Q1 2025 Xponential Fitness Inc Earnings Call
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Speaker Change: Good afternoon, ladies and gentlemen, and welcome to extend until fitness, Inc. First quarter 2025 earnings call. At this time I note that all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session and if at any time. During this call you require you to the system.
Speaker Change: Please press Star Zero for operator also note that this call is being recorded on Thursday may eight 2025, and I would like to turn the conference over to Patricia and hear from other Investor Relations. Please go ahead.
Patricia: Thank you operator, good afternoon, and thank you all for joining our conference call to discuss exponential fitness says first quarter 2025 financial results I'm joined by Mark King Chief Executive Officer, and John Malone, Chief Financial Officer.
Patricia: On this call will be posted on the investors section of our website at investor exponential Dot com.
Patricia: 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.
Patricia: Risks and uncertainties. Please refer to our recent and subsequent filings with the S. Four.
Patricia: We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with GAAP measures that we prefer.
Patricia: Right.
Patricia: Conciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today.
Patricia: Up to this call. Please also note that all numbers reported in today's prepared remarks referred to global cigarettes, unless otherwise noted as a reminder, in order to ensure a period over period comparability and consistent with our reporting method since the IPO, we present, all kpis on a fully pro forma basis.
Patricia: Meaning for full Kpis history presented we only include the brands that are under our ownership as of the current reporting period for the period ended March 31, 2025. This includes B S. T club Pilates cycle bar, Linda or a pure Barre Rumble stretched.
Patricia: Lab and yoga.
Speaker Change: I will now turn the call over to Mark King CEO of exponential fitness.
Speaker Change: Thanks for Tricia and good afternoon to everyone.
Speaker Change: The business performed as expected this quarter we.
Speaker Change: We demonstrated solid kpis completed our updated financing agreement and filed our franchise disclosure documents all while continuing to focus on optimizing operations franchisee health and setting up the company for long term success.
Speaker Change: In the first quarter, North American system wide sales of $467 million were up 18% year over year.
North America quarterly run rate average unit volumes of $659000 were up 8% year over year.
Speaker Change: Total members stood at 865000 at quarter end up 12% year over year.
Speaker Change: Same store sales were up 4%.
Speaker Change: Our core focus remains optimizing our operations as part of this FERC last month, we welcomed our new Chief marketing Officer Luisa occasion.
Speaker Change: Luis brings 25 years of experience in marketing and business operations having.
Speaker Change: Having previously served as President North America, and global CMO for instant brands, where she led and executed marketing commercialization strategies.
Speaker Change: Prior to that she held leadership roles in the toy and entertainment industries at companies, such as Warner Brothers Spin Master and Mattel.
Speaker Change: At exponential Luis hit the ground running one of the first areas. She is focusing on is a review of media strategies to ensure marketing funds are managed efficiently.
Speaker Change: We have also brought on Fabiano Lopez Fabia and has been supporting us as interim chief Human Resource officer. Since earlier this year and we are thrilled to welcome her into the role full time.
Speaker Change: The C. H R. O function is at the heart of reorganizing the company.
Bobby: Bobby and brings 25 years of leadership experience across multiple industries and organizations from startups to fortune 100 companies.
Bobby: With exposure to public company environments and franchising.
Speaker Change: She has a proven track record and organizational transformation strategic human resources talent strategy and scaling HR infrastructure to support rapid growth.
Speaker Change: In addition to these two senior management appointments, we have undertaken a comprehensive reorganization of our resources and remain highly focused on strengthening our operations. So that we can more effectively serve our franchisees, notably we are launching a new field operations function.
Speaker Change: With plans to have 12 field managers in place across North America by quarter end.
Speaker Change: This is the first for the company, marking a significant development and operational support.
Speaker Change: These individuals will work closely with our franchisees to drive best practices across studios and support New studios and launching successfully.
Speaker Change: These field roles are reallocated, rather than new hires meaning that for every employee in the field, we are eliminating our head count at HQ.
Speaker Change: Turning to franchise sales and new studio openings, we are making good progress on the franchise disclosure documents or F. D. DS we filed all F D DS except Lin Dora at the end of the first quarter and we have had them available in all 36 states that don't require registration.
Speaker Change: We are also actively selling in the majority of the 14 registration states under F D D registration or exemption.
Speaker Change: On the international front, we are continuing to support our established and growing master franchisee base. We now have boots on the ground in London with plans to have physical presence in Asia later this year.
Speaker Change: Some of the international markets, where we're seeing particular success include Spain, Portugal, France, Japan and Australia.
Speaker Change: Exponential is very focused on providing a high level of support to master franchisees and ensuring that we have the right relationships in place for long term international success.
Speaker Change: In summary, we are making significant efforts to optimize operations and we are executing with urgency to better support and serve franchisees.
Speaker Change: While we acknowledge there is more work ahead, we're confident that we have the right strategy team and infrastructure in place to adequately support our franchisees and drive long term sustainable growth.
Speaker Change: We look forward to sharing more about our key initiatives and operational enhancements at our upcoming analyst and Investor day on May 29.
John: With that I'll turn it over to John.
