RE/MAX Holdings, Inc. (RMAX) - 21-Feb-2020
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21-Feb-2020
RE/MAX Holdings, Inc. (RMAX)
Q4 2019 Earnings Call
Total Pages: 20
1-877-FACTSET www.callstreet.com Copyright © 2001-2020 FactSet CallStreet, LLCRE/MAX Holdings, Inc. (RMAX) Corrected Transcript
Q4 2019 Earnings Call 21-Feb-2020
CORPORATE PARTICIPANTS
Andy Schulz Karri R. Callahan
Vice President-Investor Relations, RE/MAX Holdings, Inc. Chief Financial Officer, RE/MAX Holdings, Inc.
Adam M. Contos Nick Bailey
Chief Executive Officer & Director, RE/MAX Holdings, Inc. Chief Customer Officer, RE/MAX Holdings, Inc.
.....................................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Stephen Sheldon Ryan McKeveny
Analyst, William Blair & Co. LLC Analyst, Zelman & Associates
Vikram Malhotra Anthony Paolone
Analyst, Morgan Stanley & Co. LLC Analyst, JPMorgan Securities LLC
Thomas McJoynt-Griffith Chris Gamaitoni
Analyst, Keefe, Bruyette & Woods, Inc. Analyst, Compass Point Research & Trading LLC
John Campbell
Analyst, Stephens, Inc.
.....................................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good morning and welcome to the RE/MAX Holdings Fourth Quarter 2019 Earnings Conference Call
and Webcast. My name is Lora 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?
.....................................................................................................................................................................................................................................................................
Andy Schulz
Vice President-Investor Relations, RE/MAX Holdings, Inc.
Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings fourth quarter and full year
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 and mortgage market conditions,
capital allocation, 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 fourth
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Q4 2019 Earnings Call 21-Feb-2020
quarter and full-year 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?
.....................................................................................................................................................................................................................................................................
Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc.
Thank you, Andy, and thanks to everyone for joining our call today. We have many positive topics to discuss. So,
let's get right to it. Looking at slide 3, recent RE/MAX recruiting initiatives and Motto marketing efforts generated
positive results almost immediately, leading to a bounce back in our US agent count and a record Motto franchise
sales, two of our key leading indicators.
The targeted investments we made early in the fourth quarter alongside the continued positive impact from the
many strategic moves we've implemented in the past two years contributed to the quarter's encouraging results.
Combined with the relatively attractive housing markets in both the US and Canada, we entered 2020 with
momentum.
Other highlights of the quarter included revenue of $68.2 million, adjusted EBITDA of $22.5 million, adjusted EPS
of $0.47. Total RE/MAX agent count increased over 5%, exceeding 130,000 agents for the first time in our history
and the technology transformation at RE/MAX continued with the ongoing rollout of the powerful booj platform as
well as the exciting acquisition of another tech innovator, First.
Let's start with the fourth quarter's headline; improved agent count results. Turning to slide 4, Q4 of 2019 was the
best fourth quarter of total agent net gain since we started tracking this metric on a quarterly basis in 2002. Our
US agent count grew by almost 600 agents quarter-over-quarter, primarily in company-owned regions.
Worldwide, we added over 2,600 agents quarter-over-quarter and over 6,600 agents year-over-year.
The strong fourth quarter performance helped us finish 2019 with more than 130,000 agents in our global
network, an increase of 5.3% year-over-year. In fact, it also closed out the fifth consecutive decade of increasing
agent count growth in the rich history of RE/MAX, despite the industry changes, economic downturns and
competitive challenges experienced during that time. It's quite a statement about the strength of our brand and the
resiliency of our model. Looking internationally, our agent count outside the US and Canada continues to grow at
a robust clip, increasing 16% in 2019 and almost 33% over the past two years. Operations in South America,
Europe and Southeast Asia led the way and the top performers in 2019 by country included Argentina, Peru, Italy
and India.
Moving to slide 5, in the US, our agent count rebounded during the fourth quarter, exceeding our expectations. As
I've mentioned previously, rejuvenating our US agent count growth has been a top priority for a while now and we
were extremely pleased with the Q4 results. On the left, while our US agent count was flat year-over-year, it
actually represents a large turnaround. Given the number of agents we added between October 1 and December
31, along with lapping some easy comps from the prior year, we successfully erased a year-over-year deficit of
1,700 agents that we had at the end of the third quarter.
