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Edited Transcript of RMAX earnings conference call or presentation 1-Nov-19 12:30pm GMT

Q3 2019 Re/Max Holdings Inc Earnings Call

Denver Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Re/Max Holdings Inc earnings conference call or presentation Friday, November 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam M. Contos

RE/MAX Holdings, Inc. - CEO & Director

* Andy Schulz

RE/MAX Holdings, Inc. - VP of IR

* Karri R. Callahan

RE/MAX Holdings, Inc. - CFO

* Nicholas R Bailey

RE/MAX Holdings, Inc. - Chief Customer Officer

* Ward Morrison

Motto Franchising, LLC - President

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jason Scott Deleeuw

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* John Robert Campbell

Stephens Inc., Research Division - MD

* Ryan McKeveny

Zelman & Associates LLC - Director of Research

* Stephen Hardy Sheldon

William Blair & Company L.L.C., Research Division - Analyst

* Thomas Patrick Mcjoynt-Griffith

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good morning and welcome to the RE/MAX Holdings Third Quarter 2019 Earnings Conference Call and Webcast. My name is Sharon, and I will be facilitating the audio portion of today's call.

At this time, I would like to turn the call over to Andy Schulz, Vice President of Investor Relations.

Mr. Schulz?

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Andy Schulz, RE/MAX Holdings, Inc. - VP of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings Third Quarter 2019 Earnings Conference Call. Please visit the Investor Relations page of remax.com for all earnings-related materials and to access the live webcast and the replay of the call today. If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation.

Turning to Slide 2. Our prepared remarks and answers to your questions on today's call may contain forward-looking statements. Forward-looking statements include those related to agent count, franchise sales, financial measures and guidance, brand expansion, competition, technology, housing market conditions, dividends, strategic and operational plans and business models. Forward-looking statements represent management's current estimates.

RE/MAX assumes no obligation to update any forward-looking statements in the future. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our third quarter 2019 financial results press release and other SEC filings.

Also, we will refer to certain non-GAAP measures on today's call. Please see the definitions and reconciliations of non-GAAP measures contained in our most recent quarterly financial results press release, which is available on our website.

Joining me on our call today are Adam Contos, our Chief Executive Officer; and Karri Callahan, our Chief Financial Officer. Ward Morrison, President of Motto Mortgage; and Nick Bailey, RE/MAX Chief Customer Officer, will join us for the Q&A.

With that, I'd like to turn the call over to RE/MAX Holdings CEO, Adam Contos. Adam?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [3]

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Thank you, Andy, and thanks to everyone for joining our call today. The successful launch of our booj technology platform, greater stability in our U.S. agent count, continued double-digit growth in international agent count and ongoing Motto Mortgage expansion, all were key contributors to our third quarter results. We're starting to see positive traction from the multiple strategic moves we've made the past 2 years. And although, it's still early, our recent performance, coupled with the improving housing markets in both the U.S. and Canada gives us added confidence that we'll end 2019 and enter the new year with good momentum.

Highlights of the quarter included: Global RE/MAX agent count increased 3.5%, exceeding 128,000 agents for the first time in our history; revenue of $71.5 million; adjusted EBITDA of $28.2 million; adjusted EPS of $0.61 per share; the successful launch of the RE/MAX technology platform powered by booj, with more and more agents adopting it each week; and the continuing growth of the Motto Mortgage brand, which recently sold its 150th franchise. Let's start here.

Looking at Slide 4. Motto was launched 3 years ago with the aim of disrupting the mortgage industry by providing more options, transparency and convenience for consumers. Motto not only creates additional business for current real estate brokerage owners and teams, but also offers opportunities for mortgage professionals seeking to open their own businesses as well as independent investors interested in financial services.

Our Motto Mortgage brand continues to expand at an encouraging clip and the Motto team's focus on ongoing improvement continues to pay dividends. Recent Motto franchisees are opening their stores at an accelerated rate with almost half of the 29 franchises sold this year through September 30 having already opened their doors. Furthermore, the average days to open is now approximately 90 days, a very quick turnaround for any franchise regardless of industry and further evidence of how compelling the Motto concept is.

With over 100 offices opened in over 30 states, Motto's presence is growing steadily. We anticipate an inflection point to arrive as we build greater mass and brand awareness, and each quarter of growth draws us closer to this point.

Having said that, we've recently expanded our marketing efforts and have been more deliberate about tapping into our existing franchise base for referrals. Both initiatives are showing early promise. Interest in owning a Motto franchise is high, and our pipeline is fuller than it's been in a while.

Many of our current franchisees are enjoying the recent refinancing boom on top of steady purchase origination volume. We are pleased with how well Motto has grown through its first 3 years, and we will continue to invest in its future growth and success.

Turning to Slide 5. As it has every year for over a decade, RE/MAX ranks as the #1 real estate franchise in the Franchise Times Top 200+ rankings, which ranks franchise networks by global sales system-wide. This is the 11th straight year RE/MAX has led all real estate franchise brands in the survey of this major industry report.

Across all industries, RE/MAX earned the #15 spot. This is the seventh consecutive year RE/MAX has been in the Franchise Times Top 15, joining other world-renowned brands such as McDonald's and Marriott Hotels & Resorts. The ranking reinforces the enduring strength, quality and recognition of the RE/MAX brand name.

