Q3 2022 Fathom Holdings Inc Earnings Call
Good afternoon, and welcome to the Fathom Holdings third quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by questions Star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Roger Palmdale Investor Relations for Fathom Holdings. Please go ahead.
Thank you very much Chad and welcome everyone to Fathom Holdings' 2022 third quarter conference call I'm, Roger Palmdale, with Palmdale Wilkinson Fathoms Investor Relations firm.
It's my pleasure today to introduce the company's founder and Chief Executive Officer, Josh Harley.
And fathoms, President and Chief Financial Officer, Marco refreshing, all before I turn things over to Josh I wanted to remind all listeners that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are subject to numerous.
<unk>, many of which are beyond the company's control, including those set forth in the risk factors section of Fathom is latest Form 10-K subsequent Form 10-Qs.
And other company filings made with the SEC copies of which are available on the SEC's website at Www Dot S. E C. Dot Gov. As a result of those forward looking statements actual results could differ materially. In addition results discussed for the third quarter.
And for any portion of the fourth quarter of 2022.
Not necessarily indicative of results for the full fourth quarter or any other future period Fathom undertakes no obligation to update any forward looking statements. After today's call except as required by law. Lastly, Please also note that during today's call, we will be discussing adjusted EBITDA, which.
As a non-GAAP financial measure as defined by SEC regulation G important disclosures about this measure and a reconciliation of it to the most recently comparable GAAP measure is included in today's press release, which is now posted on fathoms website and with that it's my pleasure to turn things.
Over to Josh Harley Josh.
Thank you Roger of course, thank you to everyone who is on todays call. Our entire team really appreciate your support and I want to start by thanking our agents and employees across each of our businesses for their ongoing hard work and dedication not just toward our vision, but also helping us grow, particularly during the current challenging times for all.
Our industry.
I also want to say, thank you to our Fabless family for their unwavering commitment to creating a culture built on service and more specifically.
And placing others first.
Want to know what makes fathom is so strong and the communities. We serve it says very principle of servant leadership.
Before turning the call over to Mark for a detailed review of our financial results I'd like to touch on several subjects first the key attributes of our model that are enabling growth in today's business environment second our recent growth third several new and exciting updates that could have a significantly positive.
Impact on our business over the coming years.
With some challenges that we faced in the third quarter are likely to face to the rest of the year, including the present market conditions and lastly, why we believe the fathom can actually benefit from the broader market headwinds over the long term.
We have the opportunity to speak with a lot of investors over the last few months, who are new to fathom and how we operate in fact, we just concluded 14 excellent one on one meetings at the LD Micro conference in Los Angeles, It's really gratifying when an investor how does that Ah ha moment as they realize how different we are.
Some other publicly traded real estate companies.
Well, we certainly acknowledge that fathom is not immune to the challenges being felt around our industry.
We continue to believe that we've built a better mousetrap with more resilience in everyday our thesis has been proven true.
First fathom Realty is among the fastest growing residential real estate brokerages in the United States. In fact in just 12 years, we've grown to become the 10th largest brokerage in the country out of more than 86000, brokerages and the sixth largest independent brokerage.
What's truly unique about our real estate brokerage is that we offer agents the opportunity keeps significantly more of their hard earned commission dollars through a disruptive and differentiated flat. The commission model is fabulous.
<unk> is the only publicly traded residential real estate brokerage platform with this model.
Specifically throughout 2022 we only charged our agents a small fee of $500 for each transaction with many of our agents closing enough transaction that we only charged them $99 per additional sale during the year. While these commission split amounts seemed low compared with traditional broker.
Is the leverage of our operating model allows us to generate higher margins, while some of our peers haven't been able to do so even when charging their their agents much higher fees.
To address it in practical terms the average agent who joins thousand ports from a traditional model brokerage takes home around 12 to $15000 more a commission annually.
This makes us highly attractive to agents and allows us to enjoy agent retention rates approximately twice the national average.
We don't just attract more agents, we keep them.
If you want to know whether agents are happy Theres no greater indicator.
We're the only company that I know what publicly shares our attrition rate over the last 12 months, our attrition rate has averaged only one 5% per month down from the 1.7% we announced last quarter.
Importantly, only 6% of agents in that 1.5% figure close 11 or more homes per year, however over 72% of the agents in that 1.5% figure close to zero or one sale per year in other words, we be extremely low attrition rate among our high.
<unk> producing agents.
We believe the overall value we provide agents who joined fathom is unmatched by our peers.
I know I'm, a little biased, it's true, but our agent growth and our low agent attrition speaks volumes and backing up my belief keep in mind, we do not charge a monthly fee to our agents compared with the traditional brokerages, who charge anywhere from $100 to $150 per month.