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Q4 2019 Earnings Call 21-Feb-2020
Many factors contributed to our strong fourth quarter performance. Some of the more impactful forces included
our enterprise-wide focus on growth, our ongoing technological transformation, improving housing market
conditions and perhaps most notably a successful recruiting campaign launched during the quarter. As we noted
on our third quarter call, we launched an agent recruiting initiative in October for the US and Canada. At that time,
we said October had posted some of the best agent gains to date in 2019. That pace accelerated even more in
the final two months of the year.
Our fourth quarter results were a reminder that consistency, incentives and organizational focus can drive growth.
It's also important to note that we believe our Q4 US agent gain was largely the result of actions taken by us and
our franchisees. Competition for high producing agents remains fierce, but the changes we and our franchisees
have made over the past few years to augment the RE/MAX value proposition and effectively activate our network
to make growth a priority are starting to show up in our results.
We stabilized our agent count in Q4 and we're eager to expand upon it in 2020. We will continue to bring creative
new ideas to the recruiting environment and strategically invest in our value proposition as we have over the last
few years to bolster our growth opportunities. As shown on the right, our Canadian agent count grew by 240
agents, highlighted by solid gains in Ontario and Québec that offset losses in the West. Canada's ongoing growth
and market share strength continues to be a highlight of the RE/MAX story.
Looking at slide 6, RE/MAX is widely known as being the home of the top producer. Our per agent productivity
levels are the envy of the industry. RE/MAX agents consistently outsell other agents at large brokerages by more
than 2:1. Several fundamentals tend to drive agent success within our industry. For example, many successful
RE/MAX agents derive the bulk of their business through repeats and referrals. We see this especially among
established top producers who've built large databases through their relationships, community presence and past
clients, even so every agent has felt the pain of seeing your competitor's sign pop up in the yard of a friend or past
client.
In the industry, almost all clients say they use their agent again, but only a very small fraction actually does. That's
because agents aren't staying as connected to their sphere as they should. To help solve this problem, RE/MAX
acquired First, a North Carolina firm recognized for its industry innovations. The First app uses data, machine
learning and predictive analytics to analyze an agent's contacts and identify those most likely to move soon. The
app, serving as an intelligent coaching platform, then prescribes a strategic action plan for the agent to reach out,
fortify the connection and be top of mind before any potential move.
With a proven product already on the market, First has had a strong track record since its 2016 launch. Its
signature app is a great complement to our current tech offerings and can help make our highly productive agents
even more productive. The acquisition makes the First app a RE/MAX exclusive, although current subscribers will
be able to use it until their existing contracts run out by the end of 2020. After that, they'll need to join RE/MAX to
access the product and we will of course welcome them to do so. RE/MAX agents will access the First app at a
heavily reduced subscription price from the normal rates users have paid.
Given the app's quality and the impact it could have on an agent's business, we believe this price point will be
attractive to our membership and enable us to continue the expansion of our technology offerings. The First app,
as well as other products capable of being developed by the First team, represent yet another competitive
advantage for RE/MAX affiliates. Additionally, in acquiring First, we not only acquired the app, but we also
welcomed another impressive group of real estate technology professionals to the RE/MAX family. At a time when
software developers steeped in machine learning and predictive analytics are difficult to find, it's wonderful to be
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Q4 2019 Earnings Call 21-Feb-2020
adding top industry talent as we build on another of our competitive advantages, technology leadership and bench
strength.
Turning to slide 7. We completed the initial rollout of the booj platform during Q4, including customized agent
office and team websites. Many of our brokers and agents have been designing their updated websites over the
past couple of months, leveraging the easy-to-use booj platform and net number of grows each week. Earlier this
month, we launched our new consumer real estate search app as well as the refreshed remax.com website
designed to help consumers find homes and connect with agents. These releases leverage the number one brand
in real estate and deliver real-time leads and contacts to RE/MAX agents.
They also further demonstrate the focus and commitment RE/MAX has on providing leading technology that
enhances the home buying and selling experience and deepens the relationship between clients and real estate
agents. The RE/MAX real estate search app is a highlight. Designed by booj, it is a powerful tool that streamlines
communication between a RE/MAX agent and consumer at every step of the home-buying transaction.
RE/MAX agents can give their clients a personally branded app which allows consumers to share all their needs,
favorite properties and save searches with the agent, essentially taking the conversation out of the office and into
their hands. Consumers without a preferred agent can find and interact with an agent within the app. The app also
introduces new search functionality like augmented reality. Consumers can point their phone at a home on the
market and instantly receive relevant information, including property details, a mortgage breakdown and
comparable listings. Then with one click, they can inform their agent about their interest.
