Xponential Fitness Inc (XPOF) 2023 Q1 法說會逐字稿

Greetings, and welcome to Xponential Fitness Inc. First Quarter 2023 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Kimberly Esterkin. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' First Quarter 2023 financial results. I am joined by Anthony Geisler, Chief Executive Officer; Sarah Luna, President; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.exponential.com.

We remind you that during this call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call.

In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that we issued earlier today prior to this call. Please also note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Exponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our first quarter earnings conference call. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak further about our progress against our core growth strategies with an emphasis on our growing B2B offerings. John will conclude with a review of our first quarter financials and an update on our 2023 outlook. It was another strong quarter for exponential as our business has continued to perform across our key performance metrics. Exponential franchisees now operate over 2,750 studios globally, an increase of 24% year-over-year with more than 5,600 licenses sold across our 10 leading fitness brands. We now have franchise master franchise and international expansion agreements in 18 countries. Also encouraging, our mature studio cohorts are again exhibiting strong same-store sales growth with profiles similar to our younger studios. For the quarter, North American studios over 3 years old comped at 21% same-store sales.

Turning to our membership levels. Total members across North America increased by approximately 31% year-over-year to a total of 665,000 at the end of the first quarter. Over 90% of these customers are actively paying members. Along with growth in our membership base, North American studio visits for the 3 months ending in March increased by 38% year-over-year, reaching a total of $12.6 million. The increasing foot traffic and utilization of the studios drove record North American system-wide sales, which increased 42% year-over-year in the first quarter. Freezers on memberships are also at their lowest level since prior to the pandemic. Q1 North American AUVs of 542,000 were up 21% from $450,000 in Q1 of 2022, our 11th straight quarter of AUV growth. We believe that AUV growth is the most direct measure of the health of our franchise system, and I am pleased to report the momentum in AUV growth has continued to build in the second quarter. We also saw same-store sales growth of 20% in the first quarter, up from 17% in the previous 2 quarters. This improvement is particularly impressive when considering the difficult comp in the first quarter of 2021 when our studios were back running at full capacity and performing solidly post pandemic. These numbers also bode well for our studios growth prospects for the remainder of the year and into the future as more members are visiting our studios. Furthermore, the acceleration in growth in our North American AUVs and same-store sales in combination with the growing membership base, demonstrate that consumers continue to view their health and wellness as a vital part of their budgets and not discretionary spend.

Turning to revenue. For the quarter, net revenue totaled $70.7 million, an increase of 40% year-over-year. Adjusted EBITDA totaled $22.9 million in Q1 or 32% of revenue, up 58% from $14.5 million or 29% of revenue in the prior year period. The resiliency of Xponential's business is best demonstrated by our franchisees opening new studios while driving additional business to their existing locations. Xponential franchisees continue to have ample access to the capital required to open studios by leveraging our relationships with several lenders. Despite higher interest rates, we have a healthy pipeline of franchisees with presold licenses seeking and receiving funding. In addition to franchisees continuing to open studios, studio members are continuing to show that they are spending on experiences. As Sarah will speak about shortly, many view their fitness memberships as part of their overall entertainment budgets. Let's now turn to our 4 strategic growth areas. I'll discuss the first 3 and then turn the call over to Sarah to discuss the fourth.

Beginning with the increase of our franchise studio base, we ended Q1 with 2,756 global open studios opening 115 net new studios in the first quarter. We sold 188 licenses globally in Q1, bringing the total sold licenses to 5,638. Our pipeline of over 2,000 licenses sold and contractually obligated to open on a global basis offers us multiyear visibility into our growth. Note this number does not include our master franchise agreement obligations, which I will speak to shortly. I am also happy that we are now conducting classes on all 15 of the cruise ships that make up the Princess fleet. Sarah will speak to this achievement in greater detail later in today's call. Turning to our second growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be opened under master franchise agreements, and we continue to gain traction. Just last week, we announced a master franchise agreement in Japan to franchise up to 40 stretch lab studios over the next 10 years.

