Q3 2022 Xponential Fitness Inc Earnings Call
Greetings and welcome to exponential fitness incorporated third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Kimberly <unk> Investor Relations. Thank you you may begin.
Thank you operator, good afternoon, and thank you all for joining our conference call today.
Exponential fitness, Inc. Third quarter 2022 financial results I am joined by Anthony Guy, Sorry, Chief Executive Officer, Sarah Luna, President and John Malone, Chief Financial Officer.
A recording of this call will be posted on the investors section of our website at Investor got exponential Dot com.
We remind you that during this conference call, we will make certain forward looking statements, including a discussion 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 the information provided on today's call.
In addition, we will be discussing certain non-GAAP financial measures in.
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.
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 referred to global figures unless otherwise noted.
I will now turn the call over to Anthony Geisler, Chief Executive officer of exponential fitness.
Thanks, Kimberly and good afternoon, everyone. We appreciate you joining our third quarter earnings conference call I'll begin today's discussion with an overview of our quarterly performance and operational highlights Gerald.
Tara will then speak about our progress against our core growth strategies, including our new partnership with Princess cruises and our recent brand launches on Lulu Lemon studio John .
John will conclude with a review of our third quarter financials, and an update on our full year outlook.
We are very pleased with our operational execution, and resulting financial performance for the third quarter beginning.
Beginning with studio count exponential remains the largest boutique fitness franchise or globally with franchisees operating over 2004 hundred studios and more than 5100 licenses sold across 10, leading fitness brand.
We have franchise master franchise and international expansion agreements in place in 16 countries around the world.
As our total studio count continued to grow so too did our membership base. Another key indicator of the strength and stability of our business model.
Looking specifically at North America total members for the third quarter increased by approximately 33% year over year to 577000.
Our Q3, North American system wide sales also continued to grow up 37% year over year to $265 million.
Finally, we ended the third quarter with run rate North American <unk> is a 489000 up from 417000 year over year.
<unk> for the month of September reached 496000, underscoring the continued momentum in the business.
The consistent growth in our run rate <unk> is a strong reminder, that despite inflationary pressures and other macroeconomic challenges the workouts our franchisees provide across our diverse portfolio of brands remain an integral part of our members' lives.
As we continue to open more studios and grow our system wide sales or profitability also increases driven by the high margins our royalties generate.
Turning to revenue for the third quarter, we posted net revenue of $63 8 million, an increase of 56% year over year.
Q3, adjusted EBITDA of 20 million or 31% of revenue was up 193% from $6 8 million or 17% of revenue in the prior year period.
As is evident from our third quarter results, while we continue to operate in a time of inflationary and overall macroeconomic pressures.
Our business has remained resilient.
This resiliency can be attributed to three factors our members our franchisees and our business model.
Let's start with our membership base.
As we noted last quarter exponential as customers continue to prioritize their health as a necessary investment rather than a discretionary spend.
Our average member has a typical household income of approximately $130000 and the majority subscribed to reoccurring membership packages with fees that represent a relatively small piece of their overall budget.
With membership counts growing in churn remaining low we are confident in the ongoing health of our membership base and demand for our boutique offerings.
The second factor contributing to exponential resiliency as our franchisees as.
As you've heard me speak to previously we take our franchisee selection process very seriously with only 2% of our leads becoming franchisees.
Our franchisees are typically corporate veterans looking for an entrepreneurial opportunity.
These individuals have the tenacity courage and capital to successfully run their businesses.
Our franchisees have also borrowed over $200 million from the SBA without any non repayment under our ownership.
To ensure our studio's success once we bring in individual into our franchisee system exponential offers ongoing monitoring of the business and key operational assistance that leverages, our extensive data analytics capability.
Should there be any indication in the data that studio operations are awry, we are able to respond quickly and make the necessary shifts to maintain that studio's performance.
We take regular engagement with our franchisee base seriously and we are looking forward to our annual convention in Las Vegas coming up again this December .
Last year over 2000 individuals travel to Las Vegas to join Us at.
At the event, we recognize franchisees for their hard work share best practices provide training showcase vendors and most importantly aligned on our goals to carry forward the momentum into the coming year.
Last but not least the third factor contributing to our resiliency is our franchise business model.
As a franchise business exponential benefits from highly predictable reoccurring revenue stream and limited ongoing capital requirement in the third quarter approximately 71% of our revenue was reoccurring largely driven by royalties.
Beyond our reoccurring revenue streams are capital light franchise business model at access to labor and equipment helped drive our continued success and margin expansion.
Based on these factors despite the uncertain macroeconomic environment, we remain confident in our go forward trajectory and are raising our revenue and adjusted EBITDA outlook for the full year.
With that as a background, let's turn to our four strategic areas of growth I will discuss the first three levers and then turn the call over to Sarah to discuss the fourth.
Darting with increasing our franchise studio base. We ended Q3 with 2000 and 485 Global Open Studios opening 128, net new studios in the third quarter.
Year to date, we have opened 355, new studios, putting us on track to reach our goal of 500, plus new studios for the year.
Of note with each progressive quarter studio opening cohorts have gotten stronger opening at higher sales and membership levels in month, one and then ramping faster than studios in prior cohorts.
We were also pleased to see our highest number of new studio openings in the final week of September .