Moving to Slide 6. We were encouraged to see the year-over-year improvement in September home sales, especially given how challenged the market was a year ago. According to the most recent RE/MAX National Housing Report, 2019's peak selling season ended on a high note as September home sales rose just over 8% year-over-year. September 2019 also marked the third consecutive month of year-over-year inventory decline, reversing the strongest 9-month stretch of year-over-year inventory growth in report history, from October 2018 to June 2019.

Healthy demand together with constrained supply contributed to price increases. September's median sales price of $254,500 represented a year-over-year increase of 4.5%, which is in line with the year-over-year average gain of 4.9% for 2019's first 9 months.

Overall, the market still poses some challenges for buyers, namely rising prices and shrinking inventory, but we're moving into the fourth quarter on better footing than we were a year ago. As we begin to lap the persistent sales declines from the end of last year, the housing market's current trajectory points to stronger year-over-year sales in the months ahead.

Flipping to Slide 7. We finished the third quarter of 2019 with over 128,000 agents in our global network, a record and an increase of 3.5% year-over-year.

Our agent count outside the U.S. and Canada continues to grow at a robust pace. We added almost 6,000 agents in the past 12 months, a gain of nearly 16%. Parts of South America, Europe and Southeast Asia drove this strong international growth.

Our top global performers include Brazil, Argentina, Italy, Israel and India. Last month, I attended the 11th Annual RE/MAX European Convention held in Mallorca, where the theme was bridge to the future. With over 1,100 attendees from 35 countries. The energy at the conference was amazing. Our European colleagues gathered to network, learn, exchange ideas and celebrate their individual and collective successes.

It was easy to see why we have experienced several consecutive years of global double-digit agent count growth. These talented, motivated professionals are setting the standard for the European real estate industry, and it was my privilege to spend the time with them.

Moving to Slide 8. Our U.S. and Canadian agent count showed signs of stabilization during the third quarter, which was welcome news. After 3 consecutive quarters of declining year-over-year performance, our agent count improved slightly relative to the second quarter.

As I mentioned earlier, we believe we are starting to see positive traction from the multiple strategic moves we made in the past 2 years. As shown on the right, our Canadian agent count grew by 111 agents, highlighted by steady gains in Ontario and Québec that offset losses in the west.

Nationwide, Canada finished the third quarter on a high note, with our best month of gross agent additions occurring in September.

On the left, you can see our U.S. agent count was down 2.7% year-over-year. However, it was almost flat when compared to the end of the second quarter, a positive development upon which we intend to build. Suffice to say that while agent count is generally soft in the fourth quarter, we're seeing actual gains in the past few weeks.

We are engaging with our brokers in an unprecedented manner, and reinvigorating our U.S. agent count growth is our top priority. Top to bottom within our organization, we are focused on continuing to innovate and to bolster growth across our network.

Two of our more notable initiatives that occurred during the third quarter involved leadership and technology. On the leadership front, in an effort to connect even more deeply with our network, we hired an industry leader, Nick Bailey, to the newly created Chief Customer Officer role. Nick's one job is to help lead the RE/MAX network in all aspects of growth: market share, agent count, brand presence and more. To a large degree, this entails helping brokers, agents and teams maximize RE/MAX tools, training, technology and culture to make their careers more rewarding and their lives easier.

One of the brightest minds in real estate, Nick brings with him 23 years of industry experience, including a prior 12-year stretch at RE/MAX.

During his 2-decade-plus career, Nick has been a broker, a franchisor, a real estate tech executive and, eventually, the head of a major worldwide real estate brand. His strong industry roots, impressive credentials and successful track record have garnered the respect of his peers, and his arrival has been universally applauded by our network. Nick is responsible for creating clear, actionable goals and targets for everyone within the network. And as of October 1, he has already achieved that objective. This alignment will help ensure RE/MAX is the #1 brand in all aspects of the industry. I am thrilled, Nick has rejoined our team and come back home to RE/MAX.

Turning to Slide 9. Regarding our technology, the recent introduction of the booj platform truly represents a landmark moment in our company's history. Less than 2 years after acquiring the award-winning real estate technology firm, we launched the booj platform in early August. By combining the world's best network with powerful technology, the booj platform can help make the most productive agents in real estate also the most efficient.

Developed by booj engineers in collaboration with thousands of RE/MAX affiliates, the booj platform should achieve 2 objectives, enhancing agent productivity and delivering a better customer experience. By streamlining the work of agents and driving their engagement with customers from lead generation to post close nurturing and beyond, we believe the platform is built to accomplish both objectives.

Customer relationship management, or CRM, is at the core of the booj platform, deeply integrating additional features, including digital branding, lead capture, client engagement and deal management. The booj platform addresses the need for a holistic real estate technology solution as a better option to siloed, one-off third-party solutions.

With the CRM at the core of this ecosystem, the booj platform also integrates transaction management partners that are widely adopted across industry. By offering deep integrations with key partners, RE/MAX ensures that agents can continue using certain products they know and trust, while allowing data to flow back into the booj platform to keep all their information centralized and easy to access. This is a milestone moment for our brand. RE/MAX agents consistently outsell other agents by more than 2:1 at large brokerages and the booj platform should strengthen their competitive advantage.