Xponential has 5 brands operating in Japan, including Club Pilates Rumble, CycleBar, AKT and Stretch lab. In addition, we recently signed master franchise agreements with Club Patties in Ireland and Switzerland. And in Q1, we opened our first club potties in Frankfurt, Germany. As a reminder, our MFAs are structured to provide Xponential with high-margin flow-through, given that we structure them as a revenue share model and require minimal incremental SG&A to support MFA growth. Our third key growth driver is to expand margins and drive free cash flow conversion. As our business continues to grow, we see further benefits of our asset-light scalable operating model, which shows up in our margin performance. Adjusted EBITDA margins again improved to 32.4% during the first quarter as we continue to increase our operating leverage. We remain confident that our adjusted EBITDA margins will expand into the 35% to 39% range in 2023 and are on track to achieve our adjusted EBITDA margin target of 40% in 2024. With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales and AUVs.

Thank you, Anthony. At Xponential, we understand the importance of empowering customers to exercise where and when they want. We also acknowledge that customers are looking to work out and to have a full experience while doing so. In other words, they are looking for a place where they can work out and socialize. And it's not just Xponential customers spending on experiences. In our recent spending report by Mastercard, the credit card company found that consumer spending on experiences rose by double digits in February. Compared to the year ago period, consumers spent 42.7% more on lodging, 15.6% more in airlines and 14.2% more on restaurants. Consumers are shifting their spending and Xponential's benefiting from the spend on experiences, as is evident from the increase in our visitation rates and membership count.

During the first quarter, North America visitation rates grew 38% year-over-year, and our North American membership base has grown to over 665,000 members. While we often see some seasonality in membership following the new year, Q1 is typically our strongest quarter for membership growth. These results are further proof points that more individuals are visiting our boutique fitness studios. Importantly, these trends have continued into the second quarter. To keep this momentum going, Xponential is consistently innovating, finding new ways to connect with our members, increase retention and reduce churn, all of which are vital to growing our same-store sales and AUVs. Our XPASS offering is one such example of a novel way in which we are providing our members frictionless access to all 10 of our brands on a single recurring monthly membership platform.

In addition to providing our customers with greater flexibility, XPASS serves as a lead generator for our franchisees to drive in studio memberships. Not only have we been able to sell traditional x-pass memberships to those frequenting our studios on land, but we now are actively offering our XPASS to individuals who work out with one of our boutique brands on Princess cruise ships. We are excited that Pure Barre, YogaSix and stretch lab have already launched across the entire fleet of Princess cruise ships. We are happy to already see social media posts from franchisees discussing signing up new members post cruises. Beyond taking our live classes on board, cruise guests also have the opportunity to stream our digital offering XPLUS across Princess' more than 23,000 state rooms. XPLUS helps enable our members to work out whenever and wherever is convenient for them, even if onboard a cruise ship.

At the end of the first quarter, we had over 140,000 subscribers on XPLUS, many of whom also hold in studio memberships, including those who have subscriptions through their club Platte or stretch lab membership. XPLUS is also a key driver of our B2B partnerships. Recently, we announced the launch of XPLUS on LG Electronics Smart TVs, which will provide on-demand access to Xponential's family of brands to millions of LG Smart TV owners in over 250 countries. Our previously announced partnership with Active Solutions is progressing well. Active is leveraging our world-class digital content for our XPLUS platform in one-of-a-kind immersive exercise experiences tailored specifically for amenities located within leading hotels and resorts, corporate campuses, universities and high-end multifamily housing properties. We've installed about 90 active base so far and expect that these will all be activated at the end of June.

Our strategic B2B partnerships with industry-leading companies are made possible by the strength of the Xponential brand as well as our expanding omnichannel fitness capabilities. We look forward to benefiting our franchisees even more with these tools and partnerships in the future, helping drive individuals into the Xponential ecosystem, whether virtually or through our brick-and-mortar locations. Thank you again for your time. I'll now turn the call over to John to discuss our first quarter results and 2023 outlook.

Thanks, Sarah. It's great to speak with everyone to discuss Exponentials first quarter 2020 results. First quarter North America system-wide sales of $317.8 million were up 42% year-over-year. The growth in North American system-wide sales was largely driven by the 20% same-store sales in the existing base of Open Sitio that continue to acquire new members, coupled with 82 net new North American sitios that opened in the first quarter. On a consolidated basis, revenue for the quarter was $70.7 million, up 40% year-over-year. Each of the 5 components that make up our revenue grew during the quarter. Franchise revenue was $33 million, up 29% year-over-year. This growth was primarily driven by an increase in royalty revenue as member visits and associated system-wide sales reached all-time highs.