Our franchisees opened 36 studios in the last week of September a strong indicators that our franchisees remained bullish on opening new studio locations as we approach 2023.
We also experienced strong demand for our franchise licenses selling 258 licenses globally in Q3 and 769, thus far this year.
Keep in mind that over time as we continue to sell through Prime geographic territories in each of our existing brands in order to maintain this elevated run rate, we would eventually need to acquire another brand.
In North America, we have over 1900 licenses sold and contractually obligated to open along with a replenishing pipeline of organic new studio expansion that offers us four to five years of visibility into our growth.
We were also excited to recently announce that our newest brand body fit training or BST, which has over 200 studios opened internationally has start expanding into additional locations in North America, beginning with Toronto, Canada.
Much like its predecessor, Rumble, which sold over 150, North American franchise licenses in its first eight months of franchising since we began franchising DFT in February of this year, we have sold over 150 <unk> licenses in North America positioning the brand for expansion across the United States and Canada.
Turning to our second growth driver expanding internationally on the international front, we have almost 1000 studios obligated to be open and we continue to gain traction in August we signed a new master franchise agreement or MFA in Kuwait for Rumble club Pilates stretch lab and cycle bar.
Then in September we signed an MSA for club Pilates in Portugal.
The addition of Kuwait in Portugal, both large fitness markets brings our global presence to 16 countries.
As a reminder, our msas are structured to provide exponential with high margin flow through given that would require minimal ongoing SG&A to support MFA growth.
Speaking of margins, our third key growth driver is to expand margins and drive free cash flow conversion.
As our business continues to grow we are increasingly reaping the benefits of our asset light scalable operating model.
Providing us with consistent and growing margin performance.
Considering the macro environment, we're especially pleased with where our operating margins performed this past quarter. We continue.
To expect our adjusted EBITDA margin will be in the low 30% range for the full year 2022, and we remain on track to achieve our long term adjusted EBITDA margin target.
With that I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same store sales in AAV.
Thank you Anthony it was an exciting third quarter and one in which exponential again proved the importance of driving new and prospective membership engagement.
As Anthony noted our consumers continuing to prioritize their health and wellness actively participating in both or in CDO classes and digital experiences visitation rates again increased with total visits for the third quarter growing 28% year over year.
This momentum will carry into the fourth quarter as it is always an active one for promotions and membership engagement activities and we are especially looking forward to the bump in sales we tend to see around black Friday, and cyber Monday, when cdos are running offerings that promote new membership retail and merchandise sales.
Let's discuss further how we continue to connect with our members increased retention and reduce churn all of which are essential to growing our same store sales in <unk>.
We remain focused on ways to attract prospective members while at the same time developing innovative methodologies to improve current customer experiences. We are building out our omnichannel offering focusing on robust BTB partnerships with industry, leading companies such as Blue Lemon Optum health, which is a subsidiary of Unitedhealth group.
Rebuilding dot com, a leading dietary supplements retailer and others rapidly expanding the reach of our brands.
One key example of these efforts is our recently announced five year exclusive licensing agreement with Princess cruises.
Through this partnership exponential has become the first cross modality fitness franchise to put its curated brands on a major cruise line.
All of our brands, including club Pilates cycle by our peer of our ROE how stretched labs strides fitness yoga <unk> and AK tea will be available onboard princesses 15 ship fleet.
We are excited to bring the best in fitness to princesses millions of guests, who will be able to join live classes and also experience our workouts on demand via X plus made available in more than 23000 Princess state rooms.
Through this agreement Princess cruises has also become exponentially first corporate wellness partner with our multi brand X pass offering made available to more than 30000 Princess employees, continuing the topic of making our brands more accessible just last month four of our brands Pier Bar Rumble AK <unk> officially debuted.
On Lulu Lemon studio launched.
On October 5th this new service from Lulu Lemon Delta upon more than 10000 on demand and live stream classes available with a Lulu lemon CDO subscription accidental workouts, appearing on the mirror featured top instructors from our <unk> platform with the new classes of curated content made specifically for Lululemon.
CDO launching every week.
Members of Lululemon studio will also now can attend our in person classes at hundreds of brick and mortar locations across the country by purchasing a separate ex pass membership at a discounted price as well as participate in additional brand workouts virtually with a free trial on our X plus app.
While the NCD experience cannot be replaced virtual fitness experiences remain core to our overall omnichannel growth strategy and we will continue to serve as an added benefit to our member experience. Just today, we officially announced our first BTB offering for <unk> streaming App a content licensing agreement with active solutions.
The leader in functional fitness design and supply.
Whether with active we will create one of a kind immersive exercise equipment experiences that are tailored specifically for hotels corporate campuses high end multifamily housing properties and universities.
In each of these newly branded locations active proprietary fitness space will exclusively feature X plus content on demand that can be accessed by downloading the <unk> app.
This partnership is a unique opportunity for us to bring increased awareness to all 10 of our boutique fitness modalities, while at the same time.
Expanding lead generation for our franchisees at no cost.
We anticipate these new experiences will open sometime in the early part of 2023 and look forward to sharing more about this unique partnership in the coming months. Thank you again for your time I'll now turn the call over to John to discuss our third quarter results and full year outlook.
Thanks, So it's great to speak with you to discuss exponential third quarter results.
