Earnings Call Transcript - MMI Q3 2022

Operator, Operator

Greetings, and welcome to the Marcus & Millichap Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jacques Cornet. You may begin.

Jacques Cornet, Host

Thank you. Good morning, and welcome to Marcus & Millichap’s third quarter 2022 earnings conference call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steve DeGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal, and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors included, but not limited to, general economic conditions and commercial real estate market conditions; the company’s ability to retain and attract transaction professionals; the company’s ability to retain its business philosophy and partnership culture amid competitive pressures; the company’s ability to integrate new agents and sustain its growth and other factors discussed in the company’s public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2022. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company’s earnings release, which was issued this morning and is available on the company’s website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. This conference is being webcast. The webcast link is available on the Investor Relations section of our website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks. With that, it’s my pleasure to turn the call over to CEO, Hessam Nadji.

Hessam Nadji, CEO

Thank you, Jacques. On behalf of the entire Marcus & Millichap team, good morning, and welcome to our third quarter 2022 earnings call. As everybody knows, the rapid pace of interest rate increases between March and September has led to a broad-based disruption in capital markets. This has become evident in the deceleration of transaction velocity due to the repricing of deals, widening of bid-ask spreads, and significantly tighter underwriting by lenders. Our third quarter financial performance reflects the impact of these fast-changing market dynamics while still pointing to the resilience and strong positioning that Marcus & Millichap has established over time. We generated third quarter revenue of $324 million compared to the prior year’s record of $328 million. Adjusted EBITDA came in at nearly $37 million, while net income, which was down 37% year-over-year, totaled $21.4 million. The anticipated return of our baseline expenses that were still reduced in 2021, as well as long-term investments in talent acquisition, technology, marketing, and business development, led to the operating deleveraging we had previously messaged. Our EPS this quarter also includes a $0.03 per share adverse impact from currency translation related to our Canadian business, which Steve will elaborate on. The strength of the Marcus & Millichap platform, particularly at times of market dislocation, is illustrated by the closing of over 3,000 transactions and $22.6 billion in volume in the quarter, while outperforming the overall marketplace. Based on data from Real Capital Analytics, we estimate that total commercial real estate transactions in the U.S. declined by 24% year-over-year, and dollar volume declined by an estimated 15% in the quarter. By contrast, our brokerage transactions were off by just 8.6%, accompanied by a 9% increase in dollar volume. Our challenge is impeded revenue production due to macro factors. The rise in our distressed deals and inventory repricing and remarketing during the quarter were directly driven by the shift in monetary policy. While rising interest rates were anticipated, the intensity by which the Federal Reserve has acted to fight elevated inflationary pressures has caused a shock to the system. In our view, this is essentially a delayed reaction by the Fed caused by missing the window last year to start normalizing financial conditions far more gradually. This, coupled with the Fed’s hawkish messaging during the quarter regarding the economic outlook, has exacerbated the slowdown in transactions. During the quarter, we saw a softening in multifamily, single tenant net lease, and industrial transactions. These segments have been favored over the past several years and are particularly challenged by higher interest rates given their lower cap rates. Hospitality, self-storage, and shopping centers registered revenue increases over the last year as more investors moved capital to these recovery segments. Office sales were hurt during the quarter as recession concerns and slow return to office patterns weighed on investor sentiment and lender underwriting. Our Private Client revenue declined by 9.6%. Although this segment is not immune to the spike in the cost of debt and recession risk, transactions in the $1 million to $10 million price range accounted for 83% of total market sales and 74% of MMI’s brokerage transactions during the