In addition, we saw increase in structured training revenues and higher monthly tech fees that will continue to increase as we open more studios domestically. Equipment revenue was $13.1 million, up 68% year-over-year. This increase in equipment revenue is the result of continued higher volumes of global equipment installations. Merchandise revenue was $7.2 million, up 18% year-over-year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic when compared to the prior year. Franchise marketing fund revenue of $6.2 million was up 40% year-over-year, primarily due to strong system-wide sales from a higher number of open sitios in North America. Lastly, other service revenue, which includes rebates from processing studios system-wide sales, B2B partnerships, PASS and XPLUS amongst other items, was $11.3 million, up 71% from the prior year period. The increase in the period was primarily due to increased rebates from the processing of (inaudible) level system-wide sales and our increased revenues from our B2B partnerships.

Turning to our operating expenses. Cost of product revenue were $14 million, up 46% year-over-year. The increase was driven by a higher volume of equipment installations for new studio openings and merchandise revenue in the period. Cost of franchise and service revenue were $4 million, down 5% year-over-year. The decrease was driven by fewer license terminations and studio transfers in Q1 of 2023. Selling, general and administrative expenses of $34.9 million were up 3% year-over-year, which in the period included the cost of the secondary offering that was completed in February. As a percentage of revenue, SG&A expenses were 49% of revenue in the first quarter, down from 67% in the prior year period, demonstrating the continued leveraging of SG&A as we continue to grow revenues. As I have noted on prior calls, costs related to company-owned transition studios are included in our SG&A. We are focused on growing the sales in these studios, optimizing operating costs to achieve 4-wall profitability and then finding new franchisee owners to wish to sell them. We also expect to see legal costs declined in the second half of the year as a result of increased efficiencies.

Further, in the first quarter, we announced the hiring of Andrew Hagopian, who will serve as our Chief Legal Officer. We are thrilled to see that Andrew has hit the ground running and has already started working towards optimizing legal expenses. Depreciation and amortization expense was $4.2 million, an increase of 20% from the prior year period. Marketing fund expenses were $5 million, up 15% year-over-year, driven by increased spend afforded by higher franchise marketing fund revenue. Acquisition and transaction expenses were $15.7 million, primarily related to the noncash contingent consideration as part of our acquisition of Rumble. As I have noted on prior earnings calls, the Rumble contingent consideration is driven by movements in our share price. We mark-to-market at each quarter and accrue for the earnout. We recorded a net loss of approximately $15 million in the first quarter compared to a net loss of $15.2 million in the prior year period. The decrease in net loss was the result of $2.8 million of lower overall profitability, a $6.2 million increase in noncash contingent consideration primarily related to the Rumble acquisition and a $9.2 million decrease 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 first quarter was $1.3 million, which excludes the $15.7 million change in fair value of noncash contingent consideration and a $0.6 million liability increase related to the first quarter remeasurement of the company's tax receivable agreement. This results in adjusted net loss of $0.02 per basic share on a share count of 30.8 million shares of Class A common stock after accounting for income attributable to noncontrolling interest and dividends on preferred shares. Adjusted EBITDA was $22.9 million in the first quarter, up 58% compared to $14.5 million in the prior year period. Adjusted EBITDA margin grew to 32% in the first quarter compared to 29% in the prior year period. As a reminder, our 2023 outlook anticipates adjusted EBITDA margins reaching the 35% to 39% range, and we expect this number to grow to 40% in 2024.

Turning to the balance sheet. As of March 31, 2023, cash, cash equivalents and restricted cash were $28.1 million, up from $15.8 million as of March 31, 2022. Total long-term debt was $266.7 million as of March 31, 2023, compared to $132.5 million as of March 31, 2022. The increase in total long-term debt is primarily due to the repurchase of 85,340 shares of convertible preferred stock at a price of $22.07 per share announced in January. These shares prior to the repurchase would have been convertible into 5.9 million shares of Class A common stock.