Third quarter, North American system wide sales of $264 8 million were up 37% year over year on a consolidated basis revenue for the quarter was $63 8 million up 56% year over year. All five of the components that makeup revenue grew during the quarter.
Franchise revenue was $30 million up 50% year over year the.
The growth was primarily driven by higher royalties as well as increased revenue generated from franchise license fees.
Equipment revenue was $11 8 million up 74% year over year. This increase in equipment revenue continues to be driven by a higher number of global equipment installed merchandize.
Revenue was $6 3 million up 28% year over year the improvement during the quarter was primarily driven by a higher number of open studios and increased foot traffic.
Given the growth we've seen across the system in October we moved our retail merchandise operations into a new 55000 square foot warehouse in Irvine, California.
The new facility will allow us to meet the higher franchise retail demand by increasing our inventory and shipping capacity, which we will continue to contribute meaningful growth and margin dollars over time.
These marketing fund revenue of $5 2 million was up 40% year over year, primarily due to strong system wide sales and average unit volume growth.
Lastly, other service revenue was $10 6 million up 90% from the prior year period, primarily due to an increase in credit card rebates on higher system wide sales at higher B to B Braun of fee revenues.
Turning to our operating expenses cost of product revenue were $11 8 million up 55% year over year. The increase was driven by higher equipment installations for new studio openings and merchandise revenues in the period.
Cost of franchise and service revenue were $4 8 million up 52% year over year.
The increase continues to be driven by costs related to franchise sales commissions and from technology fee cost from a higher number of open studios.
Selling general and administrative expenses of $32 8 million or up 35% year over year, largely due to costs associated with public company expenses and higher noncash equity based compensation as well as expenses related to one time legal costs.
As a percentage of revenue SG&A expenses were 52% of revenue in the third quarter compared to 59% in the prior year period.
Depreciation and amortization expense was $4 2 million, an increase of 75% from $2 4 million in the prior year period.
Marketing fund expenses, which include expenses related to corporate marketing were $4 3 million.
11% year over year.
Acquisition and transaction expenses were $16 3 million versus $2 9 million in the third quarter of 2020 what.
This increase is due to the change in noncash contingent consideration primarily related to our acquisition of Rumble as <unk>.
I noted on prior earnings calls the Rumble contingent consideration is driven by our share price, we mark to market each quarter and accrue for the earn out.
We recorded a net loss of $13 1 million in the third quarter compared to net loss of $8 9 million in the prior year period, while overall profitability was up by $13 6 billion. There were offsetting amounts of $13 4 million and higher noncash contingent consideration expense primarily related to the Rumble ACA.
Position $3 7 million increase in impairment of brand assets and $7 million increase in noncash equity based compensation expense.
We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release.
Adjusted net income for the third quarter was $8 million, which excludes the $16 3 million change in fair value of noncash contingent consideration.
$1 1 million expense related to our third quarter re measurement of the company's tax receivable agreement liability and a $3 7 million expense related to impairment of brand assets compared to an adjusted net loss of $5 8 million in the prior year period.
To calculate adjusted net earnings per share we isolate the portion of the net income that is attributable to exponential fitness Inc.
Is $4 4 million and we reduced this number by $1 8 million to account for the dividend attributable to exponential Inc. Paid on our preferred shares.
This results in adjusted net earnings of <unk> 10 per basic share on $26 2 million shares a.
<unk> of net income to adjusted net income is provided in our earnings press release.
Adjusted EBITDA was $20 million in the third quarter.
Impaired to $6 8 million in the prior year period.
Adjusted EBITDA margins grew to 31% in the third quarter compared to 17% in the prior year period.
As a reminder, our 2022 outlook anticipates adjusted EBITDA margin in the low 30% range and long term, we expect this number to grow to over 40% in 2024.
Turning to the balance sheet as of September 32022, cash cash equivalents and restricted cash were $30 9 million up from $21 3 million as of December 31, 2021.
Total long term debt was $136 5 million as of September 32022, compared to $133 2 million as of December 31, 2021.
Moving to our outlook based on our current business conditions, our year to date performance and our expectations as of the date of this call. We are again, increasing our full year 2022 outlook for revenue and adjusted EBITDA and reaffirming our guidance for studio openings and system wide sales in north.
Erika as follows.
We continue to expect our total 2022 global new studio openings to be in the range of 500 to 520.
This range represents the highest number of studio openings in our company's history, and a 53% increase at the midpoint over 2021.
We also continue to project North America system wide sales to range from 995 billion to $1 5 billion or $1 billion at the midpoint, which represents a 41% increase from the prior year and the highest north American system wide sales in our history.
2022 revenue will again be higher than initially forecasted and is now expected to be between $235 million to $240 million, an increase of 53% of our 2021 at the midpoint of our guided range.
The increase in the range was primarily attributed to higher overall franchise revenues higher revenue from B to B and brand fee partnerships and increased revenues from our company owned transition studios.
Adjusted EBITDA is now expected to range from 70 million to $74 million, a 164% year over year increase at the midpoint of our guided range.
This new adjusted EBITDA guidance range translates into a roughly 30% adjusted EBITDA margin at the midpoint.
Let's now spend a few moments on SG&A.
System with prior year fourth quarter's SG&A expenses are expected to increase in Q4 2022, because of our annual franchisee convention.