quarter. Our leadership in the Private Client category should be an advantage given the personal drivers that often lead to transactions, creative solutions such as seller financing to get deals done, and the frequent use of 1031 tax-deferred exchanges for which Marcus & Millichap is also the market leader. Revenue from larger transactions valued at $10 million plus showed resilience for MMI with an increase of 10%, particularly in the middle market range, led by self-storage, hospitality, and retail. Although larger transactions valued at $20 million-plus tend to be more variable amid market shifts, they were essentially flat with last year’s third quarter results for us. Institutional apartments saw a significant decrease in trading given their outside sales volume and price appreciation since the pandemic. This was offset by larger sales in other property types, particularly self-storage and affordable housing portfolios. Our financing division, MMCC, saw a revenue decline of 4% as debt placement became more difficult during the quarter. Nonetheless, MMCC closed 518 transactions and closed with more than 400 lenders in the past year, making us a leading source of capital and lender relationships. This is a major advantage for our sales force and clients as they face more restrictive debt capital in the near term. For multifamily loans where debt funds and some banks have exited the market, the agencies are capturing more business, highlighting the benefits of our strategic partnership with M&T Bank announced last year. In addition, we remain aggressive in recruiting experienced originators, supporting our existing tenured originators, and making strategic acquisitions to grow MMCC. On the sales force headcount front, the market for talent remains competitive. Our average sales force count for the quarter was down 6% year-over-year, primarily driven by attrition in the newer ranks. The pandemic, followed by the recovery in 2021 and the first half of 2022, has created a volatile environment making the development of new professionals more difficult. The competitive labor market has also been an unusual barrier to hiring new talent compared to past cycles. We’re confident that various initiatives to offset these trends, including our expanded sales internship program and the partnerships we have to attract more diversity, will return us to net increases once the market stabilizes. In the meantime, we are further building on our recent success in attracting experienced professionals and teams whose production has offset the headcount growth gap. Looking forward, we view this phase of the market cycle as another opportunity to help investors solve problems, secure financing in a difficult lending environment, and leverage buying opportunities. The experience, knowledge, and access of our sales and financing team backed by industry-leading research and a consistent flow of technology advances give us a compelling arsenal of value creation for real estate investors. Our strategy is to stay on offense and build on platform enhancements implemented over the past several years. These initiatives include the addition of numerous experienced professionals and teams, the expansion of our institutional property adviser and MMCC divisions, the introduction of an auction platform earlier this year, the addition of our loan sales division, and technology rollouts that directly facilitate transactions. These capabilities will bring several advantages during the current market dislocation. For example, during the quarter, we introduced a key technology upgrade called MyMMI, which allows investors to save multiple searches for our exclusive inventory, personalize their research content, and sign up for various events. This broadens our ability to match investors with our inventory and connect them with our sales professionals in an efficient and customized manner. Within just the first two weeks of the MMI launch, more than 12,000 investors had registered for access. Defensively, we will continue to scrutinize every expense, focus on productivity, and prioritize costs and investments. MMI has the benefit and power of a strong balance sheet to maximize growth opportunities through the market disruption. We added $30 million to our cash reserves just in the third quarter. Over the past 12 months, we grew our total cash by $44 million after returning $55 million to shareholders. This also accounts for capital invested in talent acquisition, investments in our sales force, and marketing support. This positions MMI to remain offensive during the market transition as we continue to focus on the long-term competitiveness of our platform, opportunity for share gains, and strategic acquisitions. With that, I will turn the call over to Steve for more details on the quarter.