When homebuyers and sellers decide to work with a RE/MAX agent, they can be confident that their agent comes equipped with the tools, training and technology to deliver a professional, efficient and smooth home buying or selling experience. A fundamental element of the booj platform is based on feedback driving future development. This is just the beginning.

Now that the platform has launched, it should provide more of a recruiting edge due to its agent productivity and consumer experience benefits. RE/MAX will continue to invest in order to optimize and enhance the booj platform over time. We have an unwavering focus on winning. The goal is to remain the pack leader, keeping people engaged so that a client today remains a client tomorrow.

The core CRM has been rolled out to all of our company-owned regions, with the introduction of agent, team and office websites currently under way. The next phase of this rollout includes a new remax.com and consumer-facing mobile experience that will enable RE/MAX affiliates to deliver a more data-driven, efficient and improved overall home buying and selling experience.

This has been an all-consuming effort for many in our company, particularly those in our technology and training functions as well as the thousands of brokers and agents who selflessly contributed their time and invaluable feedback.

We thank everyone who has participated to date, and we are confident the investment of time, effort and resources will pay off. With that, I'd like to turn the call over to Karri.

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [4]

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Thank you, Adam. Good morning, everyone. Overall, we are pleased with our third quarter results. A better-than-expected housing market contributed to stronger-than-anticipated broker fee revenue. Our solid top line results, combined with lower-than-planned tech training expenses and other costs, driven in part by favorable timing, helped to deliver strong profit performance.

Moving to Slide 10. Revenue increased to $71.5 million during the third quarter due to the acquisition of the Marketing Funds on January 1. The expansion of Motto, healthy international RE/MAX agent growth and an improving housing market helped offset lower revenue caused by reduced U.S. agent count. Excluding the Marketing Funds, organic growth dipped 2.3%, and adverse foreign currency movements had a negligible impact. Continued attrition of booj's legacy customer base adversely affected revenue by about $400,000 in the third quarter.

Excluding that impact, our organic growth would have declined just 1.5%. Recall that at the time of purchase, booj's existing client base generated annual revenue of approximately $7 million. We strategically elected not to grow this customer base and chose to focus on building product for RE/MAX while continuing to service booj's existing clients. We expected booj's legacy client base to decrease over time because of industry consolidation and other reasons. However, it has declined more rapidly than anticipated. More on that in a moment.

Looking at Slide 11. Selling, operating and administrative expenses were $24.5 million in the third quarter of 2019, a decrease of $3 million or 10.9% compared to the third quarter of 2018 and represented 45.7% of revenue ex the Marketing Funds compared to 50.1% in the prior year period. SO&A expenses decreased primarily due to lower equity-based compensation expense and other personnel expenses and professional fees. Partially offset by increases in training expenses for the booj platform and property taxes as well as a less-favorable fair value adjustment of our Motto contingent consideration liability. Despite overall professional fees decreasing, legal expenses were up about $500,000 year-over-year due to industry-related litigation initiated earlier this year. More on that in a moment.

Moving to Slide 12. Our business continues to generate healthy amounts of cash, with over 65% of adjusted EBITDA converting to free cash flow on a trailing 12-month basis. Generous cash flow means more capital available for those initiatives which we expect will deliver the best returns.

Our capital allocation priorities remain unchanged. We plan to continue to allocate capital, to acquiring independent regions, reinvesting to drive future organic growth, exploring other strategic acquisitions and partnerships, and returning capital to shareholders.

We recently filed a shelf registration statement with the SEC to provide increased financial flexibility and efficient access to capital to pursue and finance future business opportunities as they arise. We have a healthy competition for capital within our company as leaders of both brands have compelling ideas as to how to energize future growth, both through organic and M&A opportunities. Further, as Adam mentioned earlier, we feel this is just the beginning for our booj platform. We intend to extend the feature set over time through both organic efforts and strategic bolt-on acquisitions.

Turning to Slide 13. Before I get into our outlook, you'll notice that we modified our full year 2019 guidance slightly by bringing up the bottom end of the ranges by $1 million. Otherwise, it remains largely unchanged despite our Q3 profit outperformance. There are a few reasons for this. First, as we have stated many times before, we are focused on the long term, and we will continue to invest for growth. The better-than-expected Q3 profit performance provided additional capacity for opportunistic investment this year, helping fund valuable recruiting and retention and other planned initiatives we are currently executing on. Second, as mentioned earlier, we are experiencing faster-than-anticipated attrition of booj's legacy customer base, which will impact Q4 2019 as well as 2020 results. The quicker pace of the attrition is happening for a variety of factors, including industry consolidation. Consequently, we expect both 2020 revenue and adjusted EBITDA will be approximately $3 million lower than they will be this year because of this dynamic.

We anticipate exiting 2020 with about $2 million in annual revenue from booj's existing customers. Third, legal expenses are increasing, both in 2019 and going into 2020, due to industry-related litigation initiated this year.

We expect to incur an incremental $1.5 million in legal costs in 2020. We plan to provide our full year 2020 guidance as part of our Q4 earnings call in late February.