Now turning to our outlook. After a solid first quarter and a continued positive momentum in the second quarter, we are confident in our growth trajectory. With that said, based on current business conditions and our expectations as of the date of this call, we are increasing our full year 2023 guidance for systemwide sales, revenue and adjusted EBITDA, and we are reaffirming guidance for net new studio openings as follows: We expect 2023 global net new studio openings to remain unchanged in the range of 540 to 560. This range represents the highest number of studios opening in our company's history and an 8% increase at the midpoint over 2022. We are increasing North America system-wide sales to range from $1.37 billion to $1.38 billion, up from the previous $1.34 billion to $1.35 billion or a 33% increase at the midpoint from the prior year.

Total 2023 revenue is now expected to be between $290 million to $300 million, up from the previous $285 million to $295 million, a 20% year-over-year increase at the midpoint of our guided range. Adjusted EBITDA is now expected to range from $102 million to $106 million, up from $101 million to $105 million, a 40% year-over-year increase at the midpoint of our guided range. This range translates into roughly 35.3% adjusted EBITDA margin at the midpoint. In terms of capital expenditures, we anticipate approximately $10 million to $12 million for the year or approximately 4% of revenue at the midpoint. Going forward, capital expenditures will be primarily focused on the BFT integration, XPASS and XPLUS new features and maintenance on other technology investments to support our digital offerings.

For the full year, our tax rate is expected to be mid- to high single digits, share count for purposes of earnings per share calculation to be $32.6 million and $1.9 million in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release as well as on our corporate structure and capitalization FAQ on our Investor website. Thank you again for your time today and for your support of Xponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions. Operator?

(Operator Instructions) Our first question is from Jeff Van Sinderen with B. Riley.

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

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

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

Yes, it's going according to plan. So we're integrated with BFT. So we're continuing that process, but it's operating today, just like our normal domestic business and our normal MFAs operating.

Our next question is from Alex Perry with Bank of America.

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

Yes. I mean still our -- we're at about 90-10 domestic versus international on openings. We're selling 75 to 25. So eventually, that $75 million to 25 will continue to pour in on the 90-10, and we will see it open studios expanding there. The domestic business is continuing to be steady. And then the international openings are what are piling on top of the domestic business. But as far as interest rates go, we reached out to our lenders, Rates are up 0.25% or 0.5% or something like that. And it's not against a lot of opening dollars when you think about -- I know people are asking the question around planet and stuff like that, and they're opening dollars or about 10x what ours are. So interest rate has a bigger effect in those large box type businesses than it does in small boutiques just because of the overall dollar amount it is to get open.

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

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

Great. Our next question is from John Heinbockel with Guggenheim Securities.

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

Look, I mean, it's not that there's one silver bullet, right? We're looking at KPIs across, right? So we're looking at foot traffic, we're looking at utilization, volume and demand, right, really kind of shows that this is nondiscretionary spend for our members and that are still going and still continue to grow. And as we look at our customer base, we're actually continuing to see younger customers that cohort grow a lot faster than even some of our older demographic. And so this is where people today get their entertainment dollars, their health dollars, their community. And so it's the volume that we see coming through that's great, the foot traffic, not necessarily price driven, we said in the past is 95% volume and the rest really being priced. And so we look at all those metrics for the health of the business, right? So -- there's not one sort of silver bullet that we stare at, but we kind of look at them all. And where we sit today, all of them are continuing to perform.

As a matter of fact, if you look at what we comped in Q4, people kind of thought, well, that's not sustainable. And then if we went from 17%, 18%, respectively, on our less than 36 months mature stores and 36 months plus stores and went to 20%, right? And so we're continuing to perform. The business is continuing to perform. And all of that is a recipe, right? That's not just the class of the leadership for the industry that we're in, like anything great, it's a rest being a metric of a lot of things working all at the same time.

