Xponential Fitness, Inc. Q3 FY2022 Earnings Call

Greetings, welcome to Xponential Fitness Incorporated Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Kimberly Esterkin, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' third quarter 2022 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.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measurements in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. Please also note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our third quarter earnings conference call. I will begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak about our progress against our core growth strategies, including our new partnership with Princess Cruises and our recent brand launches on lululemon Studio. John will conclude with a review of our third quarter financials and an update on our full-year outlook. We are very pleased with our operational execution and resulting financial performance for the third quarter. Beginning with studio count, Xponential remains the largest boutique fitness franchisor globally with franchisees operating over 2,400 studios and more than 5,100 licenses sold across 10 leading fitness brands. We have franchise, master franchise, and international expansion agreements in place in 16 countries around the world. As our total studio count continues to grow, so too does our membership base, another key indicator of the strength and stability of our business model. Looking specifically at North America, total members for the third quarter increased by approximately 33% year-over-year to 577,000. Our Q3 North American system-wide sales also continued to grow, up 37% year-over-year to $265 million. Finally, we ended the third quarter with run rate North American average unit volumes (AUVs) of $489,000, up from $417,000 year-over-year. AUVs for the month of September reached $496,000, underscoring the continued momentum in the business. The consistent growth in our run rate AUVs is a strong reminder that despite inflationary pressures and other macroeconomic challenges, the workouts our franchisees provide across our diverse portfolio of brands remain an integral part of our members' lives. As we continue to open more studios and grow our system-wide sales, our profitability also increases, driven by the high margins our royalties generate. Turning to revenue, for the third quarter, we posted net revenue of $63.8 million, an increase of 56% year-over-year. Q3 adjusted EBITDA of $20 million, or 31% of revenue, was up 193% from $6.8 million, or 17% of revenue, in the prior-year period. As is evident from our third quarter results, while we continue to operate in a time of inflationary and overall macroeconomic pressures, our business has remained resilient. This resiliency can be attributed to three factors: our members, our franchisees, and our business model. Let's start with our membership base. As we noted last quarter, Xponential's customers continue to prioritize their health as a necessary investment rather than discretionary spending. Our average member has a typical household income of approximately $130,000 and the majority subscribe to recurring membership packages with fees that represent a relatively small piece of their overall budget. With membership counts growing and churn remaining low, we are confident in the ongoing health of our membership base and demand for our boutique offerings. The second factor contributing to Xponential's resiliency is our franchisees. As you've heard me speak to previously, we take our franchisee selection process very seriously, with only 2% of our leads becoming franchisees. Our franchisees are typically corporate veterans looking for an entrepreneurial opportunity. These individuals have the tenacity, courage, and capital to successfully run their businesses. Our franchisees have also borrowed over $200 million from the SBA without any non-repayment under our ownership. To ensure a studio's success once we bring an individual into our franchisee system, Xponential offers ongoing monitoring of the business and key operational assistance that leverages our extensive data analytics capability. Should there be any indication in the data that studio operations are struggling, we are able to respond quickly and make the necessary shifts to maintain that studio's performance. We take regular engagement with our franchise base seriously, and we are looking forward to our annual convention in Las Vegas coming up again this December. Last year, over 2,000 individuals traveled to Las Vegas to join us. At the event, we recognized franchisees for their hard work, share best practices, provide training, showcase vendors and, most importantly, align on our goals to carry forward the momentum into the coming year. Last but not least, the third factor contributing to our resiliency is our franchise business model. As a franchise business, Xponential benefits from a highly predictable, recurring revenue stream and limited ongoing capital requirements. In the third quarter, approximately 71% of our revenue was recurring, largely driven by royalties. Beyond our recurring revenue streams, our capital-light franchise business model and access to labor and equipment helped drive our continued success and margin expansion. Based on these factors, despite the uncertain macroeconomic environment, we remain confident in our go-forward trajectory and are raising our revenue and adjusted EBITDA outlook for the full year. With that as a background, let's turn to our four strategic areas of growth. I'll discuss the first three levers and then turn the call over to Sarah to discuss the fourth. Starting with increasing our franchise studio base, we ended Q3 with 2,485 global open studios, opening 128 net new studios in the third quarter. Year-to-date, we have opened 355 new studios, putting us on track to reach our goal of 500-plus new studios for the year. Of note, with each progressive quarter, studio opening cohorts have gotten stronger, opening at higher sales and membership levels in month one and then ramping faster than studios in prior cohorts. We were also pleased to see our highest number of new studio openings in the final week of September. Our franchisees opened 36 studios in the last week of September, a strong indicator that our franchisees remain bullish on opening new studio locations as we approach 2023. We also experienced strong demand for our franchise licenses, selling 258 licenses globally in Q3 and 769 thus far this year. Keep in mind that over time, as we continue to sell through prime geographic territories in each of our existing brands, we would eventually need to acquire another brand to maintain this elevated run rate. In North America, we have over 1,900 licenses sold and contractually obligated to open, along with the replenishing pipeline of organic new studio expansion that offers us four to five years of visibility into our growth. We were also excited to recently announce that our newest brand, Body Fit Training, or BFT, which has over 200 studios opened internationally, has started expanding into additional locations in North America, beginning with Toronto, Canada. Much like its predecessor Rumble, which sold over 150 North American franchise licenses in its first eight months of franchising, since we began franchising BFT in February of this year, we have sold over 150 BFT licenses in North America, positioning the brand for expansion across the United States and Canada. Turning to our second growth driver, expanding internationally. On the international front, we have almost 1,000 studios obligated to be open, and we continue to gain traction. In August, we signed a new master franchise agreement in Kuwait for Rumble, Club Pilates, StretchLab, and CycleBar. Then in September, we signed an MFA for Club Pilates in Portugal. The addition of Kuwait and Portugal, both large fitness markets, brings our global presence to 16 countries. As a reminder, our MFAs are structured to provide Xponential with high-margin flow-through, given that we require minimal ongoing SG&A to support MFA growth. Speaking of margins, our third key growth driver is to expand margins and drive free cash flow conversion. As our business continues to grow, we are increasingly reaping the benefits of our asset-light scalable operating model, providing us with consistent and growing margin performance. Considering the macro environment, we are especially pleased with where our operating margins performed this past quarter. We continue to expect our adjusted EBITDA margin will be in the low 30% range for the full year 2022, and we remain on track to achieve our long-term adjusted EBITDA margin target. With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales and AUV.