Now on to our 2019 outlook. The company's fourth quarter and full year 2019 outlook assumes no further currency movements, acquisitions or divestitures. For the fourth quarter of 2019, we expect agent count to increase 3% to 4% over fourth quarter 2018; revenue in a range of $66.5 million to $69.5 million, including revenue from the Marketing Funds in the range of $17.5 million to $18.5 million; and adjusted EBITDA in a range of $21 million to $23 million.

For the full year 2019, we are adjusting our guidance and expect agent count to increase 3% to 4% over full year 2018, changed from 2% to 4%; revenue in a range of $280.5 million to $283.5 million, including revenue from the Marketing Funds in the range of $72 million to $74 million, changed from $279.5 million to $283.5 million; and adjusted EBITDA in a range of $102 million to $104 million, changed from a range of $101 million to $104 million.

Now I'll turn it back to Adam.

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [5]

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Thanks, Karri. Moving to Slide 14. With continued strength in Motto Mortgage, stabilizing RE/MAX agent count in the U.S. and the ongoing rollout of our landmark booj technology platform, we are starting to see positive traction because of the many strategic moves we have made over the past 2 years.

Sentiment is high within the networks of both of our brands, and we are looking to finish 2019 with good momentum going into 2020.

With that, operator, let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jason Deleeuw with Piper Jaffray.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [2]

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Good to see some stabilizing U.S. agent counts. Can you just characterize the competitive environment for agents right now? And then regionally, are there any call-outs of areas that are stronger or weaker?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [3]

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Jason, it's Adam. Yes. We're really excited about talking about this because of the initiatives that we've put in place and with us bringing on Nick Bailey as the Chief Customer Officer, and I'll let him jump in on the answer here in a moment.

But ultimately, what we see and what we're excited about is we've implemented several new initiatives recently for brokerage growth, and we're aggressively pursuing that. Really, we have 2 key pillars that we're pursuing. One is, obviously, agent growth throughout the network, obviously, particularly in the company-owned regions that we operate from headquarters here as well as continuing to implement the exciting new booj platform that's been picked up so well and with such excitement by our offices throughout our regions. So I'll let Nick kind of jump in and talk a little bit more about agent growth.

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Nicholas R Bailey, RE/MAX Holdings, Inc. - Chief Customer Officer [4]

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Yes. Thanks, Adam. Jason, I'll tell you what, as the new guy here for 2 months. I couldn't be more thrilled coming into this role, talking about growth, for a couple of reasons. One, people ask me all the time, what were you surprised about the most: the investment the organization has made to set our value proposition to have something good to grow with. And so immediately, as an example, we launched a growth campaign in October for U.S. and Canada. And it's early, but it is safe to say that October showed some of the best gains of any month yet this far, and especially looking at it being in fourth quarter, it's too early to forecast on it. But at the same time, we know that recruiting is a contact sport. And when we take the value proposition that this organization has invested in, in the last few years, and we partner directly with our franchise owners to help drive growth in their organizations, they're hungry for it, they're excited about it, they love it, and we're seeing results of it. And it will be the foundation of what we not only do in this quarter, but build on it moving into 2020.

As far as your question about regions and areas, it is also more competitive out there than it's ever been, but that's not surprising. We've had approximately a 12-year run-up in a seller's market. And when that happens, you see a lot of new entrants into the industry. History has proven that. And there are markets as Phoenix, as an example, the competitive ground zero test market for the U.S. And we remain very, very strong there, our offices continue to grow, and we see that not only there, but across the country.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [5]

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That's great to hear. And then the shelf registration. I'm just looking for a little bit more color. There was mention of strategic bolt-on acquisitions. Is this looking at other brokerages? Or is this just other technology that you're looking to acquire? Or is it just the independent regions? Just trying to better understand what you're thinking with the shelf?

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [6]

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Jason, it's Karri. So with regards to the shelf, we really looked at this as a blocking-and-tackling exercise. With bringing on Nick and really having leaders of both brands cemented in place, we wanted to make sure that the company had all of the necessary financial flexibility to allocate capital to those initiatives that would really derive the most value. And so as we look at things from a technology perspective, as Adam mentioned, we do believe that booj is truly the foundation. We think that it will be a great product and the best product for our unique culture of highly productive agents. However, there may be opportunities from a bolt-on technology perspective that we could look to enhance that platform and potentially do a pay-as-you-go type of model to create a better service offering and a differentiated value proposition that would really satisfy what are -- some of our strategic goals are around increasing our already very strong per agent productivity and helping our agents deliver a better consumer experience.

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Operator [7]

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Next question comes from Brad Berning with Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Congrats, team, on the longer-term investments. It's starting to lead to the agent results. It's great to hear. Wanted to follow up on the margins side of the equation, you've obviously had investments in Motto, and you've had investments in booj. You talked about a couple of the different kind of one-off items for the year ahead a little bit, but maybe you can talk the trajectory that you're starting to see from those investments? And how do you think about the opportunity for margin expansion versus the opportunity to accelerate the other investments to drive future growth? How do you think about those trade-offs going forward on the margin outlook?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [9]

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Brad, it's Adam. Yes, it's exciting what we're seeing because long-term investments obviously take a long time to start to feel the movement on, and in the inpatient marketplace that a lot of times we play in, you just got to sit there and keep grinding away in order to make these things happen. And we've been really excited around here. We have a great team working on this with RE/MAX, Motto and booj to make sure that we maintain that consistency.