Our annual franchisee convention is anticipated to add roughly $4 5 million in sequential SG&A expenses, noting that we do have sponsorship revenue is expected in our other service revenue line, which will partially offset this expense down to approximately $2 million.
As I noted last quarter, we continue to see cost pressure from general operations in particular legal while these expenses will increase SG&A dollars in the fourth quarter. We view this legal expense as an isolated event and we will again adjust for it in our EBITDA calculation.
Lastly, with 10 brands and thousands of studios as previously discussed exponential always have some studios that are rehabilitated and subsequently a free franchises costs related to these temporary on transition studios are included in our SG&A.
While our current count is above historical levels. We are intent on cost effectively optimizing these studios and finding new owners for them as we've done in the past.
In terms of capital expenditures, we anticipate approximately 9 million to $10 million or 4% of revenue at the midpoint.
Going forward capital expenditures will be primarily focused on the <unk> integration X pass at X plus new features and maintenance on other technology investments to support our digital offerings.
For the full year, we expect our tax rate to be in the mid to high single digit.
Share count for purposes of earnings per share calculation to be $25 3 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 can be found in the tables at the back of our earnings press release as well as our corporate structure and capitalization F. Q on our Investor website.
Thank you again for your time today and for your support of exponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions.
Operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys.
Our first question is from Jeff fan syndrome with B Riley. Please proceed.
Hi, everyone and first let me say congratulations on what I think really amazing metrics, especially in the backdrop that we have.
Macroeconomically.
Maybe you can just touch on.
I'm curious if there are any performance variations that you're seeing in your metrics.
Among your various concepts just wondering about any kind of consumer behavior, what they might be gravitating towards more.
Among concepts and then also same thing as far as franchisees, which concepts of yours are they tending to be most excited about at the moment.
Thank you, yes, we don't give guidance on a brand by brand basis, but directionally.
Entire company is moving in the right direction.
As far as from a franchisee sales perspective, which is what I think your question is kind of geared toward.
Today that is <unk> and Rumble.
And the reason for that is because of the most recently acquired brands. Therefore, they have the most available white space right. So.
They wanted to buy a club pilates with 1000 and sold as you know it's hard to do that.
So for us, it's really Rumble, and DFT and of course any club pilates that become available.
Those are being sold.
Throughout the year as well so we still have a lot of club pilates sales lot of club Pilates openings, just like we do across the various brands, but the majority of white space is sitting in the most two recent acquisitions.
That we have so it's a sort of a metric of if you want Dallas Miami Manhattan, those kind of things those are more available and be FTE than they are even in rumble, but still for all of our other brands. There is some availability and in certain parts of the.
The country.
Okay terrific and then.
I'm just wondering is it too early to speak to any response early response on Princess and Lulu or any early color there.
Yes, I mean look on the on the Lulu Lemon studio piece the metrics are looking really good.
Have a rating program much like El ports, one through five stars in all four of our brands are at four nine so doing very well about 2 billion impressions, which obviously lends to lowering brick and mortar studio CAC.
That's the reason why we do lululemon deals or Princess cruises deals is not necessarily for you now.
A bunch of upfront economics are ongoing economics, although we do have that.
It really is for kind of lowering that CAC and even potentially lower nutrition.
As their brands build in People's minds, and so if you look at Princess cruises for instance, salary would be on the ships and do b to B promotions and partnerships that will be in front of 9 million people.
In the in room.
Digital perspective of what we do so.
Both of those are doing very well both companies are very excited about the early results of what we're seeing.
Okay, great and if I could squeeze in one more just wondering if there are any changes that you can speak to.
Regarding kind of your marketing plans promotional plans as we're getting through the end of the year.
Yes towards the end of the year, we do do a good amount of marketing as well as retail and merchandising sales around black Friday and cyber Monday.
All of the Cdos are gearing up for those two retail events and then we go to the back half of the year. They ended the year really pushing out memberships and making sure everyone is set up for their fitness program heading into the new year.
Okay, great. Thanks for taking my questions and continued success.
Yes.
Our next question is from Randy <unk> with Jefferies. Please proceed.
Yeah, Thanks, guys I guess Anthony for you.
I wanted to.
For you to unpack, yes, you made some commentary earlier about some of the support structure you have in place because I think the one kind of thing extending out about your business and business model is the flawless kind of execution that you're able to kind of put forth to and show the market with these results. So I just wanted to get some perspective on things that you're sure.
Corporate home office is going to be working on to kind of help support some of these.
She lives around.
The cruise partnership stuff the international expansion.
Et cetera, I, just wanted to kind of get some perspective on looking out a few years as you kind of dominating the globe with all these different concepts around the world.
What youre kind of working on to kind of add to that support structure, which continues to kind of.
Continue to improve your flawless execution that you've shown thus far.
Yes.
Yes, Thank you Randy.
What I think we're proving out as a company is not only can we build brick and mortar facilities and pack them with members an increase of UV and kind of do that job to your point. It really becomes what can we do as a company to leverage the company assets into things like Princess cruises.
Our Lulu lemon or renew or any of these deals that we do our celsius receive for whatever it is that the company is able to do the stuff, we're doing with active or any of those these types of things.
And what's nice is the internal infrastructure to do those things.
There's not a lot.