John: Thanks, Mark and thank you to everyone for joining the call, let's now turn to an overview of our first quarter results. We ended the quarter with 3298 Global Open studios opening of 116 gross New studios during Q1 with 93 in North America and 23 internationally.
John: There were 51 global studio closures in the first quarter or about one 5% representing an annualized closure rate of 6% the elevated closures in the period were mostly in cycle bar and stress that.
John: We sold 21 licenses during Q1, which were all international and largely concentrated in club pilates.
John: During Q1, there were no North America license sales, while we completed the 2025 annual renewal of our franchise disclosure documents our base of licenses sold and contractually obligated to open is over 1500 studios in North America, and we also have over 1000 international Master franchise obligations.
John: These licenses will provide a foundation for future new studio openings. However, as noted last quarter, we anticipate that approximately one third of our global licenses contractually obligated to open are lagging over 12 months behind the applicable development schedule. As a result, we have begun an active campaign to give these franchisees.
John: An opportunity to open the lagging studios or Alternatively, these licenses will be terminated the termination of these licenses will result in a recognition of additional EBITDA as they occur which is consistent with our historical practices. There is no cash flow associated with the termination of these licenses as we receive payment upfront at the time of sale.
John: Under U S. GAAP, we are simply required to accelerate the recognition of the license fee revenue and associated commissions that we would normally amortize over the term of the license typically 10 years.
John: First quarter, North America system wide sales of $467 million were up 18% year over year with growth driven primarily by the 4% same store sales increase within our existing base of open studios, coupled with growth from our net new studio openings north.
John: North America run rate average unit volumes of 659000 in the first quarter increased 8% from 609000 in the prior year period. The increase in HAE U V was largely driven by a higher number of actively paying members higher pricing for new members and the continued favorable trend of proportionate studio openings coming from our <unk>.
John: Scale brands, which make up 95% of our system wide sales and 94% of our open studios in North America.
John: Yeah.
John: On a consolidated basis revenue for the quarter was $76 9 million down 4% from $79 7 million in the prior year period, which included $1 4 million in revenue from company owned studios.
John: 80% of revenue for the quarter was recurring which we define as including all revenue streams, except for franchise territory revenues and equipment revenues given these materially occur upfront before the city opens.
John: Turning to the components that make up revenue franchise revenue for the quarter was $43 9 million up 5% year over year. This growth was primarily driven by an increase in royalty revenue as system wide sales were supported by year over year membership and visits increasing 12% and 14% respectively. In the period, we had offsetting lower raw.
John: Revenue recognized from franchise license sales as we temporarily pause our normal maintenance on terminating franchise licenses, which accelerates revenue recognition, while we organized the activation campaign previously mentioned.
John: Equipment revenue was $11 1 million declining by 20% year over year. This decrease was primarily the result of a 22% year over year lower volume of North American installations in the period compared to the same period prior year.
John: Merchandise revenue of $6 3 million was down 25% year over year. The decrease year over year was due to lower sales volumes vendor rebates and price discounts as the company focused on reducing inventory levels. We continue to explore alternatives for our retail operations that will result in greater profitability for exponential improved.
John: Service levels for our franchisees higher frequency of inventory turns and merchandise offerings that more closely align with our members' interests.
John: Given the current discussions on tariff impacts I wanted to point out that we typically apply a cost plus markup in the purchasing setting prices and reselling of equipment and merchandise Directionally. We do believe there will be some higher costs in the procurement process, but as designed and the way we set pricing. We believe we can largely mitigate.
John: The impact on margin percentages.
John: Franchise marketing fund revenue of $9 3 million was up 18% year over year, primarily due to continued growth in system wide sales from a higher number of operating studios in North America.
John: Lastly, other service revenue, which includes sales generated from rebates from processing studio system wide sales brand access partnerships company owned studios ex Pats in X plus among other items was $6 4 million down 19% from the prior year period.
John: The decline in the period was primarily due to lower brand access fee revenues and from lower package of membership revenues due to the company shifting its strategy in 2023 to no longer operate company owned studios.
John: Turning to our operating expenses for the quarter cost of product revenue were 12 million down 18% year over year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period.
Merchandise inventory levels at quarter end remained in line with the prior year and which we believe it is now a more manageable position to turn inventory over more frequently.
John: Cost of franchise and service revenue were $4 1 million down 19% year over year. The decrease in franchise sales Commission was largely due to the temporary pause of franchise license terminations and associated Commission expense acceleration, while we organize the previously mentioned activation campaign.
John: Selling general and administrative expenses of $45 5 million or 24% higher year over year. The increase in SG&A was primarily driven by an increase in legal judgments and settlements.
John: In the period, we recorded an incremental accrual of $15 million. In addition to the 10 million previously accrued in Q4 of 2024 for a total of $25 million related to the potential settlement of a threatened franchise class action subject to entry into a definitive settlement agreement.
John: After this amount will be paid upon court approval and the remaining half will be paid out and even increments annually from 2026 through 2028.
John: We currently expect at least $5 million of the settlement to be recovered from our professional insurance policies.
John: At present, we have entered into lease settlement agreements of approximately $30 7 million and have paid approximately $35 million through the first quarter.
John: As of March 31, 2025, we have approximately $14 5 million of lease liabilities yet to be settled.