This helps us attract and keep agents, who are price sensitive Jordan down months, especially in this market.
In addition, attracting more agents to our low cost Commission model, our proprietary technology platform and wholly owned mortgage title and insurance businesses should allow fathom to generate significantly more revenue and profit per transaction over time.
On top of that we currently license our proprietary technology to outside agency brokerages through a recurring revenue subscription offering further increasing the long term revenue potential for Fathom holdings and the stickiness of our brand.
When you combine our asset lite virtual platform with the savings we generate long term from fully owning our technology you get an important key distinction for fathom, namely and as I mentioned earlier.
We're able to charge your agents far less than our public peers, while building a model to generate margins similar to or even better than our peers over time, even those who charge agent seven to 10 times more than we do.
As some of our earliest investors were quick to realize it's not just that fathom wins because of our unique commission model, but because of the walls. We've built around the business. We believe it would be extremely challenging if not impossible for many of our competitors, especially our public peers to shift to Fabless model.
Given their high cost and franchise structures.
Despite today's market conditions in the residential real estate sector for the third quarter, our year over year revenue grew by more than 10% and poorly for the sixth quarter in a row, our real estate brokerage operation was adjusted EBITDA profitable think about that we charge a small fraction.
<unk> of what other brokerages charged their agents and yet we believe that over the long term, we can achieve profitability far faster than they have even with today's economic uncertainty, we believe that fab and has a long positive runway ahead of us.
In Q3, our agent count grew by 33%, which we believe is particularly noteworthy since we had a tough comparison to last year's quarter during which we made a sizeable brokerage acquisition. In addition, our transactions grew by 5% again coming off 40%, 42% rather transaction growth in the previous.
Q3, while simultaneously managing through current market conditions.
As we see other real estate companies share their quarterly results I believe that our revenue agent in transaction growth will prove to be even more impressive.
As I stated earlier adjusted EBITDA for our real estate business was positive. This quarter. However, total adjusted EBITDA was negatively impacted primarily by our mortgage operation and the unprecedented speed of interest rate hikes.
We are seeing improvements in this business as we right size, our expenses to current and future market conditions now.
The market will speak in more detail about that in a few minutes.
Our cost to acquire one agent during Q3 remained low at approximately $1020, making our breakeven on each agent less than the 1100 and $50 will earn on their first sale.
I also want to point out, but the average lifetime value of an agent is currently over $21000 on just the real estate side of the business.
The ratio of that lifetime value to our cost of acquisition is around 21 X and that does not take into account the revenue, we're generating from our mortgage title insurance and technology companies.
Now when I started this call I referenced several changes that we believe could have a significantly positive impact on our business over the coming years I'd love to share those changed with me now.
The first change is to our commission model.
<unk> of January one 2023.
We will be raising transaction fees by approximately $50 across the board that means that our current 500 dollar transaction fee will increase to $550 and our $99 transaction fee will increase to $150.
Raising prices is always difficult, but given inflation and the ongoing fed rate increases we felt that we had no choice and we're confident that our agents will fully understand.
Even with these small changes agents will still be generating significantly more income than they could buy hanging their license with the traditional brokerage charging large splits.
An important point to remember is that our commission fee is not based on the price of a home. So we have very little compression risk as housing prices come down.
We will also be increasing the annual cap on the number of sales in which we charge the full fee for individual agents from 12 sales to 15 sales and we're increasing the cap for team members from four sales to five sales.
Youll recall that once an agent hits their cap their fee per transaction decreases from the $550 to the $150.
The last time, we raised fees, we did not lose a single agents that I or my team is aware of as a result of the raised fees.
This is in large part because even at a $550. Our agents are still saving an average of over $3000 per sale versus the industry average commission split from a traditional brokerages.
Right.
We have also decided to eliminate stock grants for closed transactions.
Dilution per transaction has increased too much for our comfort level as our shares have become so deeply undervalued for this reason we felt it was important to end those grants this too will become effective January one.
Of 2023.
Okay.
Onto some exciting changes that we're making to our business effective immediately we're rolling out a new agent referral program called free for life that I believe is superior to any other agent referral program out there.
The program has three levels. The first level is similar to our previous program.
Our fathom agent refers another agent who joined our company the referring agent will receive $250 stock grants for each agent they refer.
These grants have a two year vesting period.
The second level is called capped for life. Once an agent refers for agents, who joined fathom and each of those agents close a minimum of two sales per year that referring agent will be capped for life, meaning the referring agent will only have to pay the $150 per cell from then on well never have to pay.
The $550 transaction fee in the future.
This is in addition to the $250 of stock grants for agents Rajeev.