Ultimately, what we're looking for is providing clarity of value to our customer base. And I think that is really shining through right now with these investments. I'll let Karri address the margins here. But ultimately, I'm happy with the direction we're seeing these things go. Obviously, bringing Nick on board has given us a second brand leader. He's the RE/MAX brand leader, Ward is the Motto brand leader, and that allows us to be very focused on driving towards growth in both of those verticals. So, Karri?

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [10]

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Yes. Just building on what Adam was talking about in terms of growth of both verticals. In September and October, we actually had some of the best months and strongest months for Motto franchise sales. And then as Nick was mentioning, between his arrival as well as the deployment of the booj platform, we are seeing some better performance in terms of agent count, recruiting and retention. However, it is very early days. Obviously, those are the 2 biggest drivers of the top line, and there's a lot of golf to be played with respect to the remainder of 2019 and as we head into 2020. We'll definitely have more information as we get into the end of February for next year. But the strength of the business model is foundational to one of our competitive advantages, and there is inherent leverage in the model. So if we can really get acceleration in those top line drivers. The long-term possibility for margin expansion is absolutely there. To Adam's point, we will continue to invest appropriately to help continue to differentiate the value proposition, and we do have some of those headwinds that we talked about in the scripted remarks. But overall, it's really good to see some of the momentum that we've got going right now.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Appreciate that. And then maybe, Nick, one other broader bigger-picture follow-up. Maybe you could spend just 1 or 2 minutes here real quickly and give your bigger-picture thesis of why you think RE/MAX is a winner in the real changes that are going on fundamentally changing this industry. And obviously, you came back here. So help us understand what you see is the real opportunity set within this changing landscape.

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Nicholas R Bailey, RE/MAX Holdings, Inc. - Chief Customer Officer [12]

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Brad, I love the question. First and foremost, I was here for a while, and I was on the outside, and I tell audiences this: Do you know how hard it is to compete against RE/MAX when you're not with them? And I mean that, it's true. The value associated with the professionalism and the per-person productivity of a RE/MAX agent is unmatched. Coming back and walking into this, we talked about the investments that the organization has made, I truly believe that the value proposition of this organization is the strongest that I have ever seen since I have been in this industry in 23 years. And so when I look at the long-term piece of it, and we're giving you examples of growth, what we launched in October is just 1 piece of what we're thinking about on a much bigger scale for next year on direct growth initiatives, but we also have to look at we don't have something like that in 3 years. And now we can take what is such a very strong value proposition and partner with our owners in a much more direct way, and that's what's going to lead to growth. Because our agent count growth comes through our owners, and we're identifying very quickly the obstacles that they have, not only for competitors, but the activities associated with what they need to do to grow their businesses, and we are then going to fill the gaps and help and be right there with them as business partners. That's just focus. And it's not rocket science, in a way, but when you have a value proposition like this to build on, it's incredible. When Karri talks about some of the things that I see that are so important, yes, we can talk about per-person productivity, but there are some fundamental things in the industry that drive agent success.

Most of the successful agents have their business based on repeats and referrals. We see it over and over again, and that is the foundation of a RE/MAX agent. At the same time, we know that there are areas in which agents in general miss out on repeat and referral business. And so when we talk about booj, there are pieces that we're looking at in a micro, micro level to say, how do we fill the gaps of what is a systemic issue for agents to move the number and close more deals and increase that per-person productivity agent -- per person productivity number. So a lot of things in that answer. But I think what we have now, value proposition, direct growth, help with our business partners, and then we are dissecting the challenges to get in the way for brokers and for agents and filling those in. And I just believe that's a winning formula for us moving into next year.

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Operator [13]

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Next question comes from Tony Paolone with JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [14]

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Just a question on the legal and stepping up the cost there, it sounds like going into next year. Is there more to that than, I guess, the Motto lawsuit? And just can you give us any color as to how that's all progressing or how you're looking at this stuff?

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [15]

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Tony, this is Karri. It is related to industry-related litigation. We don't comment on specific litigation matters that are outstanding. What I can tell you building on what Nick was saying is, the strength of the RE/MAX network is in the quality of our agents and the global footprint and the overall brand recognition that the network has. And given those strengths, we do believe that the company is positioned, regardless of any potential outside changes that may have, to weather those storms.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Okay. And then just other detailed question. I don't know, can you provide us how many Motto Mortgage franchises were actually sold in 3Q? Or how many have been sold to date to just get a sense as to what the pipeline of openings looks like?

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Ward Morrison, Motto Franchising, LLC - President [17]

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Sure. This is Ward. Pipeline is very, very robust. I think some of the changes that we've made, we're still on course for about 50 Motto sales just like we did last year right now, but September and October have been 2 of our best months this year. And I think that's tied to some initiatives that we rolled out that I think will continue to further grow. So we rolled out a referral program to our existing broker owners to try and get them involved in the excitement of the growth of the network. Also, we just had a Meet Motto, which is our discovery day, where we had 25 prospects out. The interesting thing about that was that only 10% of them were RE/MAX. The rest, 90%, were outside the RE/MAX family, so that was very exciting to see. And I think that could lead to an inflection point of having more and more independent real estate companies, independent teams, investors and even LOs start to look more closely at the product. So we're continuing to look at same type of forecast as last year on not 10s of Mottos, but starting to see some very much -- some great excitement around it.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Okay. Can you give a sense of like how many were sold as of the end of 3Q?