Steve DeGennaro, CFO

Thank you, Hessam. As noted, revenue for the third quarter was $324 million, a decrease of 2.6% as compared to last year’s record third quarter. Net income was $21 million, with earnings per share of $0.53, which included a $0.03 per share loss on unrealized currency exchange due to the stronger U.S. dollar against the Canadian dollar during the quarter. For the nine months ended 2022, total revenue was $1 billion, up 29.7% year-over-year. Net income was $96 million, up 19.7% year-over-year, and earnings per share was $2.39, up 19.5% year-over-year. Moving to segment details. Real estate brokerage revenue for the third quarter accounted for 90% of our total revenue or $293 million, a similar percentage to historical levels. This represents transaction volume of $18 billion across 2,246 deals, a year-over-year increase of 8.6% in volume and a decrease of 8.6% in transaction count. Our average deal size increased to $8 million, up from $6.7 million a year ago. On a year-to-date basis, brokerage revenue was up 30.6%. Within brokerage, our core Private Client business accounted for 56.5% of revenue for the quarter or $166 million, which was a 9.6% decrease compared to the third quarter of 2021 due to the slowdown in transaction activity. Our middle market and larger transaction segments together accounted for 41% of total brokerage revenue or $120 million, an increase of approximately 10% over the prior year. Year-to-date, revenue from our Private Client business was up 20.1% on a 21% increase in volume. For the same year-to-date period, revenue from middle market and larger transactions combined was up 52.7% on an increase of 56.5% in volume. Shifting to our financing division, MMCC, revenue came in at $28 million in the third quarter, a decrease of 4.4% year-over-year. Fees from refinancing, which accounted for 49% of loan originations, decreased 16.5% over the prior year. MMCC closed 518 total transactions compared to 600 in the third quarter of last year, ranking us among the leading financing intermediaries nationally. Volume was flat with prior year at $3.3 billion for the quarter. Financing revenue for the first nine months of 2022 was $91 million, up 21.1% year-over-year. Other revenues comprised primarily of consulting and advisory fees, along with referral fees, was $3 million for the quarter, modestly lower compared to the third quarter last year. Other revenues for the first nine months of 2022 increased 29% year-over-year. Total operating expense for the third quarter was $293 million, an increase of 2.3% year-over-year. Cost of services for the quarter was $217 million or 67.1% of total revenue, an increase of 117 basis points year-over-year. This was primarily due to our producers qualifying for higher commission thresholds earlier in the year, driven by the outperformance in the first half. Cost of services year-to-date was 64.5% of total revenue, 123 basis points higher than the same period last year. SG&A during the third quarter was up 12.9% year-over-year to $73 million, primarily due to increased sales support costs, the return of in-person events, and normalization of staffing levels. As a percentage of revenue, SG&A was 22.5% for the quarter compared to 19.5% last year. For the nine months year-to-date, SG&A was up 27.6% to $227 million and decreased 35 basis points as a percentage of revenue. As a reminder, the significant SG&A leverage we realized last year was due to exceptional revenue growth post-pandemic at a time when the baseline expenses had not yet normalized. For the quarter, we generated $0.53 of earnings per diluted share compared to $0.84 in the third quarter of 2021. Adjusted EBITDA was $37 million or 11.3% of total revenue compared to $51 million or 15.3% in the prior year. The effective tax rate for the quarter was 31.7% compared to 26% last year. The increase in the tax rate for the quarter was primarily due to changes in valuation allowance and permanent items that are not tax deductible. On a year-to-date basis, the effective tax rate was 27%. Moving to the balance sheet. We remain in an excellent position with no debt and $572 million in cash, cash equivalents, and marketable securities, which is an increase of $30 million for the third quarter. Since the beginning of the year, we have expanded our capital allocation strategy to include returning capital to shareholders. In the first quarter, we initiated a regular dividend. In the third quarter, our Board authorized a $70 million share repurchase program. During the quarter, we repurchased nearly 227,000 common shares for $7.6 million. Through the end of October, we purchased an additional $15 million in stock, putting the total purchases to date at approximately 650,000 shares for a total of $22.5 million. Subsequent to quarter end, we paid an additional dividend of $0.25 per share and now collectively have distributed more than $60 million in dividends for the year. Let me emphasize that our exceptionally strong balance sheet, consistent operating performance over the long run, and cash flow generation provide the foundation for continued investment in the platform, accretive M&A opportunities, and returning capital to shareholders. These actions are not mutually exclusive and reflect our confidence in the long-term operating outlook and the durability of our platform through any business cycle. Turning now to the near-term outlook. Given the steep rise in interest rates and expectations of additional increases, real estate valuations and trading volumes will be challenged as the market recalibrates. That said, we are well-positioned to capitalize on this market disruption and remain committed to growing our market share. In this environment, the normal pattern of sequential revenue growth in Q4 is unlikely. From an expense standpoint, we are focused on managing controllable costs to minimize the impact of the near-term market disruption without compromising our long-term growth priorities. Cost of services for the fourth quarter as a percentage of revenue will likely follow the historical trend and increase sequentially from the third quarter. SG&A for the fourth quarter is expected to increase slightly in absolute dollars on a sequential basis, but increase more significantly as a percentage of revenue due to slowing transactional velocity. We expect our full-year tax rate to be in the 26.5% to 27.5% range. In closing, we believe healthy real estate fundamentals and drivers of capital flows into commercial real estate will result in sales and financing recovery as we progress through the rising interest rate cycle and Fed-imposed economic slowdown. We are highly focused on shoring up our short-term results while positioning the company to lead in the recovery. That concludes our prepared remarks. Operator, we can now open the call for Q&A.