The third level is called free for life.
Once an agent refers a total of eight agents, who joined fathom each close a minimum of two sales per year.
The referring agent will be free for life, meaning they'll never have to pay another annual fee or residential real estate transaction fee.
Again. This is in addition to the $250 of stock grants the agent receipts. We believe this program will be incredibly exciting for agents in fact, we actually rolled out the cap for life level in beta on September one and as a result, we have the best for a full month ever with over 40% increase in Asia.
Referrals for September .
Now understand without doing the math you may be thinking that we're giving away the farm, but even in the worst case scenario. We're ahead to help your vendors better understand the benefits to fathom like to explore the MAU for capital life in a typical scenario.
So a thousand agents, who causes fixed sales per year refers for agents, who each close six sales per year.
In this scenario, we're ahead by more than $13000 in incremental revenue as we now have six agents paying a 600 dollar annual fee along with their father and 50 dollar transaction fees plus we now have five agents, who have the potential to refer another agent rather than just one.
Now, let's run the same math for free for life.
Using our fathom agents, who closed six cells per year, and referring a total of eight agents, who each closed six sales per year. In this scenario. We're ahead by more than $27000 in additional revenue.
Per year and again, we now have nine agents, who have the potential to refer other agents rather than only one.
While we do not believe it will have thousands of agents exceed the free for life level imagine how many more agents, who may not have otherwise referred anyone will try to ultimately for one two or even three agents.
I Hope you can see why we're so excited to rollout this new agent referral program.
So to recap the changes, we're raising transaction fees across the board by $50. We're raising the cap from 12 sales to 15 sales, we're eliminating stock grants for transactions and lastly, we're rolling out a new Asia referral program with three levels to 50 and stock grants for each agent referred capped.
Her life and free for life.
At this point I'm going to transition from the company is focused on the current market conditions.
When I started this call I referenced a difficult market.
And I'd like to add a few thoughts to clarify what I meant.
We're living through unprecedented times right now inflation is a 40 year high inventories still in short supply and we have not seen interest rates rise this quickly and well over 50 years.
Which is concerning for potential buyers and putting a halt on the refinance business altogether.
These outside influences have are having a negative impact on all real estate companies and as I said earlier, we're not immune.
Moreover, none of us have an accurate crystal ball is still what's to come. Although we are assuming that we will continue to see some pressure through the end of this year.
As such we're taking extra precautions to protect ourselves and even leverage the market to our benefit.
We believe these macroeconomic conditions will prove to be much more impactful on our competitors when all of us.
But we're mindful of the challenges that we made over time, we believe that we can turn the otherwise adverse market conditions into a tailwind for us our conviction to this thesis has not changed and has in fact strengthened.
Our focus remains on reaching adjusted EBITDA breakeven in the first half of next year.
Although our fourth quarter projections, which mark will discuss momentarily are lower than originally hoped and plan.
With market conditions in mind, we are working with each of our business heads to reduce companywide expenses by a total of $1.5 million per quarter by Q1 of next year.
This is twice the amount we discussed on last quarter's call.
We're determined to right size, the company's expenses and we have set a target to achieve cash flow breakeven as early as Q3 of next year.
It's important to note that even though we are finding ways to cut costs, we will not sacrifice our ability to continue growing.
While the current residential real estate market is challenging I do believe can benefit from it that's because we could see more agents joining our brokerage when those agents begin to see their income negatively affected at their current brokerage.
Our model resonates with the agents, who hear about us for the first time and actually take the time to learn more.
Remember, there's only two ways for real estate agent to net more income increased our revenue by closing more sales, which is hard to do in a downmarket or decrease their expenses. We believe we can help agents do both.
Well the majority of real estate agents their largest expense is not their marketing.
Splits they pay their brokerages with fathom agents have access to all the technology training resources and support they used to getting.
One of the legacy brands.
They save an average of $15000 or more per year and commission split pages, a brokerage in essence, an agent could close 20% fewer homes.
Which could be likely given the current market.
Bill earn more income with fathom it did before with the traditional brokerage.
We believe it's a key reason why our agent count continues to rise and why so many agents and even full brokerages are interested in joining the <unk> family.
Now a word about acquisitions and I will turn the call over to Marco as you know our mortgage title and insurance operations all added through strategic acquisitions, and we're continuing to work diligently to integrate each business fully to ensure strong attach rates.
While this process has been slower than we'd like due to our focus on achieving breakeven for the full company. We are highly committed to getting there as soon as possible, while making sure expenses throughout the company are in line with the current environment and our long term goals.
Taking a stab and public we've also made several strategic real estate brokerage acquisitions each of it with each of which was immediately accretive to our business.