It really helps.
On the cash side like I said to the earlier question the co marketing, we're able to do.
Lulu Lemon via Princess cruises.
Asher active or any of these things that we do constantly pudding.
The assets of exponential and its brands in front of the face of current customers to help with any attrition customers that we haven't acquired yet.
It should be able to see our products interact with our products.
So we will continue to push the company in that direction.
Obviously, we've seen it from other companies in the space that customer acquisition cost or even if at some point. There is a diminishing return where you just you can't pay enough to get a customer or paying for a customer when you do get them kind of blows the model out and so we're finding creative ways to get.
In front of the customer not for free, but they actually get paid I would call that like negative CAC.
Where we're getting paid to put our assets in front of customers that have a like demographic to our current studio base and so we'll continue to invest in those type of deals and leverage and optimize the complete asset base of exponential.
Super Super Helpful. I guess my last question would be I know you don't give color around individual concepts as it relates to AUC, but what I'd like to get some perspective on is as you continue to drive higher and higher.
<unk> B is that a function of let's say the most productive concept probably being clubs a lot he is getting.
Even stronger lifting up the rest is the rest kind of pulling up as well is at the top quintile getting stronger the bottom quintile performer is getting stronger with just give us some maybe flavor of whats contributing to the the really nice numbers, you're putting up on the <unk> side that'd be super helpful. Thanks, guys.
Yeah, I'll take that one so when you look at the brands I mean, it's the brands that take off earlier typically are the ones that have the highest maturity from an AAV. So the things that we've talked about on prior earnings calls Thats given us really good optimism around some of the younger brands as brands like Rumble, and PFT and even our stress lab, which I would say is kind of in the middle innings.
It's been around for a while and growing they're turning out much higher <unk> than we've historically seen from Copel <unk> Anthony as mentioned early on in club what he's had an AAV that was like kind of sub 300 now it's sitting 750000 plus per studio our stress labs are approaching that and it's a much younger brands.
If you look at club.
Rumble and you look at BMT. The early again small sample set but the early units that are opening up are opening up well above like that 500 AAV. So as these brands continue to mature I think even the younger ones will continue to push up well above that 500, AAV, which we have always defy.
And as the.
<unk> not the Max like we never saw the Max <unk> prior to Covid. So now that the system has gotten back to pre COVID-19 levels and we're starting to see all of these brands start to performed well above that 500 I don't think.
Youll see that as the cap I think that's just the kind of the ante to get to play where do you get to that point of where the brand is expected to perform two but well above that.
We will see the brands performing $505 50, as they kind of age and get more units open another thing that I want to point out is the cohorts in 2020 to those units that have opened up are performing and growing faster than they did in 2021 and then prior to COVID-19.
So it gives us a lot of encouragement as well that these units that are opening up in today's time actually performing faster and getting to breakeven faster.
Very helpful answers thanks, guys.
Our next question is from Brian <unk> with Morgan Stanley . Please proceed.
Yeah. Thank you hi, guys, maybe just.
On the other service revenue, which I think is has grown quite nicely there or maybe just comment on how some of these new partnerships are kind of driving that and if you think that will.
Continue to be the case I don't know if there were any one time fees in there last quarter, but.
Be interested to know just how all of those things are kind of adding.
Economically at this point.
Yes, so when you look at the other service revenue line Theres kind of two big pieces in there. The one constant is the rebates, we get related to processing. Our membership. So we get a rebate from our credit card openings systemwide sales continue to increase the rebate, we get on processing those monthly memberships will continue to increase so thats, a very steady Eddie revenue.
Stream that we'll have in that line for the foreseeable future. We've also layered into that like the X pass the video on demand revenue very steady state very recurring revenue streams, we have seen.
We have seen I would say a little bit more lumpy revenue in regards to some of the <unk> stuff is some of the agreements we have upfront revenue component, but a lot of them have the tail as well so signing the agreement Upfronts, we do get some benefit but there's also the.
The agreement is over one year two years three years, we also get a tail related to amortizing any revenue over that period of the contract so overtime it'll be less lumpy and more steady state very high reoccurring again, driven much by the Vod as the X passes the credit card rebates that we get but in the short term as we've signed some of them.
Bigger agreements with Lulu Lemon and Princess.
<unk> there is some upfront lumpiness associated with those agreements.
Okay understood Jon maybe also just on the.
Your G&A comment so when you refer to the step up are you are you using like an adjusted G&A number are you referring to the <unk>.
$33 million reported I guess I'm, just trying to square because I know, there's some items you adjust out on there, but I'm trying to square, what we should be comparing to exactly.
Can you be a little bit more specific on.
The 33 as far as like the actual for Q3 results are you talking about for going forward, how we should be looking about it.
Well I guess.
I'm kind of trying I am trying to determine what the numbers for the fourth quarter right. So then my comparing your comments against the full 33 in the third quarter.
Yes, so the comments around SG&A in the fourth quarter as it relates to there will be a step up in Q4 SG&A as it relates to the fact that we have the cost of our National Convention. So it is about a four to $4 million to $5 million increase in SG&A, but it is netted down by the fact that we do.
Sponsorship rebates that get recorded in our other service lines. So net net you will see a increase from Q3 to Q4 in SG&A. However, there is offsetting revenue.