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

Yes. I think sometimes it's a less of dollars that they make and we're shifting a priority of the dollars. When you see in a post-COVID world, people are really taking their health and wellness seriously. And I've said before in boutique, especially in our brands that like a rumble or (inaudible) or AKT or Stride or something like that, where they're working out in the nightclub in essence. There's a lot of entertainment dollars there and a lot of community that's very hard to replace. That's where there are clubs in the morning at 8 a.m. or Club Pilates on Tuesday at 5, that group that's there. That's their community, right? Those are the people they look forward to seeing. So this is where friendships are formed and where people get entertainment dollars. So this is not something that's easy to replicate. Since 95% of it is volume and 5% is price. They are getting more perceived value, right, because they're -- as inflation happens and other things happen, they're still continuing to enjoy their original price that they came in at. And so it makes it stickier because we're not raising rates on pass members. We're raising rates on new members coming in as the old ones expire and cancel and we go up a tier in our kind of 5-tier pricing. But we're not going back to kind of customer #1 and taking price on them.

Our next question is from Randy Konik with Jefferies.

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

Thanks Randy. I'll give you a quick point of clarification. Club Pilates is not the highest AUV at the company. It's kind of the highest AUV with the highest sample set, right, kind of the highest volume. That's why we point to that. But brands like BFT or like Rumble, actually come out at some higher AUVs, which is a lot less locations than we have across the country. So that makes us really excited. What I'd like to talk about the difference between Club Pilates and some of the other brands is what I call the born-on date, right? And when you look at Club Pilates, when we first bought that brand, the AUV was $250. And today, it's over 3x that, right, 7 years later. And so what I'm excited about is brands like BFT and brands like Rumble, the brands that we're selling and opening the most of today given the most white space in those brands, they're actually coming out at $500,000, $600,000 more AUV -- so they're kind of born on date. They're kind of being born twice as smart as Club plates was originally. So there's still a lot to build off those brands as they're in their infancy. And we've got a lot of contributors to AUV, right?

We've talked about this concept of negative CAC. And as we drive people on the cruise ships that saw a posting on our StretchLab Facebook page for franchisees where they said, "Hey, I got my first princess lead that closed them, right? And that's proof of concept that people can go on a cruise ship, get associated with stretch lab and then go home, get marketed to and get closed by the franchisees. So as we continue to increase the customer lead base for our franchisees. And of course, we'll always continue on our closing ratio to try and close higher and close at higher dollars, but we're able to deliver more leads than we have before. And when we look at the cohorts of 2023 versus 2022, and we do it by quarter you continue to see quarter-over-quarter these cohorts and these ramps continue to increase.

And so as we put stores next to each other, as we put store in neighborhoods, it kind of rises all ships. And so same is true with Princess, same with Lululemon or being on LG TV. I mean our Hyatt and Hilton hotels with active 11,000 locations that Active has. And so it's really our goal that -- by the time what I like to call our Starbucks mom is on her way to the grabber coffee in the morning, and she sees pure bar next door, Rumble next door. She doesn't know it's not having to wonder what it is. She thought it on her television, -- she saw it on an app. – she saw it on mirrors. If you remember, 2 of those mirrors are being played as equipment, a lot of high-end hotels, right? I was in a high-end hotel the other day and the mirrors sitting there playing our content inside the hotel gym while people are working out. So there's a lot of ways that people are becoming associated with Xponential and its brands. And so the idea is that by the time they actually see us in our kind of brick-and-mortar for wall state, they're not having to wonder who we are, what we stand for and what the value prop is that they walk in and then hopefully, we have a very well-qualified salesperson at the desk that was able to close that sale.

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

John, are actually talking about this this morning on an international basis, so for instance, if AUVs are 500 here in the U.S. and they're rumble doing 500 in Australia, right, in AUD. On a country-per-country basis, the AUV is about the same. So we're getting better and better data on our international side for system-wide sales and AUV and things of that nature, and we're continuing to kind of hone in on that. Obviously, our big international regions, APAC and inside APAC, VFT is kind of the big driver there, much like Club Pilates in the early days and had the most volume and AUV here was sort of the biggest driver. But we do have Club Pilates operating and rumbles operating. It is open a rumble boxing in Bondi Beach in Sydney, which is kind of like the premier location in Australia is doing very well. So we're constantly encouraged by what we're seeing both from the brand level AUVs and kind of overall system wide sales in the countries.