Operator, Operator

[Operator Instructions] And our first question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck, Analyst

Great. Thank you. Good morning. Hessam, you touched on a lot of the questions I had, but maybe we can dig deeper into some of them. First off, can you talk more about any particular segments of the transaction market that you think could be more resilient than others in this type of market, whether that be by property type, deal size, or even any markets that you think may be more active than others?

Hessam Nadji, CEO

Sure. Good morning, Blaine. Let me address the market question first. We are seeing continued strength in the Sunbelts, Florida, Texas, in particular, come to mind where they’re still in migration and a pro-growth, business-friendly environment, attracting companies. That really does show up in the numbers — Atlanta is another market that comes to mind, along with the Carolinas, where in-migration has helped there as well. Conversely, some of the urban markets that have been hit hard during the pandemic are also showing some impressive recovery. If you look at some of the job growth numbers over the past 12 months, New York, Los Angeles, and Chicago, as examples, are showing impressive job recovery numbers. But fundamentally, the Sunbelt is benefiting from the demographic wave and the in-migration. From a product-type perspective, once the market settles and there’s price discovery, we still have a lot of confidence that multifamily will continue to attract a lot of capital as well as single-tenant net lease, which are perfectly aligned with aging baby boomers. These have proven to be great cash flow investments over time. There is a lot of demand for both of those from a fundamental perspective. Right now, we’re going through a period of price discovery and reacting to the shock of the rapid move in interest rates. Fundamentally, there’s nothing broken in the capital demand for those assets. Self-storage is another one. We continue to see strength there. Ironically, as the market has left retail for dead, we have taken the position that retail is anything but dead — it’s just reinventing itself. You now see that come to fruition with shopping centers trading at a higher velocity than a year ago, and our revenues were up in shopping center sales, as were hotel sales because those are recovery plays; they have higher cap rates, and there is an opportunity to reimagine real estate, particularly for retail. We expect all of that to continue. From a deal size perspective, the Private Client business, as I mentioned in my comments, does have personal drivers that we’re very familiar with after 51 years of specializing in value creation for them. That always comes into play. Again, right now, the market is going through this period of grounding valuations, coming to terms with not just the higher interest rates but the uncertainty related to future job growth and, therefore, future occupancy and rent growth impact. Once there’s clarity on that, and we get through the worst of the Fed’s actions, which we appear to have done given their commentary earlier this week that future rate hikes could be at a lower level, I think that kind of removal of the cloud that the market is looking for will begin to emerge.

Blaine Heck, Analyst

Great. Really appreciate all that color. And it sounded like you were seeing more 1031 exchange deals in this market. I guess, can you put any numbers around the percentage of deals that you’re doing now that involve a 1031 versus the longer-term average? And then can you remind us that those 1031 deals tend to be more prominent in the private client or middle market versus larger deals? Or are they pretty well distributed across all deal sizes?

Hessam Nadji, CEO

Sure. The 1031 exchanges are more prominent among private clients and the middle market. They have accounted for anywhere from 20% to 30% or more of our business over time. The percentage isn’t necessarily changing that much. But what is interesting is that when the market has a disruption like we’re experiencing right now, the access to that 1031 exchange buyer becomes significantly more important and valuable. So we’re not doing anything different. We’ve always been out there facilitating 1031 exchanges as the market leader, and we continue to do so. But when the market shifts from a tailwind to a headwind, and the investment community faces disruption, the motivated buyer coming out of an exchange has a premium value to it. Therefore, it allows us to be more effective at getting deals done in a disrupted market.

Blaine Heck, Analyst

Okay, that makes sense. Switching gears, can you talk about what you’re seeing in the lending and financing market? How has availability of capital changed? How have lending standards specifically around loan-to-value or debt yield changed? What’s the kind of ultimate effect on the transaction market in your view?

Hessam Nadji, CEO

There has been a direct impact by lower loan proceeds in the last four to six months, particularly in the third quarter. It felt like many of the interest rate increases and the Fed messaging came to fruition more so in the third quarter than in previous months, even though the market had been well aware of the tightening cycle coming. We’ve seen many lenders actually price themselves out of the market. The beauty of how we position ourselves with having closed with over 400 lenders in the last 12 months is our ability to find a lender if one exits the market or prices themselves out that is willing to do a particular deal. One of the most important things about that is the creativity that it takes on the seller side, the buyer side, and the lender side to be able to actually execute and fund transactions. Thus, the mechanics of that troubleshooting are a very important part of what our financing team and sales team are jointly doing every single day right now. There is liquidity. We are not in a credit crunch like we were in 2008 or 2009, but the reluctance of lenders to lend versus six months ago is clearly a factor in the marketplace. Deals are being scrutinized a lot more closely; the sponsors are being scrutinized a lot more closely, and there has to be more equity to make financing work.