Not all $4 5 million flows to the bottom line as an expense only about $2 million oil.
Is that helpful is that what youre kind of getting that yes.
Yes.
That helps thank you.
Okay.
Our next question is from Alex Perry with Bank of America. Please proceed.
Hi, Thanks for taking my questions and congrats on a strong quarter.
Just first maybe John could you just sort of help square away the revenue guidance a bit. So total revenue guidance came up but the system wide sales guide sort of remain the same so what what sort of would be the delta between the two.
Yes, I think it would be helpful too to kind of walk back to the Q2 earnings call and I mentioned on the call that when we increased guidance. The methodology. We were you were using as we exceeded our expectations in the second quarter by.
Couple of million top line, a couple of million bottom line and we just added that to our existing guidance. We wanted to remain conservative from the perspective of all this talk about recessions uncertainty into the future and we weren't at that point go into raise guidance unless we felt for sure certain that.
There wasn't going to be a slowing in the business.
That being said it kind of restricted what we probably could have raised guidance in Q2 on.
Based off of how we performed in Q3 and got the upside. We went ahead and committed that into this guidance the guidance that we have for this quarter. The upside really comes from a lot of the franchise revenues, we've seen really strong.
From an opening perspective, we said we've had upside in some of the.
Royalties and some of the equipment that we've had the merchandise across the board overall expectations around revenue has been strong for us so.
A little bit of as over performance in a little bit was kind of over performance that was there in Q2 that we were kind of holding back on from our perspective, we weren't sure what the impacts related to the business, we're going to be if they presented themselves as part of our kind of the macro economic environment.
Perfect. That's really helpful. And then maybe just my follow up.
Anthony can you just talk about the willingness of franchisees to open clubs right now.
Are they being affected at all by the rising rate environment or are they doing anything different to finance in this environment.
Are they seeing anything in terms of higher construction costs and labor, that's giving you some hesitation.
And then others are calling now you have some supply chain headwinds like HVAC availability. It doesn't seem like you guys are seeing that.
And then just just off of that maybe just speak a little bit to sort of profit margins at the franchisee level versus pre pandemic and sort of how those are tracking thank you.
Yes, so just kind of give you an idea or give us some extra color.
We sold 120 units in September alone on the franchise sales side, so kind of starting to top of the funnel. We actually opened 63 stores in September and we're signing an increased number of leases right now so.
Hmm.
It's one thing to look at the quarter right to say July August September but its another thing to look at September metrics is kind of like your your last leading indicator. So we're not we're not seeing.
Any slowdown.
Matter of fact, we're kind of seeing the opposite.
Our most recent month.
Perfect. That's really helpful best of luck going forward.
Our next question is from John <unk> with Guggenheim Partners. Please proceed.
So can you guys talk to the.
The quickness of the ramp with the active partnership right I would guess most of their locations would be applicable for your prayer.
Work with them, how quick can that ramp.
Do you look at that also has a.
As a brand.
Awareness.
And then just remind us on the economics right of exponential plus two.
The corporate entity.
Yes, so we really leverage X plus X pass to do these deals like princess or Lulu lemon or things of that nature. They obviously are accretive in their own right.
But we use them to be able to do deals like we're doing like the active deal. The active deal was signed this week and so pretty pretty quick and premature to say how quickly it's going to ramp obviously we are.
Doing our best as a company to continue to be aggressive in our macro economic sort of pressured market as you can see from our results.
This quarter and even the the work that the company did in September that we've disclosed so.
We will continue to to ramp all of these BW partnerships.
So the benefit of the company as fast as possible.
Maybe as a follow up I believe you guys done any work when you look at your target customer right. So when you've got a very small percentage of the.
Households, right.
With 130000 or more of income.
When you think about.
What they're spending on fitness.
Your share of wallet and is the bigger opportunity to create demand to drive demand from that group as opposed to.
Chip.
Away from somebody else.
Have you tried to size that and.
Is that the bigger opportunity is to drive demand for fitness.
Because of your offering.
Yes, it is but as I said earlier you know what.
We're focused on is not only doing kind of our core work, which is selling franchises opening stores and driving <unk> is higher.
It really is to continue to leverage the assets of exponential.
Really across the network.
And so the answer is yes, but the answer is also both right that we want to continue to drive wallet share demand and find new wallets in new ways that if somebody may not be coming to us today in our brick and mortar consumer sense, but theyre going to use the mirror in their house or Theyre going to go on a cruise or.
Or are there going to be part of it.
Health insurance deal are there going to be part of.
Third party that active services.
That they kind of find exponential.
Really in their life right that exponential and its brands become a part of their lifestyle.
And not just something they do for 60 minutes three days, a week, but something that becomes a part of their lives seven days a week.
Alright, thank you.
Our next question is from Jonathan Komp with Baird. Please proceed.
Yes, hi, thank you.
John can I just follow up on the Q4.
Adjusted SG&A that you're embedding in the outlook could you maybe just clarify the adjusted figure that Youre looking for in the fourth quarter just to clear up any confusion.
And then when you look at the full year guidance change I just wanted to ask it looks like the <unk>.
Midpoint of revenues going up by $20 million or a little bit more in the midpoint of the EBITDA range is going up.
By about $2 million.
Could you just maybe comment on any factors that are impacting that that flow through.
Yes.