Additionally, RE/MAX app users can search properties nearby or by drawing specific map boundaries. The
RE/MAX real estate search app is available for download across the United States. Likewise, the re-launch of
remax.com provides a lot of backend improvements for agents and teams and interconnects with their booj-
powered agent, office and team websites. A big enhancement is that information in searches via website are
instantly shared on the mobile app, giving the consumers all the tools they need at their fingertips regardless of
their location.
The launch of the new remax.com and RE/MAX app builds on our vision of becoming the global leader in real
estate technology. RE/MAX agents already average more sales than other real estate agents. This technology
suite is designed to add to that strength and productivity, while creating a better experience for the consumer.
Moving to slide 8, the other headline of the fourth quarter was record quarterly Motto franchise sales. The strength
in franchise sales that we saw, beginning in September, continued through the end of the year. Sensing
opportunity, we launched a targeted Motto marketing event in Q4, which helps spur additional sales. We flew
about 20 interested parties to Denver for a meet Motto showcase event. In addition to hearing a current Motto
owner discuss his experience, attendees got to meet the Motto team in person and learn more about this unique
franchise opportunity, all while interacting with other prospective franchisees. An encouraging fact about the event
was that only about 10% of the attendees were RE/MAX affiliates. The rest were from outside the RE/MAX family.
The discovery event was a great success and we intend to do it again soon.
Adding to our momentum are the industry accolades Motto continues to receive, including recently earning a
place on Entrepreneur Magazine's Franchise 500 list, ranking number one in the Miscellaneous Financial
Services category for 2020. Recognition in the Franchise 500 is a major honor in the franchise industry and this is
the first time Motto Mortgage has been included in the general rankings. As a three-year old startup, ranking first
in its category, Motto is in rare company. Since its launch in October 2016, Motto has grown quickly, averaging 50
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Q4 2019 Earnings Call 21-Feb-2020
franchise sales a year or 1 a week. The brand currently has over 100 offices open across more than 30 states.
Motto is also among the top 5% of the fastest growing emerging franchises according to Franchise Grade.
Motto continues to grow rapidly. Revenue increased almost 80% in 2019 and open offices increased more than
40%. Motto's impressive growth trajectory is perhaps best reflected by the fact that the Motto Mortgage network of
offices closed over $1.1 billion in loan volume and served over 5,000 families in 2019. Reaching this milestone is
a significant accomplishment for any mortgage company, but it is especially notable to achieve it in only three
years' time.
Motto continues to disrupt the mortgage industry by providing exceptional service, more options, transparency
and convenience for consumers. This model not only creates an ancillary business for current real estate
brokerage firms and prolific real estate teams, but also offers opportunities for mortgage professionals seeking to
open their own businesses as well as independent investors interested in financial services. We see continued
demand from each of these customer types. Interset in owning a Motto franchise remained high and we expect to
surpass our 2019 franchise sales total in 2020.
With that, I'd like to turn the call over to Karri.
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc.
Thank you, Adam. Good morning, everyone. Fourth quarter results were highlighted by the encouraging
performance in our two key leading indicators; improving US agent count and increasing Motto franchise sales.
For the full-year 2019, we were pleased with our resilient revenue and margin performance despite the soft
housing market that prevailed during the first part of the year. We also continued to invest strategically. As Adam
mentioned, the RE/MAX technology transformation is well underway and we are excited about the recent
acquisition of First and its mobile app.
Turning to slide 9, revenue increased to $68.2 million during the fourth quarter due to the acquisition of the
Marketing Funds on January 1. The expansion of Motto and an improving housing market essentially offset lower
revenue caused by declining booj legacy customers and reduced average US agent count. Excluding the
Marketing Funds, organic growth was virtually flat. Foreign currency movement also had a negligible impact.
Continued attrition of booj's legacy customer base adversely affected revenue by about $600,000 in the fourth
quarter. Excluding that booj impact, our organic growth increased 1.2%, marking our first quarter of organic
growth, ex-legacy booj customers, since Q4 of 2018. This is a welcome development and reflects the growth of
Motto, improving agent count results and the rebounding housing market, trends which we expect to continue in
2020.
Looking at slide 10, selling, operating and administrative expenses were $35.2 million in the fourth quarter of
2019, an increase of $5.1 million or 17% compared to the fourth quarter of 2018 and represented 69.3% of
revenue, ex the Marketing Funds, compared to 59.1% in the prior-year period. SO&A expenses increased
primarily due to higher equity-based compensation expense, the unfavorable timing of certain annual regional
events and increased legal expenses.