John: We expect most of the remaining liabilities will be settled during the remainder of 2025.
John: Moving on to depreciation and amortization expense was $3 million down 33% compared to the prior year period.
John: Marketing expenses were $9 4 million up 44% year over year, driven by higher system wide sales and the associated marketing fund revenue contributions.
John: In the period, we did accelerate approximately 1 million in marketing expenditure that was planned in future periods to drive increased leads and ensure that the year has gotten off to a good start.
John: As the number of studios in system wide sales growth. It is expected that our marketing funds spend will increase since we are obligated to spend marketing funds and increase in marketing fund revenue will always translate into an increase in marketing fund expense overtime.
John: Acquisition and transaction credit was $8 6 million compared to an expense of $4 5 million in the prior year period as I have noted on prior earnings calls. This includes the contingent consideration activity, which is related to the Roma acquisition earn out and is driven by the share price at quarter end, we mark to market the earn out each quarter and adjust our accruals.
John: Accordingly.
John: We recorded net loss of $2 7 million in the first quarter or a loss of <unk> 10 per basic share compared to a net loss of $3 8 million or a net loss of 29 cents per basic share in the prior year period. The change in net loss was the result of $1 2 million of lower profitability $15 5 million increase in litigation expenses.
John: $1 9 million increase in impairment of goodwill and other assets $8 9 million increase in transformation initiative costs and a <unk> 7 million increase in other miscellaneous cost offset by a $13 2 million decrease in acquisition and transaction expense, which includes noncash contingent consideration primarily related to.
John: The <unk> acquisition of $7 3 million decrease in restructuring and related charges and a <unk> 9 million decrease in equity based compensation and related taxes.
John: We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release adjusted net loss for the quarter was $7 7 million, which excludes $8 6 million in acquisition and transaction income a one.
John: 1 million expense related to the Remeasurement of the company's tax receivable agreement $1 9 million related to the impairment of goodwill and other non current assets point 1 million loss on brand divestitures, and wind down <unk> 6 million of restructuring and related charges.
John: This results in an adjusted net loss of <unk> 20 per basic share on a share count of $33 9 million shares of class a common stock.
John: Adjusted EBITDA was $27 3 million in the first quarter down 9% compared to $29 9 million in the prior year period due to the accelerated marketing funds spend that was pulled into the quarter.
John: Adjusted EBITDA margin was 35, 5% in the first quarter down from 37 five in the prior year period.
John: Turning to the balance sheet as of March 31, 2025, cash cash equivalents and restricted cash were $42 6 million up from $27 2 million as of March 31, 2024 for the quarter net cash provided by operating activities was $5 8 million, which includes <unk> 6 million in lease settlements.
John: Net cash used in investing activities was $1 million with <unk> 9 million for purchases of property and equipment and intangible assets and <unk> 1 million for issued notes receivable.
John: The cash generated from financing activities was $5 million, which included a $10 million borrowing on long term debt offset primarily by $1 5 million in a payment of long term debt and debt issuance costs $1 8 million payment on preferred stock dividends.
John: $9 million related to the share settlement of restricted stock units <unk> 5 million in payments of contingent consideration for the <unk> acquisition, and <unk> 3 million payment for distribution to pre IPO L. L. C members.
John: Total long term debt was $379 1 million as of March 31, 2025, compared to $331 4 million as of March 31, 2024. The increase in long term debt is primarily due to the company drawing 10 million in additional debt in the first quarter of 2025 for general working capital purposes and 25.
John: An additional debt in the third quarter of 2024 to address the lease termination payments on previously owned studios and for general working capital purposes.
John: Let's now discuss our outlook for 2025 based on current business conditions and our expectations as of the date of this call. We are lowering guidance on global net new studio openings and reiterating guidance for system wide sales total revenue and adjusted EBITDA for the current year as follows.
John: We project North America system wide sales to range from $1 93, 5 billion to $1 95, 5 billion, representing a 13% increase at the midpoint from the prior year.
We expect 2025 global net new studio openings, which is net of closures to be in the range of 160 to 180, representing a 29% decrease at the midpoint from the prior year.
John: We now expect the number of closures to be 6% to 8% of the global system. This year as a percentage of the total open studios with a longer focus to reduce global closures to the low to mid single digits as a percentage of the total global system.
John: Total 20 to 25 revenue is expected to be between 315 million to $325 million, representing no change year over year at the midpoint of our guided range. Adjusted EBITDA is expected to range from $120 million to $125 million, representing a 5% year over year increase at the midpoint of our guided range.
John: This range translates into roughly 38% adjusted EBITDA margin at the midpoint.
John: We expect total SG&A to range from $145 million to $155 million when further excluding the onetime lease restructuring charges and regulatory and legal defense expenses, we are expecting SG&A of $115 million to $120 million and a range of <unk> $99 million to $104 million when further excluding stock based costs.
John: In terms of capital expenditures, we anticipate approximately 10 million to $12 million for the year or approximately 3% of revenue at the midpoint.
John: For the full year, our tax rate is expected to be mid to high single digits share count for purposes of earnings per share calculation to be $34 8 million and $1 9 million in quarterly cash dividends related to our convertible preferred stock.