Thank you, Anthony. It was an exciting third quarter and one in which Xponential again proved the importance of driving new and prospective membership engagement. As Anthony noted, our consumers continue to prioritize their health and wellness, actively participating in both our in-studio classes and digital experiences. Visitation rates again increased, with total visits for the third quarter growing 28% year-over-year. This momentum will carry into the fourth quarter as it is always an active one for promotions and membership engagement activities, and we are especially looking forward to the bump in sales we tend to see around Black Friday and Cyber Monday, when studios are running offerings that promote new membership, retail, and merchandise sales. So, let's discuss further how we continue to connect with our members, increase retention and reduce churn, all of which are essential to growing our same-store sales and AUVs. We remain focused on ways to attract prospective members, while at the same time, developing innovative methodologies to improve current customer experiences. We are building out our omni-channel offering, focusing on robust B2B partnerships with industry-leading companies such as Lululemon, OptumHealth, which is a subsidiary of UnitedHealth Group, bodybuilding.com, a leading dietary supplements retailer, and others, rapidly expanding the reach of our brands. One key example of these efforts is our recently announced five-year exclusive licensing agreement with Princess Cruises. Through this partnership, Xponential has become the first cross-modality fitness franchise to put its curated brands on a major cruise line. Eight of our brands, including Club Pilates, CycleBar, Pure Barre, Row House, StretchLab, STRIDE Fitness, YogaSix, and AKT will be available on board Princess' 15-ship fleet. We are excited to bring the best in fitness to Princess' millions of guests, who will be able to join live classes and also experience our workouts on demand via XPLUS made available in more than 23,000 Princess staterooms. Through this agreement, Princess Cruises has also become Xponential's first corporate wellness partner, with our multi-brand XPLUS offering made available to more than 30,000 Princess employees. Continuing the topic of making our brands more accessible, just last month, four of our brands, Pure Barre, Rumble, AKT, and YogaSix, officially debuted on lululemon Studio. Launched on October 5, this new service from lululemon builds upon more than 10,000 on-demand and live-stream classes available with a lululemon Studio subscription. Xponential workouts appearing on the mirror feature top instructors from our XPLUS platform, with new classes of curated content made specifically for lululemon Studio launching every week. Members of lululemon Studio also now can attend our in-person classes at hundreds of brick-and-mortar locations across the country by purchasing a separate xPaaS membership at a discounted price, as well as participate in additional brand workouts virtually with a free trial on our XPLUS app. While the in-studio experience cannot be replaced, virtual fitness experiences remain core to our overall omni-channel growth strategy and will continue to serve as an added benefit to our member experience. Just today, we officially announced our first B2B offering for our XPLUS streaming app, a content licensing agreement with Aktiv Solutions, the leader in functional fitness design and supply. Together with Aktiv, we will create one-of-a-kind, immersive exercise equipment experiences that are tailored specifically for hotels, corporate campuses, high-end multifamily housing properties, and universities. In each of these newly branded locations, Aktiv’s proprietary fitness base will exclusively feature XPLUS content on demand that can be accessed by downloading the XPLUS app. This partnership is a unique opportunity for us to bring increased awareness to all 10 of our boutique fitness modalities while at the same time, expanding lead generation for our franchisees at no cost. We anticipate these new experiences will open sometime in the early part of 2023 and look forward to sharing more about this unique partnership in the coming months. Thank you again for your time. I'll now turn the call over to John to discuss our third-quarter results and full-year outlook.