Blaine Heck, Analyst

How much of that do you think has to do with just a lot of lenders having hit their quotas for the year? And does it make sense that maybe the lending frees up a little bit in the new year as quotas are reset?

Hessam Nadji, CEO

That will be somewhat of a factor, but I don’t believe it will move the needle. On the bank side of the equation, we have the good position of great liquidity among our major banks and even regional banks, but the restrictions from a regulatory perspective on exposure to commercial real estate are now factors that hinder some of their activity. There are concerns about a minor blip, maybe related to loan performance, given that over the past three years or so, there have been many short-term loans through debt funds and other sources pumped into the marketplace that are going to be maturing in the next six to 18 months. As those loans roll over, refinancing options may be limited, leading to more capital, more equity, and, in many cases, I believe, a recapitalization. This is another opportunity for us to be ahead of that—working with those lenders and current owners facing those maturing loans.

Blaine Heck, Analyst

Great, very helpful. We touch on this pretty much every quarter, and you mentioned it in your prepared remarks, but it looks like broker count continues to slide. It’s now 9% below your highest level seen in early 2021. Can you just give us an update on those different initiatives you guys are pursuing to turn that trend around, any traction you’re getting with those? And really whether we should expect a continued push to increase headcount even in a declining transaction environment.

Hessam Nadji, CEO

Sure, Blaine. Our commitment to swim against the tide is unwavering in that we believe passionately that hiring, training, and incorporating new talent is as much a priority as it has ever been for us in our entire history. That is such an important part of how we became who we are over the last 51 years, and we’re not going to give up on that. We genuinely believe that these unusual conditions of record-low unemployment and very competitive base salaries, especially for recent college graduates, which has always been a major feeder of talent for various Marcus & Millichap offices, will normalize at some point. We don’t know exactly when. We didn’t know exactly when the phenomenon really showed up after the pandemic, but it will not deter our strategy and commitment to organic growth. That’s a huge part of our success and our future. The initiatives that I mentioned, whether they are career fairs, college fairs, just the usual traditional one-on-one resume flow generation and putting Marcus & Millichap in front of talented people looking for a career shift, including, by the way, sales experience professionals in other industries, have been effective for us in bringing a little more mature candidates to real estate sales for the first time. We are continuing to pursue all of those strategies, improving through technology and digital marketing and more targeted advertising. None of that is unwavering. The results aren’t showing up just because the conditions around the market haven’t changed yet. Just this morning, we saw a little relief on the unemployment rate from 3.5% to 3.7%. The Fed’s stated desire is to see unemployment move up to about 4.5%. If that happens, which I believe will eventually occur, given the degree of interest rate increases and economic slowdown that the Fed is implementing, that’s the kind of easing of the labor market pressure that I believe will return the environment to a normal competitive environment instead of being extremely competitive. On the other hand, we continue to build on our success in attracting very experienced professionals, both on the brokerage side and on the financing side. Traditionally, Marcus & Millichap had not focused on that as a stated strategy until about three years ago; we made it a formal part of our long-term growth strategy, along with our acquisition strategy. It has worked well, and the folks that we’ve brought onboard are, if you look at their reaction, very pleased to be with the company. We have exceeded their expectations in the majority of cases, and they’ve exceeded ours because we’re selecting people that are complementary to our existing capabilities and not overlapping. That’s why it’s targeted as a strategy for us to bring in the right people in the right product types and markets. It’s not a wholesale just trying to buy market share. It’s a very hand-selected strategic way of going about it, frankly, a little slower at times possibly frustrating, but the right way to do it.

Blaine Heck, Analyst

Very helpful. Appreciate all that commentary. Next, can you talk about your acquisition plans for 2023? What can you tell us about the current pipeline or potential investment opportunities on the horizon? And whether you think a better price, maybe larger opportunities could come about as a result of the transaction market headwinds and increased macro uncertainty.