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Ward Morrison, Motto Franchising, LLC - President [19]

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29, I think. Yes, 29 or 30, right around there.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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So in the quarter itself?

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Ward Morrison, Motto Franchising, LLC - President [21]

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Oh, no, no, no, sorry. Year-to-date, at that time.

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Operator [22]

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Next question comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [23]

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So just first on the international side, I'd be interested to hear kind of what Nick has said as well. You've got now critical mass in some markets there, and I'm wondering how do you convert more of this to higher revenue and maybe change the revenue on a -- instead of on a per-office basis to more like the U.S. and Canada, where it's driven by the agent productivity and number of agents.

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [24]

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Vikram, it's Adam. I just got back from the European convention, where I spoke with about 35 different countries and understood a little closer some of their different business models. And obviously, 35 countries, essentially, we have different -- 35 different ways of doing real estate business or even more than that because each country also has its sub-areas, just kind of like in the U.S., where real estate rules or laws or traditions are different.

So ultimately, what we're continuing to strive for is increasing our count of productive agents in those different countries and helping them build out the real estate infrastructure. We're seeing it very effective. And I don't know that we've even approached critical mass in most of those areas because you look at Portugal, which is one of the smaller countries involved, yet it is a massively one of our most populated with RE/MAX agents, and continues to be a strong growth catalyst in Europe for us.

We discussed on the scripted call before this, that some of the other countries that we're seeing also are showing strong growth and continue to do so. And those you look at and you might think, oh, we've got critical mass in like Israel or India or some of these other places, but actually, we continue to grow. So really, it's about expanding our footprint, evangelizing the brand because we are in a global marketplace now, and we see a lot of flow of purchase going across borders, which is a huge advantage of our brand with our expansive global footprint and the close connectivity of our network and their ability to communicate so seamlessly with each other. So as far as ancillary monetization, we're exploring different opportunities for that, particularly how can you monetize the technology or the data or things of that nature.

But ultimately, that's continued to be a long-term projection as we continue to build out the footprint and look at those opportunities.

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Nicholas R Bailey, RE/MAX Holdings, Inc. - Chief Customer Officer [25]

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Yes, Adam, I'll jump in on that. I'll add a couple of things. In my past, I had some experience with a global real estate network. And as you know, you're seeing double-digit growth coming from our global side. And yet, when you start breaking it down country by country, there are some that are completely untapped that we have a long runway to be successful with. And so the idea that we are limited in the global is not even on the table. We are just identifying very specifically what countries have the most demand, and how do we provide our team more focused to grow in those countries specifically in the next year.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [26]

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That's reasonable. So just on the U.S., just you mentioned sort of the recent trends, been more stabilization in Canada. U.S. continues to see somewhat negative growth. And I'm wondering if you can sort of maybe bifurcate or give us a bit more color on, as you look at the attrition you've seen, kind of what's driving that. How much of that is the competition? How much is just people not succeeding? And then how do you plan to kind of -- is there a plan to kind of have different approaches for maybe different groups of agents in terms of the hiring?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [27]

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Well, it's kind of been a holistic approach for us to reinvigorate agent count. When you look at what causes a business to grow or start to stall out in growth, I think the leading indicator is sentiment. Of the people involved and the clarity of their value proposition. And we've been focusing very heavily, as has Nick, in clarifying our value proposition, completely defining how our agents can continue to grow their businesses. And we see the sky just opening up with opportunity for our agents when it comes to their individual growth and when they start seeing that, understanding it, putting the tools that provide some of that assistance into place, particularly like the booj platform as well as our market dominance and expertise, you start to see change moving in a positive direction driven by that sentiment and attitude in daily activities because this is an entrepreneurial contact sport. We know that, and that's what we have to light the fire under, and that's what we've been doing just an amazing job with, with our executive team all the way down to the partners that we have in our amazing brokerages. So I'll turn the rest over to Nick to kind of add a little bit more color to that. But I think a lot of it really starts with what's in their heart and getting up in the morning and pursuing the business, and that's what we're seeing some reinvigoration in as well.

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Nicholas R Bailey, RE/MAX Holdings, Inc. - Chief Customer Officer [28]

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Yes, 2 things. One thing I failed to mention a little bit earlier when we talked about this early growth that we're seeing as a result of these initiatives, is it's coming from U.S. -- our U.S. company-operated regions. And so that's a good sign because we're so directly involved in being able to monitor exactly to your question, where it's coming from and why?

The second thing that we're looking at, though, is pouring fuel on utilizing data to understand geographically a more micro level of areas of opportunity. And so this is something that's been worked on, that we have been focusing on with not only franchise sales but agent count opportunity and using the data to help us drive specific areas of opportunity. It's going to be a big part of our playbook going into next year.

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Operator [29]

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Next question comes from Ryan McKeveny with Zelman & Associates.