Thanks, Sarah. It's great to speak with you to discuss Xponential's third quarter results. Third quarter North American system-wide sales of $264.8 million were up 37% year-over-year. On a consolidated basis, revenue for the quarter was $63.8 million, up 56% year-over-year. All five of the components that make up revenue grew during the quarter. Franchise revenue was $30 million, up 50% year-over-year. The growth was primarily driven by higher royalties as well as increased revenue generated from franchise license fees. Equipment revenue was $11.8 million, up 74% year-over-year. This increase in equipment revenue continues to be driven by a higher number of global equipment installs. Merchandise revenue was $6.3 million, up 28% year-over-year. The improvement during the quarter was primarily driven by a higher number of open studios and increased foot traffic. Given the growth we've seen across the system, in October, we moved our retail merchandise operations into a new 55,000-square-foot warehouse in Irvine, California. The new facility will allow us to meet the higher franchise retail demand by increasing our inventory and shipping capacity, which will continue to contribute meaningful growth in margin dollars over time. Franchise marketing fund revenue of $5.2 million was up 40% year-over-year, primarily due to strong system-wide sales and average unit volume growth. Lastly, other service revenue was $10.6 million, up 90% from the prior year period, primarily due to an increase in credit card rebates on higher system-wide sales, and higher B2B and brand fee revenues. Turning to our operating expenses, cost of product revenue were $11.8 million, up 55% year-over-year. The increase was driven by higher equipment installations for new studio openings and merchandise revenues in the period. Cost of franchise and service revenue were $4.8 million, up 52% year-over-year. The increase continues to be driven by costs related to franchise sales commissions and from technology fee costs from a higher number of open studios. Selling, general, and administrative expenses of $32.8 million were up 35% year-over-year, largely due to costs associated with public company expenses and higher noncash equity-based compensation, as well as expenses related to one-time legal costs. As a percentage of revenue, SG&A expenses were 52% of revenue in the third quarter compared to 59% in the prior year period. Depreciation and amortization expenses were $4.2 million, an increase of 75% from $2.4 million in the prior year period. Marketing fund expenses, which include expenses related to corporate marketing, were $4.3 million, up 11% year-over-year. Acquisition and transaction expenses were $16.3 million versus $2.9 million in the third quarter of 2021. This increase is due to the change in non-cash contingent consideration, primarily related to our acquisition of Rumble. As I noted on prior earnings calls, the Rumble contingent consideration is driven by our share price. We mark-to-market each quarter and accrue for the earnout. We recorded a net loss of $13.1 million in the third quarter compared to a net loss of $8.9 million in the prior year period. While overall profitability was up by $13.6 million, there were offsetting amounts of $13.4 million in higher noncash contingent consideration expense, primarily related to the Rumble acquisition, $3.7 million increase in impairment of brand assets, and $0.7 million increase in noncash equity-based compensation expense. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the third quarter was $8 million, which excludes the $16.3 million change in the fair value of noncash contingent consideration, a $1.1 million expense related to our third quarter remeasurement of the company's tax receivable agreement liability, and a $3.7 million expense related to impairment of brand assets compared to an adjusted net loss of $5.8 million in the prior year period. To calculate adjusted net earnings per share, we isolate the portion of the net income that is attributable to Xponential Fitness, Inc., which is $4.4 million, and we reduced this number by $1.8 million to account for the dividend attributable to Xponential Fitness, Inc. paid on our preferred shares. This results in adjusted net earnings of $0.10 per basic share on 26.2 million shares. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted EBITDA was $20 million in the third quarter compared to $6.8 million in the prior year period. Adjusted EBITDA margins grew to 31% in the third quarter compared to 17% in the prior year period. As a reminder, our 2022 outlook anticipates adjusted EBITDA margin in the low 30% range. And long-term, we expect this number to grow to over 40% in 2024. Turning to the balance sheet, as of September 30, 2022, cash, cash equivalents, and restricted cash were $30.9 million, up from $21.3 million as of December 31, 2021. Total long-term debt was $136.5 million as of September 30, 2022, compared to $133.2 million as of December 31, 2021. Moving to our outlook. Based on our current business conditions, our year-to-date performance, and our expectations as of the date of this call, we are again increasing our full-year 2022 outlook for revenue and adjusted EBITDA and reaffirming our guidance for studio openings and system-wide sales in North America as follows. We continue to expect our total 2022 global new studio openings to be in the range of 500 to 520. This range represents the highest number of studio openings in our company's history and a 53% increase at the midpoint over 2021. We also continue to project North America system-wide sales to range from $995 million to $1.5 billion or $1 billion at the midpoint, which represents a 41% increase from the prior year and the highest North American system-wide sales in our history. 2022 revenue will again be higher than initially forecasted and is now expected to be between $235 million to $240 million, an increase of 53% over 2021 at the midpoint of our guided range. The increase in the range was primarily attributed to higher overall franchise revenues, higher revenue from B2B and brand fee partnerships, and increased revenues from our company-owned transition studios. Adjusted EBITDA is now expected to range from $70 million to $74 million, a 164% year-over-year increase at the midpoint of our guided range. This new adjusted EBITDA guidance range translates into a roughly 30% adjusted EBITDA margin at the midpoint. Let's now spend a few moments on SG&A. Consistent with prior year fourth quarters, SG&A expenses are expected to increase in Q4 2022 because of our annual franchisee convention. Our annual franchisee convention is anticipated to add roughly $4.5 million in sequential SG&A expenses, noting that we do have sponsorship revenues expected in our other service revenue line, which will partially offset this expense down to approximately $2 million. As I noted last quarter, we continue to see cost pressure from general operations, particularly legal. While these expenses will increase SG&A dollars in the fourth quarter, we view this legal expense as an isolated event and will again adjust for it in our EBITDA calculation. Lastly, with 10 brands and thousands of studios, as previously discussed, Xponential always has some studios that require rehabilitation and subsequently free franchises. Costs related to these temporarily owned transition studios are included in our SG&A. While our current count is above historical levels, we are intent on cost-effectively optimizing these studios and finding new owners for them as we've done in the past. In terms of capital expenditures, we anticipate approximately $9 million to $10 million, or 4% of revenue at the midpoint. Going forward, capital expenditures will be primarily focused on the BFT integration, XPASS and XPLUS new features and maintenance, and other technology investments to support our digital offerings. For the full year, we expect our tax rate to be in the mid to high single digits, share count for purposes of earnings per share calculation to be 25.3 million, and $3.25 million in quarterly dividends to be paid related to our $200 million convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release, as well as our corporate structure and capitalization FAQ on our Investor website.