A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the end of our earnings press release as well as our corporate structure and capitalization F. Q on our Investor website.
John: We anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business.
John: We expect that our anticipated interest expense in 2025 will be approximately $49 million tax expenses to be approximately $10 million, including the cash usage for tax receivable agreement and tax distributions for pre IPO L. L. C members and approximately $8 million in cash dividends related to our convertible preferred stock resulting in.
John: <unk> adjusted EBITDA cash flow conversion of 37%.
John: This concludes today's prepared remarks. Thank you all for your time today, we'll now open the call for questions operator.
Speaker Change: Thank you, Sir ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone you will then hear a prompt that your hand has been raised and should you wish to decline from the polling process. Please press star followed by two it's using a speakerphone you will need to lift the handset first before pressing any keys.
Speaker Change: Please go ahead and press Star one now if you have any questions.
Speaker Change: First question will be from Randy comment at Jefferies. Please go ahead.
Randy: Yeah. Thanks for taking my questions I guess, Mark we heard a lot John.
Speaker Change: We've heard a lot during the call a lot of numbers, but can we just kind of boiled boil. It all down to just broad strokes of what we're trying to get done here over the next few months before the Oh I get it.
Randy: For the analyst day coming up actually.
Randy: What do you want to kind of take away from all these actions that are occurring are we were basically at a point where the closure rate is starting to subside the openings are going to start to stabilize.
Speaker Change: You're talking about more efficiency.
Speaker Change: In the headquarters I, just wanted to get a real kind of if we had kind of just boil it down without the numbers just kind of the big our overarching themes coming out of this quarter and into next few quarters that you can be focused on that'd be super helpful. Thanks.
Mark King: Hey, Randy this is mark I'll take the first part of it may be John can follow up I think what we're in the middle of Randy is really a transformation of our business from a very aggressive sales focused company to one that is building the foundation of efficiency and effectiveness star.
Mark King: <unk> from the way, we sell licenses the way, we help France, the choosing of franchisees to the opening.
Speaker Change: Of studios.
Speaker Change: Putting people out in the field are these ops people to help franchisees get open get started audit their operations as we go forward. So I think it's building.
Speaker Change: The foundation for long term sustainable growth I think that's that's what we're trying to get accomplished here and it's affecting everything that we do we've we've taken more time on the F. D. D. So we were out of the market for quite a few months, which will affect our license sales it'll it'll affect openings to the back half of the year, because we were out of.
Speaker Change: Circulation for four or five months in license sales, but I think all of these steps are necessary for us to prepare the company to be a very solid growing company as we go forward.
Speaker Change: Yeah, and just to add to that Randy I think what youre seeing in 2025 is this going to be more of a stabilization of the business. When you look at the guide on revenue and EBITDA its relatively flat to 2024, but the one thing that as we go through this transformation and youre not seeing a degradation in the overall financial health of the business. It just more of a stabilization so as such.
Mark King: These things Mark I spoke about and as we start to improve the operation.
Speaker Change: Of the overall business, but also the health of the franchisee that's when the company itself will return to growth so twenty-five as more of a stabilization and will elaborate some of the.
Speaker Change: More detailed information around that at analyst day, which will eventually lead to how we look at 26% 27 beyond where the company returns to growth, but the key walk away for 2025 as the business is healthy we are executing well you know we continue to open up studios.
Speaker Change: And the franchisee health is should only get better with one of the things that we're trying to do here.
Speaker Change: Here in 2005.
Speaker Change: Thanks, and then just on the revised openings for the year, how many of those are club Pilates, and then maybe mark when you've kind of starting to continue to get.
Speaker Change: Different concepts.
Speaker Change: Portfolio, maybe kind of is there a way to kind of get some color on where you have obviously beyond club wise, we have obviously, the most conviction and confidence in <unk>.
Speaker Change: Where are the whereas the other highest level of confidence and conviction, thus far that you have.
Speaker Change: Kind of sorted through when you're looking at the different concepts.
Speaker Change: Yes.
Speaker Change: Well I'll take the second part of that question first Randy.
Speaker Change: We're very bullish on yoga six we've had a really good quarter on yoga six on same store sales, while we have more interest in openings. So we feel really good about yoga six pure Barre also has had really great.
Speaker Change: Tail winds of in Q1 same store sales memberships visits are all the things that would indicate the health of those brands.
Speaker Change: Stretch lab is struggling that's not new we've talked about that the last couple of quarters, we have all hands on deck.
Speaker Change: With stretch lab, we believe very much in the concept we're looking at everything from the size of the studio, we're working with franchisees and hand in hand to look at the size of the studios are how do we train of flex allergist more rapidly at lower costs are looking at a pricing strategy.
Speaker Change: <unk> looking at the Labor model. So we really like stretch lab, because the consumer feedback is so good but we need to fix that model.
Speaker Change: And a follow up on the openings you know club pilates will be over half of the openings. This year. It also reflect most of the license sales as well over half the license sales and then as we've talked about on previous calls you will see good growth in.
Speaker Change: Stress.
Speaker Change: But if their training and then yoga six so those are kind of the four core brands that are really contributing to the increased new studio, our gross new studio openings and largely where youll see the license sales come from as well.
Speaker Change: Super helpful. Thanks, guys.