We're receiving a fair number of inquiries on a regular basis from smaller brokerages, who are interested in joining us.
While we are eager to move forward on many of these opportunities we remain highly selective and thorough in our diligence process prior to proceeding with any acquisition.
We have been careful to educate potential acquisition candidates and help them reevaluate their expectation as virtually all company valuations.
A decrease.
Given there is typically a big disconnect between what owners believed to be either company's current value in what we believe to the actual market value. We did not make any brokerage acquisitions in Q2 or Q3 of this year and we do not believe that we will close any acquisition in Q4 for now as market condition.
We continue to play out we're choosing to keep more cash reserves and minimize any extra dilution. However, we do expect to continue evaluating and completing strategic acquisitions over the coming years, we believe valuations could become even more attractive if current macro headwinds persist to accelerate.
To be clear, we have many opportunities ahead of us even without making additional acquisitions. In fact, we anticipate opening several new geographic markets in the next 30 to 60 days and we'll keep you apprised when we do.
One final point I'd like to make is this.
The prevailing wisdom is that real estate brokerages tend to grow or gain market share right now due to some of the unprecedented macro changes in the industry as I said earlier, while fabless certainly not exempt from these challenges, we believe that our market model positions us well and our execution.
<unk> continues to drive solid growth.
Last but not least I believe you know that Marco and I and many other noteworthy by the others in our organization are significant cloud I'm shareholders and cares deeply as you do about our stock price I know its a little consolation to you that other publicly traded real estate brokerages platforms are are also experiencing dreamed.
Decreases in their public market valuations.
My my own family owns around 38% of Fathom and I feel exactly what you feel.
That said our entire team is working diligently and I'm confident that we will deliver sustained.
Sustainable sustainable long term value.
So thank you so much to all of you to share that vision and who continue to support us with that I will turn the call over to Marco Marco It is all yours.
Thank you Josh I'll start with a detailed review of our third quarter results.
Revenues for the most recent quarter grew more than 10% year over year to $111 3 million from $100 9 million for the last last year's third quarter.
The increase reflects the growth in real estate transactions high average revenue per real estate transaction and revenue contributions from acquired businesses.
GAAP net loss GAAP net loss for the quarter was 6 million or a loss of 38 cents per share.
Compared with the loss of $3 4 million or a loss of 28 four cents per share for the 2021 third quarter.
Year over year change in GAAP net loss resulted principally from higher noncash stock compensation expense and an increase in noncash amortization of intangible assets and depreciation plus increases in investments in technology, as well higher marketing and G&A expenses related to building our ancillary businesses.
Our adjusted EBITDA loss, a non-GAAP measure was $2 3 million versus an adjusted EBITDA loss of $1 8 million for the third quarter of 2021.
While we over deliver on top line our bottom line came in below guidance. We gave we gave last quarter.
As a real estate transaction that makes us not as expected and we had higher recruiting and marketing expenses.
In the 2000 2022 third quarter G&A was $11 5 million or approximately 10, 4% of total revenues compared with $9 6 million or approximately 95 of total revenues for the 2021 third quarter. However, on a sequential basis G&A decreased from $12 4 million.
For the second quarter of 2022.
The year over year increase in G&A was primarily attributed to recently completed acquisitions and increase in noncash stock compensation expense.
Our gross profit grew by $2 1 million to $11 8 million up from $9 7 million for the fourth quarter of 2021 gross profit increased to 10, 6% of revenue in the third quarter of this year compared with $9 six for the third quarter of 2021.
Expenses related to market activities were a $1 5 million for the 2022 third quarter versus 591000 for last year's third quarter. The change was mostly driven by an increase in marketing activities related to new market openings and promoting their services offer by our acquired company.
Now I'll discuss our business unit results.
Our real estate business continues to perform well despite market conditions.
Josh indicated we grew our agent network by 33% ending the quarter with nearly 10000 agents. We believe we'll continue to see our agent count growth as the value of our commission structure and referral program becomes more widely known throughout the industry.
To reiterate we closed 12077 real estate transactions for the quarter, a 5% increase from last year's third quarter. The results were expected given the state of today's market.
Adjusted EBITDA for our real estate Division was 576000, making our sixth consecutive quarter of adjusted EBITDA.
Profitability.
Our mortgage business generated revenues of $2 8 million for the 2022 third quarter up slightly from second quarter results, while interest rates have significantly impact the mortgage industry, we narrow our loss on a sequential basis to approximately 406000 from a loss of 860000 in the second quarter.
This year, we'll continue to make adjustments to rightsize our mortgage business.
Turning to our technology segment revenue in 2022 third quarter. It was 702000, which is higher than the 644000 for the second quarter of 2022.