Thank you. Our first question is from Jeff Van Sinderen with B. Riley. Please proceed.

Hi, everyone. First, let me say congratulations on what are truly amazing metrics, especially in the backdrop that we have macroeconomically. Maybe you can touch on – I'm curious if there are any performance variations that you're seeing in your metrics among your various concepts, just wondering about any kind of consumer behavior, what they might be gravitating toward more among concepts. And then also, the same thing as far as franchisees, which concepts of yours are they tending to be most excited about at the moment?

Thank you. Yes, we don't give guidance on a brand-by-brand basis, but directionally, the entire company is moving in the right direction. As far as from a franchisee sales perspective, which is what, I think, your question is kind of geared toward, today that is BFT and Rumble. The reason for that is because they're the most recently acquired brands, therefore, they have the most available white space, right? So somebody today wants to buy Club Pilates with 1,000 sold, it's hard to do that. So, for us, it's really Rumble and BFT and of course, any Club Pilates that become available, those are being sold throughout the year as well. So, we still have a lot of Club Pilates sales, a lot of Club Pilates openings, just like we do across the various brands, but the majority of white space is sitting in the most two recent acquisitions that we have.

Okay. Terrific. And then just wondering, is it too early to speak to any response, early response on Princess and lululemon, or any early color there?

Yes, I mean, look, on the lululemon Studio piece, the metrics are looking really good. They have a rating program, much like Yelp, where it’s one through five stars, and all four of our brands are at 4.9. So, doing very well, about two billion impressions, which obviously lends to lowering brick-and-mortar studio customer acquisition costs (CAC). That's the reason why we do lululemon deals or Princess Cruises deals. It's not necessarily for a bunch of upfront economics or ongoing economics, although we do have that. It really is for kind of lowering that CAC and even potentially lowering attrition as their brands build in people's minds. And so, if you look at Princess Cruises, for instance, not only will we be on the ships and do B2B promotions and partnerships, but we'll be in front of nine million people in the in-room digital perspective of what we do. So, both of those are doing very well. Both companies are very excited about the early results of what we're seeing.

Okay, great. And if I could squeeze in one more, I'm just wondering if there are any changes that you can speak to regarding kind of your marketing plans, promotional plans, as we're getting through the end of the year.

Yes, towards the end of the year, we do a good amount of marketing as well as retail and merchandising sales around Black Friday and Cyber Monday. So, all of the studios are gearing up for those two retail events. And then we go to the back half of the year, the end of the year, really pushing out memberships and making sure everyone is set up for their fitness program heading into the New Year.

Yes, thanks, guys. I guess, Anthony, for you. I wanted for you to unpack, so you made some commentary earlier about some of the support structure you have in place because I think the one kind of thing standing out about your business and business model is the flawless execution that you're able to show the market with these results. So, I just want to get some perspective on things that the corporate home office is going to be working on to support some of these initiatives around the cruise partnership stuff, the international expansion, et cetera. I just wanted to kind of get some perspective on looking out a few years, as you're kind of dominating the globe with all these different concepts around the world, what you're working on to add to that support structure that continues to improve your flawless execution that you've shown thus far.