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Ryan McKeveny, Zelman & Associates LLC - Director of Research [30]

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So just to clarify on the U.S. agent count and kind of setting expectations around that for the coming fourth quarter. So the recent gains, the growth initiatives all sound great. But I think, Adam, you alluded to the fourth quarter typically is softer just from a seasonality perspective in terms of agent count and, historically, it does decline in 4Q versus 3Q. So just as far as kind of setting the expectations for the U.S. for fourth quarter, when we look at 3Q and 2Q, down 2.8, down 2.7, can you help us just think about the fourth quarter? I mean are we to expect that, that year-over-year decline should be lessening? Or could it still be in a similar range as the last couple quarters and then potentially the growth come through more in 2020? Any clarification there on the fourth quarter would be very helpful.

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [31]

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Ryan, it's Karri. So yes, we do think the comps should be easier here as we get into the fourth quarter. Obviously, from an overall macro perspective, we're on a little bit more solid footing now than we were this time a year ago. And from an agent count perspective and an agent -- a U.S. agent count performance perspective, in Q4 of '18, it was just pretty tough. As Nick and Adam have mentioned, we've seen some positive traction here in October. Contrast that to October of last year, where we were down hundreds of agents. And so I think it should be some easier comps, very early days still. And so kind of looking more maybe along the historical trends of slight degradation in agent count, but not as bad as what we saw in Q4 of '18.

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Ryan McKeveny, Zelman & Associates LLC - Director of Research [32]

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Got it. That's very helpful, Karri. And then one more, maybe Karri or Ward. Apologies if I missed this. But on the Motto side of things, can you frame what the contribution to revenue has been year-to-date in 2019? And then secondarily, with the -- I think the recent press release said 150 have been sold and versus the 100 opened. So what's kind of the time line for the actual kind of revenue contribution to flow in from the Motto franchises that have been more recently sold? Is that still a function of kind of discounted fees initially and then get on board a bit later? Just any update there would be helpful.

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [33]

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Yes. So the run rate from the -- for those offices that are being sold, we're still looking it about 12-month period of ramp up before they're paying the full complement of monthly fees, and kind of still looking kind of in that mid-single digits of revenue contributions on an annualized basis.

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Operator [34]

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Next question comes from John Campbell with Stephens.

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John Robert Campbell, Stephens Inc., Research Division - MD [35]

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So congrats on the launch of booj. I know that's exciting for you guys. We're anxious to see how the impact kind of plays out here. But I don't know if the launch helped drive some of the better agent kind of growth translate in the quarter. It sounds like that could have played maybe a minor role. But maybe, first, if you could comment on that? And then staying on booj, you guys talked to it kind of being geared towards agent productivity and better customer experience. But over the next few quarters, how do you guys define success around that, like what are your KPIs you've kind of established around that?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [36]

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John, it's Adam. I mean first of all, obviously, the best gauge of success initially with a technology launch is adoption rate. So we're -- the booj platform is centered around the CRM, and we look at a couple of things. One is how many people have signed up for it, how many people log into it, and how many people are actually utilizing and putting their contacts in there, and what's that volume of contact placement that we're seeing as well as the frequency of log and things of that nature.

But ultimately, the cool part about this, having been through these different technology launches in our space before that we've done a few years ago, this one, we find to be incredibly powerful. We're very excited about it because the sentiment that we're seeing and the pickup rate, the adoption, the conversation and the sentiment going on about this, I mean we have a lot of raving fans now. We've trained hundreds of trainers, brokers, agents here at headquarters that impact tens of thousands of agents, and we're seeing a very good adoption rate. I mean, in fact, above what we expected really. So that in and of itself has a deep psychological impact on somebody in an entrepreneurial environment and sales, frankly, when you can really attach yourself to a lever to grow your business. So really, this is an efficiency play for the agents and brokers in order for them to really leverage their business, to spend more time with their customers and more effective time with our customers through the communication, through transparency, through clarity and really it has a great deal of impact on our relationship with them and the retention that provides us in our network. So obviously, retention leads to a lever in agent growth because we're losing less, we're keeping more and, thus, we can gain more effectively. So overall, this whole thing has been a great success for us. We're very excited about it. The interesting part is you see when something -- somebody has a question about something, and they hop online and ask a question, a lot of times our agents and our brokers will answer the question before we answer that question. So it's kind of neat. We have a great deal of advocacy out there for it as well, and I just haven't seen this in the past in a real estate technology launch.

So I'll pass it to Nick and let him, kind of, fill in any gaps that he may see as far as future leverage of this platform. But I see this as being a continued win through the future.

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Nicholas R Bailey, RE/MAX Holdings, Inc. - Chief Customer Officer [37]

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Agreed. Customer experience, that's a focus of it. You hear all the time end-to-end platforms are integrated. We're focusing on the customer experience because, quite honestly, when you look at surveys in the industry and buyers and sellers, after they buy or sell a house, some of you on the call may have personally dealt with this and you say, "Would you like to go through it again?" And a lot of consumers say no. And this is where we can take technology and leverage it for the consumers, which helps empower the agent, the better that the agent sits, the more productivity, the more agents that the offices have.

And then the second piece, when we talk about productivity, we're early stages in launch. Getting people on it as step one, then getting them involved with their contacts and some of the pieces that we have planned create a world in which we have seen, in a period of 7 years, online leads go from approximately 4.5 million to last year being at 89 million. The space of leads is overwhelming agents. And we need this product then to take that very full funnel and spit out and help drive agents who they should be focusing on to buy and sell. And so we're taking the landscape of what the industry is doing with leads, taking -- getting as many people on it as possible, but then also, the next step is more to come on how we use it to drive business to the agents that they might be missing because there's so many lease flying around in their world.