Hessam Nadji, CEO

Sure, Blaine. The market disruption is creating more motivation for high-quality individuals to rethink their own strategy, whether it’s boutique firms, some individuals and teams. We’re only a couple of months into a visible disruption in the transaction market because of the tightening cycle. The pipeline of discussions has already increased. On the M&A front, we’re always actively pursuing key targets. A couple of our discussions did not come to fruition, partly because we felt that the risk factor in those particular acquisitions had elevated too much, and we weren’t prepared to take too much of a chance on valuation and the disconnect between our expectations. The bid-ask spread is just as much a factor in the M&A front as it is in the real estate trading front. But for any of those discussions that came to a stop, new ones have begun, and we’re encouraged by that. Now that we have a track record of success in bringing on boutique firms, individuals, and teams, that also speaks for itself and has become part of the reason that more people are interested in learning more about the MMI platform. But we absolutely see the market disruption as an opportunity to do more of that and are out there aggressively pursuing these discussions.

Blaine Heck, Analyst

Great. So I guess with that context, how do you think about the priority of potential capital allocation avenues between dividend payments or growth in dividend payments versus share repurchases, which you did a little bit of this quarter versus saving up your dry powder for these acquisitions or M&A activities?

Hessam Nadji, CEO

Sure. I’ll make a comment and I’ll defer to Steve on that as well. For me, I’ve always wanted to see the company in a position to have a really well-rounded capital position and capital allocation strategy. It took some years, given our conservative approach, to ensure that in a cyclical industry, we’re always well capitalized to get to the point where our capital position is such that we can do both. We can be very offense-oriented on the acquisition front, invest in the platform. Those two are the highest and best use of capital on behalf of not just our shareholders, but also our team and our clients. But at the same time, we have the privilege of being able to return cash to investors when it’s appropriate and really pursue a multipronged strategy of deploying capital without one coming at the expense of the other. I’m very pleased that we’re in that position. Steve, anything to elaborate?

Steve DeGennaro, CFO

Yes. I would say, as Hessam did, that we have the luxury of such a strong balance sheet, no debt, and almost $600 million in cash that allows us the flexibility to not only make those crucial internal investments in growth initiatives, whether it’s tech or the rollout of the MyMMI platform. M&A is more significant when the market is disrupted; these are opportune times to make M&A investments. The price has to be right. We’ll continue to be disciplined in our underwriting criteria. The bid-ask spread is a factor right now. Everyone is coming off a period that may have been the best two years of their career. There’s a difference in expectation. But because of the level of liquidity we have, we can make investments both internally and for M&A, and we don’t anticipate any changes to the return of capital to shareholder initiatives that we’ve implemented this year, whether it’s dividend or repurchase. We stated when the repurchase was approved last quarter that we would be active participants in the market when the price was appropriate, and I think we’ve shown that during the quarter and subsequently. So the punchline is there’s plenty of liquidity for us to pursue all these initiatives.

Blaine Heck, Analyst

Okay, very helpful. Last one for me, I promise. Steve, I’ll stick with you. Can you just give us any kind of guidelines or color around how we should think about the sensitivity of your income to the changes in the Canadian to U.S. exchange rate?

Steve DeGennaro, CFO

Yes. We’ve always been subject to fluctuations in the USD versus the Canadian dollar. That fluctuation was more pronounced in Q3 than it has ever been. The dollar strengthened considerably. In fact, if I look at the exchange rate today, it has come back a little bit in the opposite direction. We have several internal initiatives underway to help minimize those fluctuations. We would prefer not to have it be so pronounced. But the strength of the dollar this quarter really highlighted the issue. There are, as I said, internal efforts to help mitigate that going forward because our Canadian operations aren’t more than 10% of our revenue, and I hope we’re not subjected to as much currency fluctuation going forward.

Blaine Heck, Analyst

Okay. Great. Thanks for all the time, guys. Very helpful answers.

Steve DeGennaro, CFO

Great to have you on, Blaine. Thank you.

Operator, Operator

And we have reached the end of the question-and-answer session. I’ll now turn the call back over to the management for closing remarks.

Hessam Nadji, CEO

Thank you, Operator, and thank you for joining our third-quarter call. We look forward to seeing you on the road and on our next earnings call. The call is adjourned.

Operator, Operator

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.