Yes, thank you, Randy. I mean, like – what I think we're proving out as a company is not only can we build brick-and-mortar facilities and stack them with members and increase AUV and kind of do that job. To your point, it really becomes what can we do as a company to leverage the company assets into things like Princess Cruises or lululemon or renew or any of these deals that we do or Celsius or C4, whatever it is that the company is able to do. What's nice is the internal infrastructure to do those things is not a lot. It really helps us on the customer acquisition cost side. Like I said to the earlier question, the co-marketing we're able to do via lululemon, via Princess Cruises, via ASH or Aktiv or any of these things that we do, constantly putting the assets of Xponential and its brands in front of the face of current customers to help with any attrition, customers that we haven't acquired yet to be able to see our products and interact with our products. So, we will continue to push the company in that direction.

Super helpful. I guess my last question would be, I know you don't give color around individual concepts as it relates to AUV, but what I'd like to get some perspective on is, as you continue to drive higher and higher AUV, is that a function of, let's say, the most productive concept probably being Club Pilates, getting even stronger, lifting up the rest. There's the rest kind of pulling up as well. Is it the top quintile getting stronger, the bottom quintile of performers getting stronger? Just give us some maybe flavor of what's contributing to the really nice numbers you're putting up on that AUV side. They will be super helpful. Thanks, guys.

Yes, I'll take that one. So, when you look at the brands, I mean, it's the brands that take off earlier, typically are the ones that have the highest maturity from an AUV. So, the things that we talked about on prior earnings calls, that give us really good optimism around some of the younger brands, brands like Rumble and BFT, even our StretchLab, which I would say is kind of in the middle innings of being around for a while and growing, they're churning out much higher AUVs than we've historically seen from Club Pilates. Anthony's mentioned, early on, Club Pilates had an AUV that was around $300. Now, it's sitting around $750,000 plus Presidio. Our StretchLabs are approaching that, and it's a much younger brand. You look at Club, Rumble, and you look at BFT, the early, again small sample size, but the early units that are opening up are opening up well above like that 500 AUV. So, as these brands continue to mature, I think even the younger ones will continue to push well above that 500 AUV, which we have always defined as the designed-for AUV, not the max. Like we never saw the max AUV prior to COVID. So, now that the system has gotten back to pre-COVID levels and we're starting to see all of these brands start to perform well above that 500, I don't think you will see that as the cap. I think that's just kind of the ante to get to play when you get to that point of where the brand is expected to perform to. But well above that, we'll see the brands performing 500, 550 as they kind of age and get more units open. Another thing that I want to point out is the cohorts in 2022, those units that have opened up are performing and growing faster than they did in 2021 and prior to COVID. So, it gives us a lot of encouragement as well that these units that are opening up in today's time are actually performing faster and getting to breakeven faster.

Yes, thank you. Hi, guys. Maybe just on the other service revenue, which I think has grown quite nicely there, maybe just comment on how some of these new partnerships are kind of driving that and if you think that will continue to be the case. I don't know if there are any one-time fees in there last quarter, but I'd be interested to know just how all of those things are kind of adding economically at this point.

Yes, so, when you look at the other services revenue line, there's kind of two big pieces in there. The one constant is the rebates we get related to processing our membership. So, we get a rebate from our credit card company. So, if systemwide sales continue to increase, the rebate we get on processing those monthly memberships will continue to increase. It's a very steady revenue stream that we will have in that line for the foreseeable future. We've also layered into that like the XPASS, the video on-demand revenue, very steady-state, very recurring revenue streams. We have seen, I would say, a little bit more lumpy revenue regarding some of the B2B stuff as some of the agreements we have an upfront revenue component, but a lot of them have the tail as well. So, signing the agreement upfront, we do get some benefit, but there's also – if the agreement is over one year or two years or three years, we also get a tail related to amortizing any revenue over that period of the contract. So, over time, it will be less lumpy and more steady-state, very high recurring revenue, again, driven much by the VODs, the XPASSes, and the credit card rebates that we get. But in the short term, as we've signed some of these bigger agreements with lululemon and Princess and the likes, there is some upfront lumpiness associated with those agreements.