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John Robert Campbell, Stephens Inc., Research Division - MD [38]

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Yes. That makes sense. And then, Adam, this is a bit of a more high-level question, maybe a somewhat loaded question. But I just want to get your view on this. I mean clearly, there's a lot of industry chatter around pocket listings and some attempts to maybe snuff them out. Where do you stand? Where does RE/MAX stand, kind of, on pocket listings going forward?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [39]

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I mean it's a great question. And you look at the chatter in the industry, and it's interesting because you have different MLSes with different rules, and you have different companies trying different things. Ultimately, we're focused on transparency in our space. We think that the consumer needs to know what's going on with their product, and a good, high-quality agent, like a RE/MAX agent is transparent upfront with, okay, here are the options for us to maximize the value of your investment here. When it comes to the listing or when it comes to a buyer, explain where the listing came from and why this is a good opportunity for us to go take a look at it.

So I think the MLSes are very fragmented. Fundamentally, that's the foundation for a lot of this issue, is we need some consistency in how the consumers see this because you could hop online as a consumer and read an article and go, "Oh, I see this pocket listing's going on in this other MLS, but I can't do this over here. Why not?" And that's confusing to the consumer. It allows this unknown to occur within this large financial transaction for the consumer, and we're not for that. We're -- for the consumer to have full knowledge of what's occurring there. And it's not a binary response from us. It's not a yes or no on these. It's a, "Hey, let's get our act together in the industry, let's become consistent with our rules and our regulations, and act in the best interest of the consumer with transparency." So that's been our -- stated position on it, is consumers' transparency first, through consistency in the rules and regulations in the MLSes.

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Operator [40]

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Next question comes from Bose George with KBW.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [41]

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This is Tommy on for Bose. Karri, I just want to make sure I heard you correctly, the 2020 comps that you gave, those figures, that was strictly relating to the booj legacy client runoff. Is that right?

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Karri R. Callahan, RE/MAX Holdings, Inc. - CFO [42]

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That's correct. The $3 million, and then there's some incremental legal cost as well of about an incremental $1.5 million.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [43]

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Okay. Got it. And then you guys mentioned the possibility of bolt-on acquisitions related to booj. Are those intended to produce potentially more premium offerings that could potentially be monetized with agents that are willing to pay for those?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [44]

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Tommy, yes, the answer -- short answer is yes. We've built out the platform. We're creating an app store around that, that has an offering of some additional monetized product, and that's the direction of that whole thing is going.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [45]

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Do you have any example in mind?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [46]

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Not at this time. We're always looking in the marketplace, but we don't have anything specific to point out at this time.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [47]

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Okay. And then lastly, we've seen some competitors announcing various partnerships in the industry. Is that something that RE/MAX is exploring, kind of those similar types of partnerships?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [48]

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Yes. We're always looking for different partnerships that are beneficial to our partner brokers, the agents and the consumer. Obviously, we haven't rolled any out in recent times, but we're always exploring. We have a lot of great friends in the industry, in these different businesses, and we continue to have conversations with them.

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Operator [49]

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(Operator Instructions) And we have a question from Stephen Sheldon with William Blair.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [50]

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Can you provide a high-level update on the timing of the booj rollout with, one, additional capabilities, including the consumer-facing portions of the platform? And then, two, kind of geographic availability?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [51]

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Stephen, we -- so throughout the fall, we've been launching the CRM to the company-owned regions, which we wanted to get everybody involved with utilizing the platform, logging in, working with their customer base in there and really kind of loading up their contacts in the CRM and beginning to manage any deals that they have in process and marketing that they have within that platform. So we're already deep into that, in the company-owned regions, which is roughly 2/3 of the U.S. We just announced in Canada the other day that we're going to be going to beta in Western Canada for them to begin testing the product that the U.S. is using. And we continue to roll out consumer-facing portions of this through the next, we'll call it, 2 to 3 months, if you will, that really integrates deeper the consumer into that process, utilizing this specific set of technology.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [52]

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Okay. That's helpful. And then it sounds like you're focusing heavily on training, et cetera, to drive adoption and utilization of booj, which makes a lot of sense. How much more do you need to do in that area? And would you expect the training expenses related to this to ramp up as we look out over the next year or so?

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [53]

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All hands on deck on training, yes. And we're looking at various options of in person using staffs that we currently have. And we're also looking at how we can deliver it virtually. We know that in -- likely in the first half of next year, we will invest in both of those areas, in person and digital and get the vast majority of the initial training to drive the initial adoption done in the first half. And then as we do that, we'll be looking through efficiencies of training via an LMS system, via virtually. There are a number of ways that we'll be able to deliver ongoing training and personalized training as features continue to develop and roll out.

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Operator [54]

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At this time, I will turn the call over to the presenters.

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Adam M. Contos, RE/MAX Holdings, Inc. - CEO & Director [55]

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Thanks, Sharon. Thanks to everyone for joining us on the call today. That concludes the call. Have a great weekend.

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Operator [56]

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This concludes today's conference call. Thank you for participating. You may now disconnect.