Our next question is from Joe Altobello with Raymond James.

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

So Joe, I think when you go back to what it was kind of around IPO, it's kind of an unfair measurement given they were in kind of the color recovery period, right? So I think if you talk about pre-COVID when we were just under kind of the 500,000 AUV. And then now you fast forward, we've met that now exceeded it. Obviously, the cash-on-cash returns and the overall profitability and strength of the franchisee is better today than it was pre-COVID. At IPO, it's kind of an unfair measurement given studios were still recovering as restrictions lifted and members return back to the studios. But overall, today, you would argue franchisees are much healthier, more profitable than they have been ever in the company's history.

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

No. Actually, I partner with our lender on a daily basis reviewing incoming franchisees, getting loans. The access to capital has not slowed. There is a healthy backlog of franchisees that are in the process of getting financing and/or opening studios. As Anthony mentioned, the rate has gone up 25.5%. I talked to the lot lender this morning and just wanted to get feedback on anything you're seeing related to the most current interest rate hike and franchisees are not really backing at the fact that interest rates have gone up. They understand it, but it's not a material portion to that given the investment is fairly low. So the financing is there. They're getting it, and sitios will continue to get open. It's not becoming a headwind for the business.

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

Yes. I mean there's 2 levers, right? High margin flow-through on revenue and SG&A costs, right? So controlling OpEx, we raised guidance in this quarter purely on the fact that we just saw an acceleration of same-store sales in Q1, very strong Q1. We take a conservative approach given the macro and uncertainty as you look out in the future quarters. So when we set guidance originally, but when Q1 came in with an acceleration of system-wide sales, same-store sales, the additional royalties it provided in the quarter, that's high margin flow through for us. So as we continue to see that kind of performance, that will give us the ability to push that margin expansion higher. And obviously, focusing on OpEx is key for us. We mentioned bringing in Andrew Hagopian, who is focused on legal. So from that perspective, OpEx we are laser-focused on that and trying to cut costs wherever we can.

Our next question is from James Hardiman with Citi Group.

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

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

Okay. And our company-owned studios still a headwind there? Or what's the status on that and transferring those to franchisees?

Yes, there are costs in Q1 related to the company-owned Studios. We've taken a more investable approach related to the company-owned studios and focusing on the tailwinds we're having around system-wide sales growth and AUV growth, we're really focused on getting these corporate studios to the desired AUV level. while really focusing on getting the OpEx efficient. And from a 4-wall perspective, the way they're designed to be. And then when we get into a healthy point, that's when we're actually going out and trying to refranchise them. The intent there is to make sure that when they do launch, they're successful, and we don't have challenges with them going forward. So in Q1, there was higher SG&A related to company-owned studios. You could expect that to decrease in Q2, Q3 and Q4 and get back to what we believe is a more normal run rate from where we are today.

Our next question is from Warren Cheng with Evercore.

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

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

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

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

Our next question is from Ryan Meyers with Lake Street Capital Markets.

First one for me. Just curious if you could comment on what sort of demand you've seen here domestically for BFT.

(inaudible) In demand has been in line with our other brands, right, with Rumble and those types of things. The first 18 to 24 months is primarily selling of the territories. And then, call it, 6 to 12 months into that, you're beginning to see openings. So right now, we're in the selling and lease signing kind of process of that in construction, and then you'll start to see openings in the first couple of dozen openings of BFT domestically this year, and then it will continue to increase, of course, in '24 and '25. Was our third highest selling brand in the first quarter from a license perspective, and it's kind of -- it's tight for fourth with Rumble as far as openings in the first quarter.

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

Yes. So the way to kind of look at -- I've got a lot of questions on the other service revenue over the last couple of months. The B2B will be about 25% of the revenue of the other service revenue. So if you just took other service revenue for the quarter, B2B represented around 25% of that revenue. (inaudible) We expect that to hold yes. And we expect that to hold consistent over time.

Our next question is from Jonathan Komp with Baird.