Moving to slide 11, we acquired First in late December using $15 million of cash on hand, plus time-based equity
awards. Notably, this is the second time we included equity as a part of the compensation provided to the sellers
of an acquired asset. We view our equity as a competitive advantage and it has made a difference in both the
booj and First acquisitions.
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Q4 2019 Earnings Call 21-Feb-2020
As mentioned previously, we will employ a pay-as-you-go method when it comes to charging users of the First
mobile app. The roughly $49 monthly subscription cost is heavily subsidized, and we believe it is a great value for
those RE/MAX agents to choose to subscribe to it and it is yet another terrific benefit available exclusively to
RE/MAX affiliates. We expect the First acquisition to be dilutive to 2020 adjusted EPS by $0.04 to $0.06 per
diluted share and then be accretive to 2021 adjusted EBITDA and adjusted EPS.
Unlike some of our competitors, our business generates healthy amounts of cash with over 70% 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 to deliver the best returns. We will continue to strategically invest to
spur future growth opportunities, like the exciting First mobile app, as well as important recruiting and marketing
initiatives for both of our brands, while we simultaneously return capital to shareholders.
Earlier this week, we announced an increase to our quarterly dividend, just as we have done every year since
going public in 2013. In addition, we are refreshing our corporate office space with an eye on increasing
productivity, improving the office environment for our colleagues, while simultaneously reducing costs. Our capital
allocation priorities remain unchanged. We plan to continue to allocate capital to acquiring independent regions,
re-investing to drive future organic growth, exploring other strategic acquisitions and partnerships, and returning
capital to shareholders. We have healthy competition for capital within our company as leaders of both brands
have compelling ideas to energize future growth both through organic and M&A opportunities.
Turning to slide 12, before I get into our outlook, a few items to note. First, as strong as our fourth quarter agent
count results were, we acknowledge it was a unique quarter, with a confluence of activity and factors that Adam
previously mentioned. We expect our agent count results will continue to improve in 2020 on a year-over-year
basis, but just not at the pace we witnessed in Q4. Embedded in our 2020 agent count guidance is the
expectation that we should be flat to slightly up in Canada, that will grow at a double-digit pace internationally and
that will continue to add agents in the US. Our 2020 agent growth in the US will likely be measured in the
hundreds of agents.
Second, we invested to help revitalize our recruiting efforts. As we have done in the past, our Q4 recruiting
campaign incentivized our RE/MAX broker owners in part by waiving certain fees on newly recruited agents for a
limited time. As a result, we expect we will forgo $2 million to $3 million in non-Marketing Fund related revenue
through the third quarter. We realized the lifetime value these agents is worthy opportunity cost many times over.
These incentives are intended to be an investment in our franchisees' and agents' businesses and reduce the
barriers of changing affiliations.
Third, as mentioned on our last earnings call, faster than anticipated attrition of booj's legacy customer base,
combined with higher legal expenses associated with industry litigation, are expected to adversely impact 2020
results by approximately $4.5 million in aggregate.
Now, on to our 2020 outlook. The company's fourth quarter and full-year 2020 outlook assumes no further
currency movements, acquisitions or divestitures. For the first quarter of 2020, we expect agent count to increase
4% to 5% over first quarter of 2019, revenue in a range of $68 million to $71 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 $18 million to
$20 million. For the full year 2020, we expect agent count to increase 3% to 5% over full year 2019, revenue in a
range of $285.5 million to $289.5 million, including revenue from the Marketing Funds in the range of $73 million
to $75 million and adjusted EBITDA in a range of $96 million to $99 million.
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Q4 2019 Earnings Call 21-Feb-2020
Now, I'll turn it back to Adam.
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Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc.
Thanks, Karrie. Moving to slide 13, we concluded 2019 on a high note with a rebound in our US agent count,
historic quarterly Motto franchise sales and a return to organic revenue growth, excluding booj. Our technology
and other investments are yielding encouraging results and we look forward to building on our momentum in
2020.
With that, operator, let's open it up for questions.
.....................................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Our first question comes from Stephen Sheldon from William Blair.
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Stephen Sheldon
Analyst, William Blair & Co. LLC Q
Hi. Good morning. First here, you talk about a lot of factors that drove the improvement in US agent count which
was certainly good to see. But just curious your view of how impactful each of those factors were between the
recruiting incentives, the booj rollout and just broader outreach efforts? And then, on the incentives, is that
something that you may continue doing and how do you think about the ROI of those incentives?