Adjusted EBITDA loss.
Adjusted EBITDA loss in our technology segment was 372000 compared with a loss of $3 25 for the second quarter of 2022.
Our insurance entitled businesses had combined revenues of $2 8 million, which is in line 2.8 million for the second quarter of this year.
Adjusted EBITDA for these businesses increased to 346000 versus the 130000 for the second quarter of 2022.
We ended the quarter with a solid cash position of $14 5 million, providing us with a means to grow our business and execute our strategy.
We did not purchase purchased any shares in the third quarter under the stock repurchase plan approximately $4 million remaining under that plan.
Now I'll finish up with our guidance for the fourth quarter and full year.
The guidance assumes that the residential real estate market will continue to soften and.
And that interest rates remain at current levels are increased.
If market conditions improve we believe that that may generate results are better than currently anticipated.
For the fourth quarter of 2020 to Fathom expects total revenue in the range of $85 million to $95 million and adjusted EBITDA loss in the range of 2.4 to a loss of $2 2 million.
That leads us to our full year revenue guidance in the range of $450 million to $425 million and adjusted EBITDA loss in the range of $8 eight to $8 6 million.
To emphasize what Josh said earlier, our goal is to reach adjusted EBITDA breakeven in the first half of 2023 and breakeven cash flow by 2023 third quarter. We believe the combination of reduced expenses by $1 5 million per quarter, and the increasing fees to contribute your reach in both of our goals.
Over the long term, we continue to believe that we can generate adjusted EBITDA exceeding 40 million per year at 100000 to 110000, and your transaction and that we should be able to reach these levels in the next several years.
As a reminder, the guidance, we're providing forward looking which as Roger noted at the start of this call is subject to certain risks and uncertainties.
Now before I turn the call back to Josh I would like to add my thanks to the entire family.
Regardless of the market conditions are keen to get it all each and every day, while the current market is difficult and challenging we strongly believe that environment will improve over time, and then with industry's most agent centric model Fathom will prosper now I'll turn the call back to Josh. So we can take your questions.
Thank you Marco we believe fathom is a clear visible in long run by solid growth prospects no matter what the market holds we believe our model is positioned to win over the long term.
Thank you again for your trust I mean part of our family with that operator, we're ready to open the call to questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Tom White from D. A Davidson. Please go ahead.
Great. Thank you good evening, everyone. Thanks for taking my questions a couple on the outlook if I could so the fourth quarter revenue guide at the midpoint implies.
The decline year over year I'm presuming.
That.
You know you expect kind of the core real estate segment.
To potentially decline year over year or two could you sort of just parse out parse out I guess, maybe your expectations as it relates to kind of agent productivity and kind of transaction volume, which I guess I'd use this kind of a proxy for the the macro versus your expectations around our agent growth.
For the fourth quarter.
And then and then just on the cash flow breakeven.
Breakeven by the third quarter of next year, maybe Mark could just talk a little bit about what that factors in about.
You know kind of topline.
Like is there a broad range of outcomes, you know related to the to the kind of the macro and the housing market.
That could kind of transpire and you guys could still could still get there.
Okay.
Thank you Paul for your question.
So let's talk about Q4 first.
The reason so there are several factors that contribute to those numbers right.
One is again the topline revenues is related to the commission pie in the average price of housing we're already beginning to see a compression on prices of houses as a matter of fact Q3 this year.
There was about a 5% or so.
Compression and how surprised so well so there are several factors that contribute to that what we're seeing overall in the market is roughly around the 25% decreasing transaction right and then you combine that with a let's call it at 30% to 35% increase in agents for us right.
And so it's so far Q4, it's not so much that we are projecting a decrease in transactions.
For Q4, this year compared to Q4 of last year Asthmatic back. If you look at Q3, our transactions grew by 5% right and probably into something somewhat similar. So we think that Q4 transactions would be somewhat in line with last year, but we think that there'll be some reduction in the average price of houses and therefore the.
Revenue the topline revenues decrease so it's more related to.
Yeah that the average price of houses decreasing in Q4, which then decreases topline. It has no effect for us on a gross profit because we charge a flexi right and so that's kind of what we see the overall look for Q4 transaction somewhat flat to last year.
Top line because the average price will decrease but it will not have an effect on gross profit did did I answer your question for Q4 before I go into next year.
Yes.
Helpful. Thanks, Okay great.
So when we look for next year, what we're looking for it is if you look at the two key things that we're doing.
Reducing expenses by $1 5 million a quarter.
Right and then the increasing fees to increasing fees.