Okay, understood. John, maybe also just on your G&A comments. When you refer to the step-up, are you using like an adjusted G&A number, or are you referring to the $33 million reported? I guess I'm just trying to square – because I know there's some items here just out in there, but I'm trying to square what we should be comparing to exactly.

Can you be a little bit more specific on the $33 as far as like the actual for Q3 results? Are you talking about for going forward, how you should be looking about it?

Well, I guess I'm kind of trying to determine what the number is for the fourth quarter, right? So, am I comparing your comments against the full $33 and the third quarter?

Yes. So, the comments around SG&A in the fourth quarter as it relates to there will be a step-up in Q4 SG&A as it relates to the costs of our national convention. So, it is about a $4 million to $4.5 million increase in SG&A, but it is netted down by the fact that we do get sponsorship rebates that get recorded in our other service line. So, net-net, you will see an increase from Q3 to Q4 in SG&A. However, there is offsetting revenue that not all $4.5 million flows to the bottom line as an expense. Only about $2 million will. Is that helpful? Is that what you're kind of getting at?

Hi. Thanks for taking my questions, and congrats on a strong quarter. Just first, maybe John, could you sort of help square away the revenue guidance a bit? So, total revenue guidance came up, but the systemwide sales guide sort of remained the same. So, what sort of would be the delta between the two?

Yes. I think it'd be helpful to kind of walk back to the Q2 earnings call. And I mentioned on the call that when we increase guidance, the methodology we were using is we exceeded our expectations in the second quarter by a couple of million top line, a couple of million bottom line. We want to remain conservative from the perspective of all this talk about recessions, uncertainty into the future. We weren't going to raise guidance unless we felt for sure certain that there wasn't going to be a slowing in the business. That being said, it kind of restricted what we probably could have raised guidance in Q2 on. And based on how we performed in Q3 and got the upside, we went ahead and committed that into this guide, the guidance that we have for this quarter. The upside really comes from a lot of the franchise revenues. We've seen really strong from an openings perspective we said we've had upside in some of the royalties, some of the equipment that we've had, and the merchandise across the board. Overall expectations around revenue have been strong for us. So, a little bit of it is overperformance and a little bit was kind of overperformance that was there in Q2 that we were kind of holding back on from the perspective of we weren't sure what the impacts related to the business were going to be if they presented themselves as part of that macroeconomic environment.

Perfect, that's really helpful. And then maybe just my follow-up for Anthony, can you just talk about the willingness of franchisees to open clubs right now? And are they being affected at all by the rising rate environment? Are they doing anything different to finance in this environment? Are they seeing anything in terms of higher construction costs and labor that's giving them hesitation? And then others are calling out some supply chain headwinds like HVAC availability. It doesn't seem like you guys are seeing that. And then just off of that, maybe speak a little bit to sort of profit margins at the franchisee level versus pre-pandemic and sort of how those are tracking. Thank you.

Yes, so, to kind of give you an idea, give you some extra color, we sold 120 units in September alone on the franchise sales side to kind of start at the top of the funnel. We actually opened 63 stores in September, and we're signing an increased number of leases right now. So, it's one thing to look at the quarter, right, to say, July, August, September, but another thing to look at September metrics as kind of like your last leading indicator. So, we're not seeing any slowdown. As a matter of fact, we're kind of seeing the opposite in our most recent month.

Hey, so can you guys talk to the quickness of the ramp with the Aktiv partnership, right? I would guess most of their locations would be applicable for your work with them. How quick can that ramp? Do you look at that also as a brand awareness effort? And then just remind us on the economics, right, of Xponential Plus to the corporate entity.

Yes. So, we really leverage XPLUS and XPASS to do these deals like Princess or lululemon or things of that nature. They obviously are accretive in their own right. But we use them to be able to do deals like we're doing, like the Aktiv deal. The Aktiv deal was signed this week, and so pretty quick and premature to say how quickly it's going to ramp. Obviously, we are doing our best as a company to continue to be aggressive in a macroeconomic sort of pressured market, as you can see from our results this quarter and even the work that the company did in September that we've disclosed. So, we will continue to ramp all these B2B partnerships to the benefit of the company as fast as possible.