Speaker Change: Thank you next question will be from Joe, Alabama at the Raymond James. Please go ahead.
Speaker Change: Thanks, Hey, guys good afternoon.
Speaker Change: First question on the closures I think John you mentioned, you're expecting 6% to 8%.
Speaker Change: Our closure rate this year I use the midpoint I think that's around 225.
Speaker Change: We would use versus 165, which I think was the midpoint of your prior guidance.
Speaker Change: The additional closures coming from which brands are they coming from.
Speaker Change: The closures that we saw in Q1 were largely in FICO borrowings stretch lab and then when we look at kind of the portfolio, that's probably where you'll still see some of the concentration.
Speaker Change: I think <unk> will probably be the third spot.
Speaker Change: On the international front so the.
Speaker Change: Q1 kind of distribution will largely look like for full year based off what we're seeing it today.
Speaker Change: Alright.
Speaker Change: A follow up on the license sales you mentioned that he was 21 in the quarter.
Speaker Change: How do we model the ramp this year for that metric.
Speaker Change: I think youll get to or you know based off of IP license that was really based off of like what you could sell right, but I think well targeted probably about 100 a quarter.
Speaker Change: Going forward, so as we get into market and start being able to sell across all the states domestically plus your internationally you are probably looking about 100 license sale in the quarter.
Speaker Change: Perfect. Thank you.
Speaker Change: Just Joe just add the distribution will obviously have a pretty high concentration in club pilates, both domestically and internationally.
Speaker Change: Thanks.
John: Thank you next question will be from John <unk> at Guggenheim. Please go ahead.
Speaker Change: So mark I know the 12 field.
Speaker Change: Field ops right, so they're going to work across multiple I think across multiple brands.
Speaker Change: Maybe.
Speaker Change: Obviously I'm not sure that I spent a lot of time on and pilates, but.
Speaker Change: How do you envision them spending their time.
Speaker Change: Impacting the business.
Speaker Change: And then I guess is there something to be said for skinny and down the portfolio further right. So that theyre not diluted are referenced are not diluted as much.
Speaker Change: Yeah. Thanks.
John: Thanks for the question, John I think theyre going to have a huge impact it was.
John: Surprising that we didn't have field ops people and I understand that we had them in the past, but anyway. When I came we didn't have any I think there's multiple things theyre going to help franchisees with specifically I think they will help new franchisees as they prepare to open their studios the presale training.
John: The staff really helping these franchisees new franchisees understand what it takes to operate a successful studio. So I think that's number one number. Two then is as they go forward. Those first six months to a year what are really the watch outs.
John: And we're also going to have the field ops visit probably once a quarter. So it will be a really active group.
John:
John: So I think theyre going to really help them get started on a positive note going forward I think we really need to audit every one of our studios to make sure. They're following the Playbooks if theyre not why arent. They can we help them. So it's not only training them, it's coaching them and it's also auditing the studios.
John: We make sure that they are following the playbooks.
Speaker Change: Okay and then.
John: When you think about the thousands that are 1000 studios that are sort of in arrears, so to speak right.
John: Good.
John: I mean, how do you assess how many of those are viable.
John: Right and I would assume very few of those are club pilates, but what is the process right for.
John: Getting in touch with franchisees.
John: Getting a resolution terminating them.
John: Refranchising it seems like that would.
Mike: Kind of a laborious process, but Mike may take a while.
Speaker Change: Yeah, So I'll take that one.
Speaker Change: We hired Tim our new CFO and hence that's why we kind of took a pause on terminating licenses in the first quarter because he wanted to really evaluate and go through that little bit labor is kind of a process to understand what is the what does that backlog look like.
Speaker Change: The first step is obviously going to be assessing who's behind and why and then two there's going to be an active campaign to start communicating with these franchisees and finding out what is the hurdle and the reason why they are not moving forward.
Speaker Change: I do believe that some of these will be activated some of these franchisees basically just not be going forward because.
Speaker Change: These things require work there you just don't open them up and they run themselves. So if they bought three licenses when they got too and they're financially doing well and they're choosing not to open a third one because theres no real rush, they're making enough money like that that's one end of the spectrum and then theres. The other end of the spectrum, where they opened up one in they're not profitable and hence they don't want to open up their second or third.
Speaker Change: So there's varying reasons as to why.
Speaker Change: These franchisees have it report and Tim will need to go through that portfolio.
Speaker Change: Ingrid franchisee licenses and determined what we need to do but the one thing that we need to do all good franchise system should do is make sure that the snow is current that we are actively maintaining it because the last thing we want to do is tie up dirt that could it be productive with our franchisee if indeed.
Speaker Change: We can get one open for the existing franchisee who owns the space doesn't want to so it's going to take some time. It is a process that we're going through probably get about elaborate more on that at the analyst day, and the kind of the progress that we're making but.
Speaker Change: Right now we're taking the time to make sure we do it strategically and think about it the right way and create a process that we can continually maintained our backlog every quarter now to that point we have.
Speaker Change: Historically and routinely gone through and done terminations in our historical numbers as well as practices. So we just chose to take a pause in Q1, while Tim kind of got his feet on the ground and step into his role.
Speaker Change: Thank you.