.....................................................................................................................................................................................................................................................................
Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc. A
Good morning, Stephen. It's Adam. First of all, we're really excited about all of these things kind of coming
together. We've been working on a lot of different projects over the past call it a year or two between when we
acquired booj to the build out of that and then the progressive launch of that, as well as the acquisition of First, the
recruiting incentives bringing on our Chief Customer Officer, Nick Bailey.
So, as far as separately impactful, I think everything is stronger as a whole when it comes to all of this, because
this is kind of the whole package of what agents are looking for in order to operate their business, moving it
forward into the new decade here. So, we're excited about that, because we're seeing things hit the street, we're
seeing results and we're seeing sentiment which ultimately – we're in a business of community and sentiment and
the people that they get excited about running their business go out and run it better when they feel like they're
confident in the tools and the processes that they have to do so. So, ultimately, that's the foundation of what
we've been building on.
And I'll turn it over to our Chief Customer Officer, Nick Bailey, and he can kind of talk a little bit more about the
incentives and kind of the mechanics of some of those recruiting aspects.
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Nick Bailey
Chief Customer Officer, RE/MAX Holdings, Inc. A
Yeah. Thanks, Adam. We were super-thrilled at the launch of our recruiting system and it wasn't one lever that
actually impacted. It was the combination of our direct engagement of creating a recruiting system that had many,
many different levers. The best part of it is we had thousands of our brokers engage in it and recruiting is a
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Q4 2019 Earnings Call 21-Feb-2020
contact sport. And so, when you put together education, a tech platform, communication, direct engagement from
our leadership team and incentives and you package that together, that was the secret sauce that created so
much engagement that we believe our recruiting results for a direct result of that packaging.
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
And then, Stephen, this is Karri, just building on what Adam and Nick had said, you specifically asked about
return on investments. We very much look at the lifetime value of our agents and what is the customer acquisition
cost to recruit those and really drive top-line growth, just given the overall strength of our business model. So, the
incentive programs, there are things that we have done in the past. As Nick said, they were part of a much
broader initiative focused really to drive top-line growth. And so, we're looking to balance that across all capital
allocation decisions.
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Stephen Sheldon
Analyst, William Blair & Co. LLC Q
Got it. Okay. And then, I guess just to follow up, it sounds like gross additions were better. Was there any notable
change or improvement in the age of retention side in the US and Canada as well?
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Retention remains pretty much flat. We're really focused on the recruiting side of the house, because historically,
as we entered into 2019, it was the top of the funnel where we were really focusing our efforts, because that's
what we really needed to accelerate. So, no real material changes to overall retention activity in the quarter.
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Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc. A
I'll add one thing, Karri, to that. As we look at the continuation of this system that we implemented in Q4 and as it
leads into 2020, we look at recruiting retention as both activity drivers here and retention is a key piece as we're
moving into Q1 that is – will become even a bigger part of this system that we launched.
.....................................................................................................................................................................................................................................................................
Stephen Sheldon
Analyst, William Blair & Co. LLC Q
Great. Thank you.
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Operator: Our next question is from Vikram Malhotra of Morgan Stanley.
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Vikram Malhotra
Analyst, Morgan Stanley & Co. LLC Q
Thanks for taking the question. Karri, if you can just outline the margin – sort of just clarify the margin, EBITDA
and the margin impact because of the transactions and all the investments in 2020 and sort of when exactly that's
supposed to turn to be a benefit in 2021?
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Yeah. Good morning, Vikram. It's a great question. So, I think the resiliency and the strength of our model is
definitely one of our most and strongest competitive advantages and the leverage in the business obviously
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Q4 2019 Earnings Call 21-Feb-2020
continues to remain and we've really invested for that long-term top-line growth. And we're really beginning to see
the results show for that in terms of just outstanding Q4 agent count growth in the US that bounced back not to
mention a record quarterly franchise sales performance for Motto. There's definitely some noise in the guidance
for 2020. Obviously, the impact of the legacy booj customer base and increased litigation cost of about $4.5
million, that's a drag on earnings.
And then, also, as we look at a couple of other factors that are impacting guidance for next year, those are really
designed to continue to diversify revenue and position us well for earnings growth in the future. So, the first is
related to the First acquisition. So, we are expecting that to have a dilutive impact in 2020 about $0.04 to $0.06 to
diluted adjusted EPS and about $1.5 million to $2.5 million to adjusted EBITDA in 2020, and then, the few waivers
that Nick was talking about.