Based on a variety of factors and a lot of things that contribute to that but we believe will generate increasing revenues really gross profit of anywhere from $4 million to $5 million and so when you put those two component you know those two key variables.
Variables together, we think that we can hit our gross profit I'm, sorry cash flow breakeven by Q3 next year, we are making the assumption that almost no transaction growth.
In order to reach that so and we do think that we're going to increase transactions next year as well, but we're making the assumption of no transaction growth.
Assuming the worst if you will but the combination of the increase.
The combination of continued to increase our agent count by hopefully over 30% a year and then a combination with combined with the increasing fees and a reduction in expense.
We feel that we can reach that goal of breakeven cash flow by Q3 of next year.
Okay.
Okay.
That's helpful. Maybe just I'll slip in one more and then I can hop in the queue, but just on the Opex commentary I think.
Josh You mentioned you guys are looking to maybe I think you said maybe about the first quarter.
Be like kind of one $1 5 million less than kind of quarterly Opex can you just talk a little bit about where that's coming from is it just sort of like general efficiencies or are there some of them maybe newer initiatives are newer products, where maybe you've.
Then maybe we'll have a little bit less kind of growth capital. If you will as a result of those changes.
Yeah.
So several things are the reduction in one five it will be fully implemented by the end of this year, which you really have the effect next quarter right and so we anticipate that one and a half million reduction expenses to be fully implemented in Q1, which will have an impact.
<unk> reduced expenses of $1 5 million in Q1, the reduction will come in in a variety of factors. We certainly have rightsize our mortgage business. They continue to do that.
And really there really two or three main components. One is just right sizing the size of the business right.
We're growing at a certain level and now we have to adjust the size of that so we are adjusting expenses and two that second there are a variety of programs that are specifically new lead generation that we are delaying to second half of next year, depending on the market conditions and so that is a significant investment that we already.
Starting to make already in Q3, two two in Q3, and we're going to eliminate that and when they bring that back into in second half of next year, depending on that and then third a variety of savings in terms of efficiency into the business.
<unk> had some third party providers that we can actually bring in house.
And and become a much more efficient in terms of reducing our expenses. So they wanted a half million comes in a variety of different ways right now having said that we believe we're still a growth business and so we actually have increased our recruiting team by 50%.
And so the message is yes, we are reducing expenses and rightsize the business, but we are becoming very aggressive continue to be aggressive in terms of recruiting a certainly the new programs that Josh in Numerate at our our programs that we're very excited about.
And also we increased our recruiting team by 50% now I think it would be reach about 30 recruiters already and so it's a combination of right sizing the business, but also a message of growth we're going to continue to be very aggressive in growing our agent count, especially given to the value that we believe we bring compared to some of the other company.
He is out there and the programs that Josh are enumerated earlier in this call.
Oh, great. Thanks for the detail Mike I appreciate it I'll get back in the queue. Thanks.
Yeah.
And the next question comes from Darren <unk> from Roth Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions.
First could you guys talk about the cadence.
Maybe real estate growth month by month in the third quarter, meaning like where you kind of exit on a growth basis in September .
Hey, Darrin good good to hear from me are you talking about sort of what's happening in the market overall, what are we seeing terms okay.
What month by month.
No Mark or is there still more just how fast fathom grew.
Transactions in the month of September .
Yes.
Yeah.
So again the transaction growth and in September .
It's around 5% because.
By the end of Q2, the market has really changed right and so and so what happens was overall for the quarter was 5% that 5% was not in line a month by month right and so we begin to see some decrease really buy.
By June July and ultimately bye bye.
Remember right and so if you think about the overall growth of 5% I would say that.
July was a little higher and then by August September was a little lower right, but not by a lot. It really it really was fairly evenly distributed.
And so it's not like we saw a decrease in all of a sudden September there's only one or 2% growth it was fairly distributor.
We saw fairly a decreasing August and September from July , but not significant.
So, we really think that that 5% because of our agent growth.
We feel we feel good about that you know.
Increasing transaction going forward.
The better way to describe this is that we think that our agent growth is going to outpace.
The transaction decrease perhaps that's the best way to describe it.
Okay.
That's fair.
They went for my decision 90 days later to increased cost cuts by a 100%.
Just.
Precipitated by the fact that maybe the market was.
Or is weaker than you guys kind of anticipate or just kind of give me some.
Thought process behind that and I think even 90 days from when you guys announced.
I have a couple of things science here.
There's a couple of things one is that no one predicted anything people kept trying to predict but nobody nailed this one.
It's been painful, but the fact is.
We are still really strong we're growing our agent growth is incredibly strong.
And so as Mark indicated that while we may see transaction.
Chris.
Still going to see higher transactions overall, because were growing so much in the agent base.