Speaker Change: Thank you next.
Speaker Change: Next question will be from Chris I'll call at Stifel. Please go ahead.
Chris: Yes. Thanks.
Chris: Mark I had a question on stretch lab and I was just curious if you think they've been under investing in marketing to kind of generate leads.
Chris: And whether you think franchisees could afford to increase their marketing budget or the company might need to support them.
Speaker Change: Yeah, Thanks, Chris Hello, Chris how are you.
Speaker Change: It's a really it's a really good question and we've done several things in Q1 to help the franchisees we've actually.
Speaker Change: Double their local marketing spend in one of the months I think it was March to help drive leads we are considering investing more money of our own as we go forward. We also have some reserve unspent marketing funds in stretch lab that we will deploy this year to help them and I also.
Speaker Change: That the addition of our new CMO Who's really looking at how we're spending money locally and the agencies that we're using to make sure that we're maximizing the amount of that local spend so all of that Chris is under review and I think we're finding we're finding some low hanging fruit that I think will impact the business, but probably won't be till the <unk>.
Speaker Change: Second half of the year, but I think there is some light at the end of the tunnel in terms of starting to get stretched lab going in the right direction.
Speaker Change: Okay.
Speaker Change: It is interesting you mentioned that you're considering a different pricing model for the brand and I was just wondering if you're considering like a monthly membership model, where our members maybe receive a discount for recession and I'm kind of thinking like a massage envy type model is that is that something you might consider for the brand.
Speaker Change: Chris we're considering a lot of things that is definitely one of them. We're also considering a membership fee where there's other.
Speaker Change: Activities inside the generate you would generate revenue through the membership and they can stop in for a five minute stretch 10 minute stretch. Some other things that we are looking at adding to the the studio, but definitely looking at a monthly membership.
Speaker Change: Okay.
Speaker Change: That's great. Thanks, guys. Thanks, Chris.
Speaker Change: Next question will be from Jonathan Komp of Baird. Please go ahead.
Speaker Change: Yes, hi, good afternoon can I just follow.
Speaker Change: Follow up on the change in the unit outlook for the year can you maybe just highlight.
Speaker Change: If there are some factors that are impacting the ability to forecast on a near term basis or.
Speaker Change: Just curious what's driving the change in outlook there.
Speaker Change: Oh, it's two factors one its not having license sales in Q4, and Q1 has created a little bit of a bottleneck as you get towards the end of the year because there was some expectation to get more units open.
Speaker Change: In the fourth quarter that you may have sold out license in Q4 of 2024 or in Q1 of 2025, so not having those license sales, but it does impact the growth funnel in the short term. So as we've kind of gotten through Q1 and looked at you know who in the movement and who is active and not active we wanted to make an adjustment for that.
Speaker Change: And then we did see slightly higher closures in the first quarter than we had anticipated so that being said, we made an adjustment for that so.
Speaker Change: Over time, I think as some of the.
Speaker Change: More the unprofitable franchisees that exist in our portfolio are those kind of fallout you should see a deceleration in enclosures, but the guide.
Speaker Change: Change in this quarter was simply just said listen, let's just be a little bit more conservative take down the guide based off of these two factors one being the higher closures in Q1, and then just the ability to get some of these.
Speaker Change: Franchisees opened by the end of the year, we just didn't want to put pressure.
Speaker Change: On the system for studios to get open faster than they're ready to.
Speaker Change: And when you think about the visibility today to the.
Speaker Change: The new outlook.
Speaker Change: 160 to $1 80 on a net basis.
Speaker Change: Any way to just.
Speaker Change: Quantify your confidence or visibility to that level today.
Speaker Change: Pretty good I think the confidence I mean, youll see the way the cadence is it going to be it's going to be about 50, 50 about 50% of the gross or net openings will be in the first half and 50 in the second half.
Speaker Change: We are looking at.
Speaker Change: On a brand by brand basis, and an honest studio by studio basis, assessing financial performance in health and really trying to assess where we think we could.
Speaker Change: How franchisees out and save them I guess is the right way to put it in a way are the ones, where it's probably not likely that there'll be able to persist. So confidence is pretty high at the 160 to 180 guide I think it's a pretty high level of confidence that that's where we'll come in for the year.
Speaker Change: Okay.
Speaker Change: Okay, and then just last one for me.
Speaker Change: Sure.
Speaker Change: John on the follow up on that.
Speaker Change: When you terminate the licenses and.
Speaker Change: For accounting purposes, the revenue and profit from that.
Speaker Change: Is that a material number on a on an annual basis.
Speaker Change: It's something you include in the guidance typically are or would that be sort of.
Speaker Change: Our the model upside.
Speaker Change: Thanks again.
Speaker Change: Yes, I mean, when you look at our historical numbers that's been in our historical numbers.
Speaker Change: It's probably a couple of million dollars of revenue a quarter typically and then you get a $1 million and change or so of EBITDA you get for every license. There is revenue and there is an offsetting commission. So there is a net let's call it roughly 50% margin.
Speaker Change: That flows through.
Speaker Change: But it has been in our historical numbers.
Speaker Change: Don't have a number for this year, because we are actively going through the backlog, but typically in our in our prior quarters. It's been about a couple of million each quarter of revenue and $1 million or so in EBITDA.