I think the thing that's really exciting from our perspective though is that those things that are kind of noisy for
2020 are going to have a more impactful impact to kind of Q1 and Q2 of 2020, kind of looking at flattish organic
growth in those quarters. But then, as we get into the back half of the year, there's a definite path to ramping up
that organic growth as we look at a continued narrowing of the net investment in Motto, as we look at
opportunities to grow adoption of First, not only in terms of the price point, but also in terms of increased
productivity.
And then, also just the momentum that Nick was really talking about from a recruiting and a retention perspective
around agent count. So, there's a lot of opportunities to look – to really drive the leverage in the business and take
advantage of the strength of the business model because of the investments that we've made to drive that top-line
growth.
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Vikram Malhotra
Analyst, Morgan Stanley & Co. LLC Q
Okay. Great. And then, just on the agent sort of recapture are now kind of flattish growth in the US specifically
after like couple of years of decline. Just I want to understand how all the technology, the investments are making
or positioning you better to compete one against the legacy brick and mortar, the [indiscernible] (00:28:06) of the
world. Like, what are you looking – in the agents you're recruiting, what's the data telling you, conversations telling
you, how are you competing?
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Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc. A
Hey, good morning, Vikram, it's Adam. Great question. It was – something to take note of here is realistically
where does the business for an agent come from? And ultimately, the majority of the opportunity for business, for
an agent comes from the people that they've had contact within the past. And this is one of the key aspects of our
most recent acquisition and the launch that we're doing here next week of the First platform. What we know is,
agents want to go where they have the ability to build their business. And that's foundationally what RE/MAX is
based upon is giving people a place where they can build their business as great as they want it to be. And what
we know on top of that is that agents potentially are missing up to 70% of the business in their contact list. So,
with the AI platform, the technology of First as well as rolling it into the foundational very leading-edge technology
that the booj platform is launching, we're giving agents a place that they can basically go after some of the
business that they're looking at as opposed to going out and trying to buy the business out of the marketplace.
So, we want them to build their business organically and we know that this works based upon the statistics that
we've seen in reviewing how an agent builds their business. So, ultimately, this is – the past year has been a
significant ramp up to this of gaining the confidence, the direction, the focus of the agents in helping them focus
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Q4 2019 Earnings Call 21-Feb-2020
on building their business and helping our brokers and the owners of the franchises, get the agents focused on
this through training and notification release, things like that of these product sets. So, essentially, that's why,
we're optimistic about the direction of recruiting agent growth, things like that, because ultimately, we're here to
help agents do more business. And in helping agents do more business, we help our franchises grow and it just is
a cycle that builds upon itself and we feel like we've put the appropriate pieces in place in order for that to be
positive into the future.
.....................................................................................................................................................................................................................................................................
Nick Bailey
Chief Customer Officer, RE/MAX Holdings, Inc. A
Adam, I'll add to that.
.....................................................................................................................................................................................................................................................................
Vikram Malhotra
Analyst, Morgan Stanley & Co. LLC Q
Sorry. Go ahead.
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Nick Bailey
Chief Customer Officer, RE/MAX Holdings, Inc. A
There is one thing that I would say; when you ask about comparison say to us to competitors, there is a piece of it
that we believe we stand in a category of our own because of the productivity of a RE/MAX agent, nearly 2:1 of
the competition. And so, when you ask in the industry about the quality of a RE/MAX agent, an agent at RE/MAX
makes more money because they sell a lot more houses. And so, the foundation of what Adam's referred to with
the investment in First fully supports exactly what the foundation of this company is, which is our agents sell more
real estate and we're having – we're putting tools in place to allow them to expand and grow that business and
sell more real estate and that is not the same motivation with some of our other competitors, because we're not all
things to all people, we know where our niche is with top producers.
.....................................................................................................................................................................................................................................................................
Vikram Malhotra
Analyst, Morgan Stanley & Co. LLC Q
Okay. And just last question. So, this is something that I guess we've been – I've been trying to get more color on
in terms of the – there is a brand, there is a strength, the agent base, they're higher producers, the whole mix
obviously benefits both RE/MAX and agent. But in terms of just the organic power of the franchise fees and the
annual dues, several years ago, you talked about in Canada having automatic bumps for franchise dues, but
you've never really instituted it in the US, you tried it. I think, you increased it once a couple of years ago, but I'm
just kind of wondering is this kind of a driver that in this environment we're in just does not exist, now, you cannot
push dues in franchise fees anymore for agent?
