So lastly, let me start with.
How do you think about if there are any bottlenecks to the ability to grow in the U S.
Right, because you've got more brands than ever you've got more mud.
Partners than ever.
And I think in the past your peak.
Studio openings were 400, what are the bottlenecks and do you think the business in theory, you should be.
Well equipped to do more than that.
Is that just.
You want to be certain about execution.
Do you think about that.
Yes.
Yeah.
Yes, So I think you know we don't really see.
Massive bottlenecks, but in in the business in general.
Franchisees need access to capital and access to leases and so.
Access to leases during Covid and still post COVID-19 are better than they were pre COVID-19.
So that's good.
Lending has come back.
Exponential had a zero default rate on its SBA loans.
Which allowed our franchisees to still continue to access capital.
So we're still continuing to see.
Yes, the same challenges in the business, we saw pre COVID-19 two to getting stores open or getting access to capital.
Franchise sales are as we've reported now really back to its 2019 run rates. So franchise sales are back and then that will eventually flow through into signed leases Fran.
Franchisees acquiring capital and getting opened.
Alright, and then maybe when you think about the la fitness partnership.
What modalities what brands do you think will occupy.
The vast majority of the.
The $3 50, or 400, Theyre going to do will there be multiple modalities that a single <unk> fitness and I assume the pricing will be consistent with.
The external studios around those locations. So that's fair.
Yes that is fair you hit the nail on the head so it'll be consistent with the pricing.
In and around those geographies and those studios.
We will be starting to rollout the club Pilates brand and the stretch lab brand and then continuing with other modalities as we go forward, but we do have the ability to have multiple <unk>.
Rands inside.
Of the same la fitness location and so we'll make sure that we access that where we're relevant and then make sure that the brands are complementary to each other.
And what la fitness is doing inside of their box as well.
Okay. Thank you.
Ladies and gentlemen, we have reached the end of today's question answer session I would like to turn this call back over to Mr. Anthony guys look for closing remarks.
Thank you operator, and thanks again for joining our call today and for your support of exponential I'd also like to thank the entire X financial fitness team and of course, our franchisees for their hard work and dedication to our business. While we will certainly speak on our fourth quarter call next year over the next few weeks, we'll be participating virtually at the Morgan Stanley.
<unk> global consumer and retail conference and the Citi Global Consumer conference and in person at the Roth Consumer conference. So we hope to speak with many of you. During these events and I Hope you all make it a great day. Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
Okay.
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