Speaker Change: Got it okay. Thanks again.
Speaker Change: Thank you next question will be from criminals Maya at Piper Sandler. Please go ahead.
Speaker Change: Good afternoon, thanks for taking the question.
Speaker Change: First I'd like to touch on just tariffs and.
Speaker Change: What kind of exposure.
Speaker Change: Name and.
Speaker Change: Pieces into the unit build.
Speaker Change: It'd be exposed to tariffs and how it how impactful could get the franchisee to franchisee with that thank you.
Marc: Thanks, Karen this is Marc I'll take that one.
Marc: So there's really two impacts we've been looking at tariffs obviously as every other company has for the past few weeks and there is a direct impact and there is also an indirect impact. So let me take the direct first first of all 80% of our revenue is recurring so the only thing really affected in the direct is about 20% of our revenue and that's on merch sales.
Marc: And.
Marc: And.
Marc: What about the.
Marc: The equipment sales to the franchisees our supply chain team has been working diligently with all of our vendors to minimize the impact we have a pretty good view of the impact it's minimal at this point, it's very fluid, it's actually getting better weekend and week out because we're finding vendors that want to work with us and they absorb.
Speaker Change: <unk>, some and we absorbed some and will pass some of that along as John mentioned in his opening remarks on the cost plus so I think that'll be minimum impact more.
Speaker Change: Like John said half the studios had open our club Pilates and and we're seeing almost no impact on those.
Speaker Change: In terms of affecting those so we feel really good that we've got our arms around it and a very limited impact both on franchisees and on US and then in terms of the indirect.
Speaker Change: What what's going to happen in the marketplace with consumers, we've proven to be pretty resilient during COVID-19 inflation, another macro challenging times, so well again at this point, we haven't seen any impact of tariffs on on memberships or visits or anything so.
Speaker Change: At work and we're concerned about it enough to be looking at it every day, but at this point, we feel pretty confident we have our arms around it.
Speaker Change: Thank you and I guess kind of building off of that point any color you can give us on kind of what's baked in at the low end versus the high end of guidance regarding that consumer and then any direction you can give us on how youre thinking about the same store sales cadence over the remainder of the year.
Speaker Change: Yeah, I'll take that I mean as far as the Guy the Guy we haven't seen any shift in consumer behavior. So I mean, when you look at Q1.
Speaker Change: And even as of through April.
Speaker Change: <unk> seen the visitation remains strong with total members have continued to grow.
Speaker Change: There hasnt been a shift in consumer demand that we've seen typically Q1 is one of your better quarters simply because theres a lot of new year's resolution and then you also benefit from the consumer.
Speaker Change: Kind of utilizing some of the promotions, we do in the fourth quarter, So haven't seen a drop off in consumer behavior.
Speaker Change: As we as we said previously we still expect same store sales to stay in that mid single digit kind of range. So in that three to six three to five kind of range.
Speaker Change: Throughout the rest of this year, so I'm not expecting any material shifts and you got to remember the majority of the.
Speaker Change: The system wide sales over 95% of it is coming from our scale brands. So club Pilates stretch lab.
Speaker Change: Yoga sake, so a peer of ours. So these are brands that have shown consistent same store sales performance. We continue to open up more studios in those brands. So.
Speaker Change: There shouldnt be we're not expecting to see any shift with the consumer.
Speaker Change: Thanks, so much.
Speaker Change: Thank you next.
Speaker Change: Next question will be from Jeff Van <unk>.
Speaker Change: I'm, sorry, B Riley Securities.
Richard Magnuson: Hello. This is Richard Magnuson for <unk> syndrome, and thank you for taking our call.
Richard Magnuson: Regarding their franchise disclosure documents can you remind us what's the most important changes are that will affect your franchisees.
Richard Magnuson: And talk about any feedback response, you've got so far and then also maybe.
Richard Magnuson: Good estimate of a pent up demand during that period.
Richard Magnuson: Yes.
Mark King: Richard Hi, Richard This is mark Yeah, we did we did as a really thorough job at looking at <unk>.
Richard Magnuson: Specifically, the Buildout cost we worked with vendors.
Richard Magnuson: Our time to really do the right job to be as accurate as we can there was some increases across all the brands in terms of build out costs, but we feel we're much more realistic at this point, we haven't really had any negative feedback or pushback from franchisees or people that are opening so we feel good about the <unk>.
Richard Magnuson: That we've done and going forward I think it'll be more accurate for franchisees.
Mark King: Okay and then.
Mark King: The fact that the time period that they had to wait for these documents.
Mark King: A bit of pent up demand on the part of the franchisees.
Mark King: There wasn't club Pilates, I mean, theres, obviously, theres any opportunity to purchase one of our <unk> licenses people will stick around for that in a lot of the purchases also come from existing franchisees who owns.
Mark King: On an existing studio and one of the brands. So yes, there was some pent up demand.
Mark King:
Mark King: We have filed all the ftes, except for <unk>, which we're in the process of doing that largely 36 of the states.
Mark King: <unk> selling and then I think in.
Mark King: We disclosed in the in the call the slide.
Mark King: Brands in the states that are still pending review.