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

Yes. So I mean in regards to same-store sales, when you look at Q1 compared to Q4, virtually 100% of the growth in system-wide sales came from volume. So from a same-store sales perspective, the growth that you saw, the 20% was really driven by new members coming into the system. When you look at -- even at 36 months older studios, those videos that have been open for 3 years plus, they still comp at 21%, which is, again, new members coming into existing locations. As Anthony mentioned, brand aware negative CAC you look regionally, not much -- there's not much differentiation when you look across the U.S. from what same-store sales. You are seeing really strong same-store sales in Club Pilates, Obviously, it's our largest brand, but has done really well. The -- I think if you look at all the other brands, except Club Pilates, you're still seeing mid- to high teens in regards to how their same-store sales is performing. So in my opinion, when you look back pre-COVID, most of our brands comped at 8% on average per quarter, we're twice that even in the brands that are in the mid- to high teens. So there's no regional focus. There is a little bit of brand focus related to Club Pilates, -- but when you look across the other brands, you're still seeing really strong [comps].

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

Yes. I mean, obviously, during COVID, that was not a good time to terminate franchisees for not opening. So we took a big chunk of time off from doing that. But the reality is, contractually, the franchisees have 6 months to get their store open. Obviously, it's 6 months and they're painting their walls and about to open in 4 weeks, we're not going to terminate them. But if they're sitting on the couch and aren't making moves to continue with their development and somebody wants territory, then we're going to terminate it and move on. It's really kind of whatever path is the most efficient to getting stores open because we're in the opening store business, not in the selling store business. We obviously have a backlog of sold stores that are available for us to develop. I said before in past quarters, since we're at 10 brands, if we don't acquire an 11th brand, we're not going to oversell these brands regardless of how great they are, like a club plates or rumor kind of any of our brands. We're going to sell consistent with our scientific demographic approach, which tells us what stores go where so that we can continue to climb AUV like we're seeing for the health of our system, the health of all franchisees.

So with 10 brands and not overselling, we have always said that we are going to see sequential sales of franchises go down. We obviously have a 4- to 5-year backlog. And so we're trying to keep that backlog fresh of people that want to open and want to develop an understanding the opportunity. We'll see in Q2 where we have to refile all the FTDs in Q2. So they're -- we're in a blackout period right now on most of our brands. So waiting to get all the different filings and all the different brands. I don't know if you're aware, but you file, you got 33 states with the FTD and then you have to file 17 independent states. So you're talking about 18 filings times 10 brands. So the permutations there, there's 180 filings out there at the Xponential level. And so as those clearances come back in per brand per state, then we're able to start to go service the franchise sales part again. So -- but we're still out selling our opening pace. And so if we continue to sell 500, 600, 700 a year, while we're opening 500, 600 a year, then we're kind of out selling our opening pace and our backlog of 4 to 5 years is even being burned, it's still staying together. So...

Our next question is from JP Wollam with ROTH Capital Partners.

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

Yes, I can take that one. There may be the one-off consumer that can only go on Tuesdays at 5:00 and Thursdays at 500, something like that. But our sets are open 70s a week, and we offer classes all over the map. And as we're starting to bundle in XPASS and XPLUS and give them different options so that they can take their fitness anywhere anytime. We're able to take classes both virtually or on demand and in our studios. So that alleviates some of the pressure. But the truth of the matter is, is that if that backlog happens and what ends up happening at the franchise level is that you have some natural churn from those customers, and we backfill with a more expensive member who is willing to either put up with the scheduling or have different scheduling demand. We are also putting together various challenges and other ways that members can engage with the studio and portfolio of studios. So we're always looking at ways to engage and make sure that we don't see that turn. But if we do then the number being right behind them to jump back in.

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

Yes. So with all of our partnerships, we really have 3 business models and each model is kind of different depending on what the partner and EXFO usually agree upon. But in that case, we've already started to see thousands and thousands of downloads of the application. It's too early to see how those downloads will then convert into sustained subscribers. But we are seeing a really great take there with LG. On the Mirror front, things are performing very well. We just got KPIs over the last couple of days on how the brands are performing and how members are consuming our brands. So from a content standpoint, things are good for us with Mirror. -- in conversations of looking to distribute even more content to the Mirror platform. So regardless of where mirror ends up or content will likely go with it or we'll go with it and things are looking good there in terms of developing additional content. So I don't think that conversation really affects EXFO.

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

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

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