But it is hard for anyone right no one has a clear crystal ball right now.
Market is pretty crazy I mean, I've got a lot of opinions of what's going to happen in the future I do truly believe we're in for a soft landing.
On this one just because what I'm seeing from a lot of the buyers who they are.
Not saying I'm out there, saying not yet right there they're waiting to see our home price is going to come down or you know.
Our whole pricing come down in our interest rates will come down if they don't Okay. I'll go ahead and move if they do then win and so I feel a lot more people sitting on the fence right now, which tells me again, they're not out of the market. They are just on hold and that gives me a lot of hope, but again I don't think anyone could possibly forecast this and so because of that.
Mark what I have to ask ourselves what is the absolute worst case scenario, we will make sure they position the company in such a way that if all Hell broke loose we're still incredibly strong when this when this all settles out like when the dust settles.
So that's what we're doing we're not doing it because we absolutely have to we're doing it because we want to be wise, we want to be we want to make sure that everyone here shareholders.
Knows that we are looking out for the company and looking out for all of our shareholders. Because the fact is if we don't you know if the crap doesn't hit the proverbial fans and in the market doesn't drop as much as some people say some people, saying, it's not drop at all some people say it's dropped a lot.
Worst case scenario, we're in a great position if it doesn't drop as much we're in a fantastic position because we're making these cuts and so we're just we're trying to be smart trying to be wise with.
Our decision making process.
But mark I'll, let you add some more color to that.
No I think I think that's I think that's the answer I think we one we don't have a crystal ball I mean, we as you know there and we looked at all kinds of data every day.
But I think it's about being prudent antibiotics. Thank you you always should prepare for the worst.
And if that doesn't come which we.
We think that the cuts, we're making combined with the increasing fees.
Prepares you know put sets this company in a position that he can do incredibly well next year, even without any transaction growth right and so if we prepare ourselves for that and then we do get transactional go which we think absolutely can happen it puts us in a very strong position right and so lets prepare ourselves for a situation.
Where we don't grow transaction and we still can't get to.
Our cash flow breakeven and then if we while we anticipate happens that we are in a much stronger position. So we have to have the discipline to run the business.
In an efficient and effective way and we have to be prudent about how we run this business and so we're doing what we think is necessary to position ourselves to not only.
You do get through this.
Difficult high but at the same time put us up in a position that as the market turns which you'll probably second half of next year. We are in a position that we can take advantage of this and even gain market share and so we just believe we're doing the prudent thing to prepare ourselves for unexpected.
And expect it.
Market conditions next year.
One thing I would add to that one of the things I learned in the Marine Corps. If you want to if you wanted to virtually guarantee mission success.
Your backup plans have to have backup plans right. So we're always putting things in place to make sure that no matter what happens were good.
That's helpful. If I could squeeze one more in so and humor me and indulge me on this one so on the third quarter.
Sumption of cash flow breakeven, if you do see the sort of five $4 million to $5 million kind of annual benefit from the fee increase if transactions are not flat, but they're actually worse like where does that put your cash flow breakeven target is there a wiggle room with that third quarter or if if units are down.
Just indulge me on that.
Sure of course, yeah, we actually.
Can you still get to breakeven even if the units are down yeah, we actually have run all the models and even the combination we actually think that fee increase can generate more than $4 5 million, but let's be conservative and I think that if you do the math on one and a half plus that.
Even if the units come down because of the issue and again. We also have you know, we're adding more agents, which you have annual fees as well so we think that trend.
<unk> decrease.
We still can't get to that cash flow breakeven, but again in order for that to happen because we're adding agents at 30% to 35% I mean transactions next year and we're already you know Q3, and Q4 is already down compared to last year right and so that that would be a significant deal.
For next year. So you can go down or the panel, 20% right because they're already Q3, and Q4 is going down.
But yes, we're prepared for that and think that we can add.
Actually continued to adjust to.
Two easy to breakeven cash flow you think transactions go down by another 5%.
Helpful. Thanks, guys.
And once again, if you'd like to ask a question. Please press Star then one.
The next question is from John Campbell from Stephens, Inc. Please go ahead.
Hey, guys good afternoon.
John Hey, John Hope you well, yeah, you as well. Thank you Marco I wanted to revisit your comment Marco around the kind of the buildup to the first half EBITDA breakeven target that you guys called out.
If I take into account the positive effect of the fee changes that you you provided a range on that and then also the cost reduction.
Per quarter basis, it looks like I mean last year I think on the front front half of last year, you had negative 4 million of EBITDA. It just seem.
Like to me you know assuming no major kind of falloff in pipeline that you can kind of get there from those two items.