As it relates to the SG&A for the fourth quarter.
It will be greater than Q3, so that is that is based off of the convention.
Total year SG&A as a percent of revenue excluding the stock based comp will remain consistent with what I said on the previous earnings call around that 42%, let's call it 40% to 42% of revenue.
For the fourth quarter I think that's probably a good way to look at.
The SG&A for the fourth quarter.
As it relates to the.
Guidance and the flow through as I mentioned on the call.
<unk> seen some cost pressures and we have seen some.
Costs related to legal.
Some company owned studios that has that has impacted us in Q3 and Q4. So as we've adjusted our outlook. Yes. We have we have had upsides in revenue, but there has been some cost pressures that have suppressed margins a little bit in the second half of the year.
We continue to kind of manage through that.
As we.
Operate but we do expect long term as you kind of roll into 2023, that's normalized back to the levels. We had expected this.
This year.
Okay. That's helpful. Thank you and then.
And then Anthony maybe a follow up on the appetite around unit development. I know you commented on the licenses sold that you'd seen any any broader perspective as you look out to.
The number of potential openings in 2023, whether you can sustain and maybe how you feel about sustaining the level that you've seen this year.
Thanks again.
Yes, a little clarification.
So we had 120 sold.
I said, we had actually had 139.
Sold in September alone, but the franchise sales are very strong.
We're continuing to deliver on openings. This year, we will deliver a course at or better.
Openings. This next year right. It's always our goal as we sell more stack up more backlog to find ways to open more.
As we go forward so that.
That's sort of sitting as of today.
Okay, great. Thanks again.
Our next question is from Warren Cheng with Evercore ISI. Please proceed.
Hey, good evening, guys and I Echo the congratulations on great quarter I wanted to ask a follow up on the partnerships.
Thats cruises Lulu the active partnerships are there mechanisms to capture the leads or the customer data generated by these programs.
And is there any data you can share on that.
The conversion or the new numbers at a foundry brands through partnerships or the impact on CAC anything to kind of understand.
Just the metrics around.
These programs.
Yes, we do have mechanisms in place for all of our partnerships. So that we can attract.
Can measure how we're attracting a new customer base through these partnerships with Lulu Lemon as an example, we've got a promo code in place and that kind of allows us to see how many net new members. We've added into Ax path. So they don't actually go directly to the studio and Buck, but the final two X pass and then through X pass and they have the option to Buck and access.
Each of our studios.
With Princess cruises.
That one's a little bit early still we did launch a partnership and a promotion with ex Pats and Princess cruises and the last week and a half and Thats a promotion that goes through the end of the year that progression is really exciting because for every X pass that we sell <unk> excuse me Princess is actually matching dollar for dollar.
With a cruise voucher. So we're excited to see how that's performing again, we're about a week, we can have into that promotion.
So too early to see ultimately how it does in the long term, but we're starting to now kick off some of those additional marketing promotions and partnerships and we'll be able to have better clarity on.
How they are accretive to the business into the franchise partners over the next couple of months.
That's really helpful. Yeah, it's been fun to see.
Understood.
New announcements every quarter under launched.
The second follow up I had was.
Was wondering if you can contextualize your performance relative to the boutique fitness industry more broadly.
Is this outperforming as a modality in general in this environment or are you really executing competition. Thank you.
Yes.
Okay, I mean, it's hard to say right because you only have.
One other boutique fitness franchise or that's public then so.
They haven't.
On their Q3 call yet so a bit premature for us to.
To answer that.
But you know.
John has kind of some further color to it and I'll, let I'll, let him kind of tell you, yes, I think the thing that differentiates us a little bit of a boutique is the fact that we run a membership model, which allows us to continually capture reoccurring revenue every month, where you typically see and maybe a bit more of the mom and pop type boutique fitness they do packages. So.
There are a little bit more soft tooth a little ups and downs, we're because we're on the recurring membership model, we have a much more steady cash flow and revenue stream that.
That we could tap into month over month.
Got it. Thank you good luck.
Our next question is from Joe <unk> with Raymond James. Please proceed.
Good afternoon.
Just wanted to go back to a comment you guys made earlier about you know future growth coming from.
Some of the younger.
Our brands are not the club pilates appear borrowers, but more the rumbles and the B M P's and it sounds like the younger brands.
You come in with a higher <unk>, but they have a shorter I guess operating history.
Impact your visibility at all in terms of your ability to forecast the business given that they don't have the history of our club Pilates for example.
Yes, thanks for that Joe.
Not really because at the end of the day the cycle from when a franchisee signed the agreement to a license to when they get open is it's very predictable I mean, when you have the sample set that we've had almost 2500 units getting open.
You quickly learn like on average this is what it takes to get from a license sale to an open studio.
When you think about the the scaled brands, which I kind of define as any brand that has over 200 studios.
<unk> the peer of ours the cycle bars, the stress labs. The <unk> they are where we're seeing the majority of our openings.
De.
Even though that Rumble and <unk> are very young brands as Anthony mentioned, we're selling quite a few licenses from those brands. So as we look forward into the future.
They will become a larger portion of our openings and brands like club Pilates, and let's say stress level, even though it has a lot of growth still to come you will see less and less of those because the territories and the number of studios have opened up so long term long term the mix and brands and the openings will shift but the predict.