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Hey, good morning, Vikram. It's Karri. So, from a pricing perspective, we're always looking at evaluating the value
that we deliver to our network and we're evaluating that from a pricing perspective. At this point that we haven't
announced any change as surprising, but it's absolutely something that we're evaluating. We've talked a lot about
the investments that we've made and it's something that we continue to evaluate.
.....................................................................................................................................................................................................................................................................
Vikram Malhotra
Analyst, Morgan Stanley & Co. LLC Q
Okay, thanks. I'll follow-up offline.
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Q4 2019 Earnings Call 21-Feb-2020
Operator: Our next question is from Tommy McJoynt of KBW.
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Thomas McJoynt-Griffith
Analyst, Keefe, Bruyette & Woods, Inc. Q
Hey, guys. Thanks for taking my question. I wanted to go back to the recruiting campaign and just trying to get a
sense of if you guys see that as kind of a one-time thing or if that could become part of your regular campaign?
And then, when you think of the markets that you rolled out and was it just the really competitive MSAs, or was it
a more broad based across country?
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Adam M. Contos
Chief Executive Officer & Director, RE/MAX Holdings, Inc. A
Hey, Tommy, it's Adam. I'll say a couple of things and I'll pass it over to Nick as – truly he's kind of the captain of
the ship of this massive growth push and it's really exciting from our perspective. But ultimately, what we started
here was, get everybody together, get everybody pointed in the same direction and excited about this and start
delivering some significant major value here in order to help people grow their businesses. So, that's
foundationally what we're talking about. Agents want to be at someplace that really is encouraging for them to
grow their business, because when you walk into a business or have contact with a business, it's a big difference
in the consumer's eyes to see somebody who's – who they recognize as being that full-time professional with a
big smile on their face and a positive optimism in order to help them accomplish their goals and overcome their
challenges. So, what we've done is get everybody together, we've aligned our strategies and tactics. And then,
Nick has taken this and run with it and I'll pass it off to him to get a little deeper.
.....................................................................................................................................................................................................................................................................
Nick Bailey
Chief Customer Officer, RE/MAX Holdings, Inc. A
Without a doubt, this is a long-term permanent play for us that we'll make adjustments in investments along the
way. Q4, we did broadly to US and Canada to all markets, so it was not just within specific MSAs, because we
have growth potential with our footprint in all of our markets. What we'll continue to do though is really frame our
entire culture around recruiting. So, here's a great example. We have our big annual conference next week and
we have the highest attendance this coming year that we've had in a decade and it includes a number of guests
that are looking at our company to join us. And so, that is one component of how we look at this entire system of a
number of 10 to 12 different levers we can pull and use quarter-over-quarter to make adjustments throughout the
year to keep this program fresh and enhance and top of mind, but it will be the foundation of how we think about
all of our engagement tools and services for our brokers.
.....................................................................................................................................................................................................................................................................
Thomas McJoynt-Griffith
Analyst, Keefe, Bruyette & Woods, Inc. Q
Got it. Thanks. And then, switching over – I appreciate the Motto slide in the deck, kind of breaking out the
revenue and the earnings from that. When you guys think about the growth trajectory, obviously it's moving
toward breakeven. I guess how do you think about the incremental margins on that business relative to traditional
RE/MAX franchises?
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Yeah. Good morning, Tommy, it's Karri. So, yeah, the page that you're referring to is in the appendix of the deck,
it's on page 21 and we wanted to provide a little bit more transparency into Motto, because it is a great growth
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Q4 2019 Earnings Call 21-Feb-2020
driver and a great diversification of revenue for us. As we look at that the top line, I mean, it's grown the top line
almost 80% this year and I think importantly, the net investment continues to narrow on that. And so, continuing to
feel that in kind of the back half of next year is when we would look at that business unit moving towards
breakeven. And then, over the long term, the inherent leverage in the Motto business model is exactly the same, if
not better than it is on the RE/MAX side. So, from a long-term growth potential, the margin upside there is
significant.
.....................................................................................................................................................................................................................................................................
Thomas McJoynt-Griffith
Analyst, Keefe, Bruyette & Woods, Inc. Q
Great. Thank you.
.....................................................................................................................................................................................................................................................................
Operator: Our next question is from John Campbell from Stephens.
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John Campbell
Analyst, Stephens, Inc. Q
Hey, guys. Good morning. Great work on the agent growth rebound and congrats on the consumer app launch
and the website rehaul. On the First acquisition, that seems like a nice strategic play for you guys. I'm curious
about the revenue synergy opportunities kind of over the long haul. It sounds like Karri, I think you said you guys
were subsidizing the cost to agents, I think you said $49 a month. So, first, how much of a discount is that to the
prior market rate? And then, secondly, any sense for how many agents are they use First out of your base?