Mark King: Which ones those are so the good news is we are now actively selling again in returning to adding more licenses. The backlog. The hope now is Q2 license sales will translate into new studio openings probably.
Mark King: More likely in the first quarter of 2026.
Mark King: Alright, thank you.
Mark King: Thank you.
Speaker Change: Next question is from J P. William Roth Capital markets. Please go ahead.
J.P. William: Great Hi, guys and I appreciate you taking my questions. If we could maybe start with the field ops team I think you said in there that the goal is to have them kind of rolled out by ended the month or ended the quarter, but.
Speaker Change: If you could just kind of help us understand like how.
Speaker Change: Soon can they really get in and be impactful and is there sort of an immediate focus as they get out of the gate are they immediately go into kind of your lowest 10% performers and you think that you could see upside by the end of the year like how are you thinking about how soon have an impact they can have.
J.P. Williams: Thanks for the question J P. So we'll rollout 12 field ops people by the end of the quarter, we have another tranche of 12.
Speaker Change: Towards the end of the third quarter and then the final group will be out by the end of the year or January so when we're fully built out will have around 40 <unk>.
Speaker Change: <unk> people I think the impact will be immediate and you are very perceptive, yes, I think they will start with the franchisees that are struggling the most to go in and really identify why theyre struggling build a plan out with them to get the franchisee and their business headed in the right direction.
Speaker Change: So I I believe once all 40 are out working it will have an immediate impact on the system, but its going to take us about three quarters to get everyone out in the field, but I think by the time, we get through July and August we're going to see an impact on on the franchisees, where these 12 initial.
Speaker Change: Field ops people will be deployed.
Speaker Change: Understood appreciate the color and then if I can just kind of a bit of a follow up to the conversation about license sales.
Speaker Change: If we step out and sort of take a high level view.
Speaker Change: Understanding that you guys kind of want to be a bit more selective and make sure you have the right franchisee partners, but can you just kind of talk about how inbound license leads are trending.
Speaker Change: Is there any changes that youre seeing out there with relationships with brokers with how people view the relationship to exponential as a whole any kind of high level themes, you're seeing there.
Speaker Change: Yes.
Speaker Change: Sure. So first of all we're not working through the broker network anymore. So we're building out our own team.
Speaker Change: We do our own marketing through different mediums to find people that are interested in being a franchisee we worked through a lot of the existing franchisees and their recommendations and we have a very seasoned development person, Eric Simon who has really brought a lot of <unk>.
Speaker Change: Experts and experience to the process.
Speaker Change: Secondly, we're also looking at with some of our scaled brands on reaching out to private equity and there is quite a bit of interest from well capitalized private equity that are looking at white space and how they would come in.
Speaker Change: Which really have capital.
Speaker Change: Access to capital access to operating and really commitment to building out. So we're really looking at the entire process, but right. Now we're just getting started to be honest and especially since the ftes. Just are now out and were able to sell but the initial response from the team is I would say positive.
Speaker Change: Great. Thanks for taking my questions and best of luck.
Speaker Change: Thanks.
Speaker Change: Next question will be from Owen Richard Northland Capital markets. Please go ahead.
Speaker Change: Hey, this is Logan on for Alan Thanks for taking our question.
Speaker Change: First how should we think about new studio openings in 2025.
Speaker Change: That ain't going forward and when should we expect a pullback.
Speaker Change: New studio openings, what Youll see is as I mentioned earlier, it will be about 50% in the first half and 50% in the second half so it'll be a pretty flat cadence quarter to quarter in the first quarter of this year, we had about 116 openings.
Speaker Change: Remember, we we didn't rush openings in the fourth quarter, even though we got the equipment installs. So you did see a little bit higher kind of rollover from the prior year of openings, but from this point forward you should see in that 80 to 90 range each quarter as far as opening so it should be about 50 50, roughly again the concentration is definitely going to be in <unk>.
Speaker Change: <unk> with over half the openings.
Speaker Change: And then Youll see stress lab yoga fix and DFT, primarily in the international space is where they'll come from.
Speaker Change: Got it that's helpful. Then a last one from US can you provide some color on your international expansion plans any updates there changes in your methodology or what markets that your top priorities. Thanks.
Speaker Change: Well the methodology really has defined a really qualified master franchisees we've.
Speaker Change: We require them to both.
Speaker Change: Own and operate.
Speaker Change: Some studios along with selling sub franchise agreements.
Speaker Change: We're focused on countries that we believe have big upside and opportunity and right now we've done a really great deal down in Mexico. So we look for that to start to build out. This year, we're really seeing some some really good momentum in Portugal, Spain, big interest in France and Germany.
Speaker Change: We're very strong in Australia, and we're really building the club pilates out in Japan, but those are the major markets right now.
Speaker Change: Thanks.
Speaker Change: In the quarter.
Speaker Change: Thank you.
Speaker Change: And at this time, Mr. King we have no other questions registered please proceed sir.
Speaker Change: Thank you again, everyone for joining today's call and we look forward to seeing many of you at some of the upcoming marketing events, including our analyst Investor Day, which will be hosted at the New York Stock Exchange later this month.
Speaker Change: Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Speaker Change: Yeah.
Speaker Change: Yes.