The ability of getting them open is not going to change and then I'll piggyback on that from a <unk> standpoint, we start pre selling as soon as we have an LOI in place and we're able to really see lead generation memberships that are sold even in advance of the cedar being open.
We've got.
Handfuls and handful that cities are opening the new studio brand or the new brands.
Those locations are tracking very healthily, and we know how they're going to perform even before they open their doors.
Got it that's very helpful and maybe just to follow up on that obviously your.
You're still targeting 500 to 520 studio openings. This year is that a good run rate going forward.
Yes for forward looking open studios Thats, what Youre looking for I mean, the other day, our long term strategy is to maintain above a 500 run rate now as you look out 234 years, unless we do some sort of acquisition it'll be difficult to maintain that level, because we're going to burn through our backlog of sold licenses in inventory.
As we play a more seeds internationally and that will continue to help.
But overall.
We will need to do an acquisition to maintain 500, but we have sufficient backlog right now and visibility for the next three to four years to achieve that 500 opening.
Greater.
We're worried about 2027, when it gets here I suppose.
Yes.
We'll wait till 2027.
[laughter].
And our final question is from J P <unk> with Roth Capital Partners. Please proceed.
Hi, everyone. Thanks for taking the question I wanted to kind of maybe jump back to the competitive landscape.
Maybe focus more on some of the boutique mom and pop shops.
I think anecdotally saw a number of closures with Covid and just curious kind of in the last year given the environment.
Cost rates rising is there anything you can speak to hear anecdotally about maybe challenges that some of those smaller independent.
You guys are facing whether closures or increasing anything to point out there.
Yes, I mean, I think it comes down to you know would you rather swim alone or would you rather swim and thousands of other people in them and a large ship for support right.
That's really what it is.
These independent operators that are out there doing what I call passion projects.
I wish him the best of luck because I want.
Every entrepreneur.
And as inflation happens interest rates happen.
And you're sitting out there isolate it on your own island, it's really tough.
Theres, the learnings of kind of thousands of other people.
That are out there that we can draw from.
That's a lot different than when you've got 250 people sitting at the corporate office with support.
To support you for every day you got to turn the key every morning, and your store Youre not turning the key alone right. You are turning the key with a lot of other people in support of you and so it makes total sense that you know.
This industry and any industry that.
Good franchise or a good support system, the learnings of thousands of stores across 10 different brands.
Makes a big difference.
And it comes down to.
Our franchisee pool as well when you look at kind of the operators of some of these independents.
Make the analogy to chefs that love to Cook food and want to open our restaurants. So that people can can taste their food a lot of times. These independent serve somebody who loves pilates do they love yoga and so they're kind of dream becomes opening yoga studio.
Our franchisees are corporate vet trends right there I call them corporate refugee is they know how to operate in tough environments. There.
All capitalized are used to managing people and you saw the evidence of that when we went into Covid and we came out of Covid not losing a single store, but actually gaining 30 plus percent locations. I mean, we opened 350 stores and processed almost a half a billion dollars, while we were closed.
So.
And what we're able to do more we are legally able to operate.
Yeah, that's great I appreciate that and then maybe just one follow up to kind of talk about the team and how youre feeling about kind of run rate.
I think John you kind of touched on it a little bit earlier, but just when you guys are talking about kind of long term, where <unk> can go.
Is there still a lot of and I hesitate to say easy, but a lot of easy expansion for now in terms of that run rate.
Given how early units are performing.
Or are we kind of really scraping to pull that <unk> be higher given how much we've grown in.
Being back above pre COVID-19 levels.
So when you think about our same store sales for Q3, 17%, we still have it normalize back to where we were pre COVID-19 pre COVID-19, we kind of comped up at 8% per quarter, we're still at 17%. So we're still kind of coming down to what we believe is our normal high to single digit.
Same store sale from an <unk> perspective, I think that applies and how we're looking at the businesses.
<unk> will continue to increase over time, I do think long term or even in the short term.
Youll see elevated same store sales throughout 2023.
Probably getting back to that mid to high single digits at the end of next year.
With that obviously <unk> will continue to climb.
What is the ceiling at which you kind of it's kind of like a car. They can only go so fast because at some point they are pushing through air and it's hard to move faster and faster, but I think our <unk>, we don't know where that that yet.
Is it possible that we do see getting to the high six hundreds I do think thats definitely a possibility having the entire system pushing close to a 600000 AAV. We're at 500000 roughly now.
And we're definitely not slowing down from a growth perspective, so youll see over the next.
Probably four quarters as we progress through 2023, how we continue to progress in the comp but for sure. These younger brands that are opening up stronger could actually influence how we're looking at <unk> is doing to just how.
Successful they've been they've launched in <unk>, and the rumbles and strip clubs of the world.
Great really appreciate the color there best of luck.
We have reached the end of our question and answer session I would like to turn the conference back over to Anthony He's our CEO .
Thanks again for joining today's earnings call and for your continued support I would like to acknowledge the entire X financial fitness team and franchisees for their strong operational execution in the third quarter. I'd also like to note that next month, we'll be participating as Ross 11th annual Deer Valley event and have several other conferences planned for.
Our early 2023 that will add now that we will be announcing in the coming months, we hope to see many of you at these events. Thank you and make it a great week.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.