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Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Yeah. So, great question, John. I think, the thing about First that we're really excited about is, it is a way that we
can look to diversify our revenue and at the same time, providing exclusive value to our network of highly
productive agents in terms of really enabling them to increase their productivity. The discount is about a 50%
discount compared to the list price. And then, there is kind of hundreds of agents that have been on the platform, I
think, most notably though and we have very much been engaging our network. So, not only the booj process, but
we're very – with Adam and Nick's leadership, very engaged with the network trying to understand what are the
tools in the market that are impactful. And we had heard very, very positive results of some of the RE/MAX users
who are already on the First platform. And so, it's something that we're extremely excited about from a strategic
perspective, from a revenue diversification perspective, but also from a talent perspective just as we look at really
building the bench strength of technologists within the organization.
.....................................................................................................................................................................................................................................................................
John Campbell
Analyst, Stephens, Inc. Q
Okay. And then, as a follow up to that, I think there was a question asked earlier about the agent fees. Is there
ever a potential where you get – you garner enough adoption where you can just basically give it out "for free"
and then basically use as a basis to raise agent fees?
.....................................................................................................................................................................................................................................................................
Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
Those are all things from a fee perspective that we're constantly evaluating and we look to balance. So, it's part of
the comprehensive view that we take in terms of evaluating the value proposition. And then, what the associated
cost investments are from our agents and from our networks to be able to put them in a position to grow their
business in the most efficient manner.
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Q4 2019 Earnings Call 21-Feb-2020
John Campbell
Analyst, Stephens, Inc. Q
Okay. And then, one little quick tack on here. On the consumer app and the rehaul of remax.com, what are the
kind of internal KPIs you guys look at that kind of gauge success for you, guys?
.....................................................................................................................................................................................................................................................................
Karri R. Callahan
Chief Financial Officer, RE/MAX Holdings, Inc. A
I mean, right now, we're definitely focused on looking at adoption, but right now, the – we've had a lot of people
who have access to the system, but it's really new. And so, we've got internal metrics on that. We'll continue to
monitor those. And as it's been up and running and operational for a longer period of time, we'll continue to
evaluate disclosing stuff externally.
.....................................................................................................................................................................................................................................................................
John Campbell
Analyst, Stephens, Inc. Q
Okay. Great. Thanks, guys.
.....................................................................................................................................................................................................................................................................
Operator: Our next question is from Ryan McKeveny of Zelman & Associates.
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Ryan McKeveny
Analyst, Zelman & Associates Q
Hey, thanks so much, guys. Good morning. A big picture question on the comment around just alignment of
interests and some of the strategies between you guys at corporate and the franchise owners. And maybe this is
for Nick, but I think on one hand, people can, on the surface, look at the new recruiting efforts and say, okay, well
that's just kind of competing on the economics. And at the end of the day surely there's a lot more going under the
hood on competing on the true value proposition, both for the franchise owners and the agents. So, Nick, I'm
curious just from your perspective on this, how should we be thinking about that balance between kind of the
economic side of things versus the value prop side of things? And then, in your fieldwork in your discussions with
franchise owners, maybe just walk us through, I mean, what are the biggest pain points of the franchise owner
base today? I know it's not necessarily just specific to you guys, but kind of industry dynamics. What keeps them
up at night? What are they most focused on and how can you leverage that to provide better value, better
solutions, better partnership, et cetera?
.....................................................................................................................................................................................................................................................................
Nick Bailey
Chief Customer Officer, RE/MAX Holdings, Inc. A
Great. Great question, we love this one. Because what we have found and this is something that has been for a
number of years in the industry that when you ask agents why they join, why they leave, why they move, price is
never at the top of the list. It is driven by culture and productivity. Bottom line is, if you don't sell houses, it doesn't
matter what the economics are. And so, what we try to look at is, what are those things that are important to an
agent to consider in making that move to increase their productivity. And when we talk about your question
specifically around incentives, we also look at what are the barriers for an agent specifically to change affiliation.
And if we can directly go back and help the broker and the agent solve those barriers to changing affiliation, that
becomes a win over purely the economics and price. It is more about culture and value and productivity.
When we look at brokers and what keeps them up at night, we know this that we have brokers across our system
that are new, we have some that have hundreds of agents in multiple locations. And so, those items will vary
based on our affiliates. Our field team then focuses very specifically within how we categorize our ownership
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