Yes, hi. Thank you. John, can I just follow-up on the Q4 adjusted SG&A that you are embedding in the outlook? Can you maybe just clarify the adjusted figure that you're looking for in the fourth quarter just to tear up any confusion? And then when you look at the full-year guidance change, I just wanted to ask, it looks like the midpoint of revenue is going up by $20 million or a little bit more, and the midpoint of the EBITDA range is going up by about $2 million. So, can you just maybe comment on any factors that are impacting that flow-through?

Yes, so, as it relates to the SG&A for the fourth quarter, it will be greater than Q3. So, that is based on the convention. The total year SG&A as a percent of revenue, excluding the stock-based comp, will remain consistent with what I said on the previous earnings call, around that 40% to 42% of revenue. For the fourth quarter, I think that's probably a good way to look at the SG&A for the fourth quarter. As it relates to the guidance and the flow-through, as I mentioned on the call, we have seen some cost pressures and we have seen some costs related to legal and some company-owned studios that have impacted us in Q3 and Q4. So, as we've adjusted our outlook, yes, we have had upsides in revenue, but there have been some cost pressures that have suppressed margins a little bit in the second half of the year. We continue to kind of manage through that as we operate, but we do expect long-term, as you roll into 2023, that to normalize back to the levels we had expected this year.

Hey, good evening, guys. And I echo the congratulations on a great performance in the quarter. I wanted to ask a follow-up on the partnerships with Princess Cruises, lululemon, and the Aktiv partnerships. Are there mechanisms to capture the leads or the customer data generated by these programs? And is there any data you can share on the conversion or new members that have found your brand through these partnerships or the impact on CAC? Anything to kind of understand just the metrics around these programs.

Yes, we do have mechanisms in place for all of our partnerships so that we can attract – so we can measure how we're attracting a new customer base through these partnerships. With lululemon, as an example, we've got a promo code in place, and that promo code allows us to see how many net new members we've added into XPASS. They don't actually go directly to the studio and book, but they funnel through XPASS, and then through XPASS, they have the option to book and access each of our studios. With Princess Cruises, that one's a little bit early still. We did launch a partnership and a promotion with XPASS and Princess Cruises in the last week and a half, and that's a promotion that goes through the end of the year. That promotion is really exciting because for every XPASS that we sell, Princess is actually matching dollar for dollar with a cruise voucher. So, we're excited to see how that's performing. Again, we're about a week, week and a half into that promotion, so it's too early to see ultimately how it does in the long term. But we're starting to now kick off some of those additional marketing promotions and partnerships, and we'll be able to have better clarity on how they are accretive to the business and to the franchise partners over the next couple of months.

Oaky, I mean, it's hard to say, right, because you only have one other boutique fitness franchisor that's public. And so they haven't done their Q3 call yet. So, a bit premature for us to answer that. But, John has, kind of some further color to it, and I'll let him kind of tell you.

Yes, I think the thing that differentiates us a little bit in the boutique is the fact that we run a membership model, which allows us to continually capture recurring revenue every month, where you typically see maybe more of the mom-and-pop type boutique fitness. They do packages. So, they're a little bit more sawtooth, a little ups and downs. Because we're on a recurring membership model, we have a much more sturdy cash flow and revenue stream that we could tap into month-over-month.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Anthony Geisler, CEO.

Thanks again for joining today's earnings call and for your continued support. I'd like to acknowledge the entire Xponential Fitness team and franchisees for their strong operational execution in this third quarter. I would also like to note that next month, we'll be participating in ROTH's 11th Annual Deer Valley Event and have several other conferences planned for early 2023 that we'll be announcing in the coming months. We hope to see many of you at these events. Thank you, and make it a great week.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.