I'm just kind of curious what your what youre, assuming maybe for the non brokerage contributions and maybe if you are assuming a decline in revenue in the first half just curious about those two.
Yeah, I think that's I think your your you know your thesis is exactly right.
We when we put this together we certainly look at variety of different models right. We looked at first half of this year and what that looks like.
And certainly the first half of last year, and what that would look like as well.
And then we looked at incendiary business as we look at the increase in their fees. We you know we looked at all the different even a decrease in transactions, but I think that you know your your thesis is correct that.
If things continue the same right and we do the transactions next year than we did in this Q1 and Q2 of this year combined with a decrease in expenses combined with the.
The increase in fees that you know we feel we feel good about getting to adjusted EBITDA breakeven.
By Q2.
And that's why we made the statement that we think that by Q2, we hit adjusted EBITDA breakeven and then Q3, we spend money in cap in the Capex in terms of building our technology.
And then we will look into that and hopefully reach our goal by Q3 in terms of cash flow neutral right, but I think your thesis is correct that and that's how we arrived at that as well, but we also looked at a variety of different models.
Transactions decreasing and so there is room in there.
For us too because we don't know what's going to happen right and so we feel we feel good about where our forecast is to hit adjusted EBITDA breakeven by Q2.
Okay. That's very helpful. And then just broadly on the cash balance what's a good kind of minimum level. When you think about the operate the business and then kind of related to that should we view the cash.
Cash flow kind of positive inflection point as maybe you guys kind of triggering back to offense on capital returns as far as M&A and maybe the buyback as well.
Yeah great.
Great question and so so when you look at the cash flow for Q4 keep in mind that we.
We had about a million dollars. If you look our balance sheet, our prepaid right and so there was a million dollars in prepaid that.
We will expense that over time right. So when you look at the cash flow.
Sort of burn rate for the quarter right, it's really.
5 million about 1 million was already prepaid.
So we think that.
Again, we get to cash flow breakeven by Q2.
We think that you know.
In Q1, there'll be some burn of cash by Q2 will be breakeven.
So we you know our goal is to finish next year at minimum with the same cash that we finishing Q in Q4 this year right and that's kind of our goal going forward.
When we think about cash we certainly like to have you know eight $9 million in the bank that doesn't mean that that's what we need to continue to run the business is actually less than that but its just their ability to run the business in a in an effective way.
Yes in terms of mergers and acquisitions and all of that let's see how the market is in Q Q3, Q4, if by Dan, we're generating cash and adding to our balance sheet will certainly be opportunistic I think one of the challenges in in an acquisition is really the price I think as Josh indicated a lot of private companies.
Private companies have not adjust their price and so if that happens in the second half of next year.
Certainly we'll look at that.
But I think one of the things we're going to focus in the next six months or so is really organic growth kept four and end of life and free for life are exciting programs and like I said, we increased our recruiting team and so we look forward to continue organically.
As Josh indicated I think September was the one of our best recruiting months, we've had our referrals went up by 40% so.
We feel good about where we are we think again that will be cash flow neutral by Q3 and at that point you would start looking at how the market is and we certainly start looking at opportunities to perhaps make some small acquisitions, but you know that the market will tell us.
What the opportunities are.
It will be at that time.
Okay very helpful. Thank you guys.
Thank you.
And the next question, we have will be from George Melas with M. KH management. Please go ahead.
Okay.
Thank you Hi, John Hi, Marco.
Hey, George how are you a healthier hope youll, probably as well again. Thank you.
I have a question on the segment and beat up right.
It seems that.
Mortgage I look at it on a sequential basis.
Mortgage the mortgage it would be the large wind down that tech was roughly flat and the insurance and the title was up slightly.
But the real estate brokerage division.
Segmented that came down quite a bit and my calculation suggests that the gross profit was relatively flat sequentially.
So that tells me the Opex went up and I understand you're adding a lot of recruitment sort of talent and resources, there, but I'm just trying to see if there's something else.
Yes, George Great question. So it's a combination of several things.
In Q3, we have increased our marketing we had some.
Marketing programs already scheduling some eventual re schedule from Q2 to Q3, and so that was an increase in expenses for marketing.
We also increased our recruiting team we believe that.
As we had planned for.
Kept for life and free for life and some of the program we already launched.
Launching the beta for that program. So that's the third.
We had in Q1 and Q2, we had 13300 transactions in Q2, we had approximately 12000, so that 1300 transactions.
Once you hit a breakeven EBITDA.
Additional transaction, there's a significant amount of money that goes out to the bottom line right and so that would be roughly that was roughly 500 to 600000. So the combination of those three factors is what caused the decrease in adjusted EBITDA, if the decrease in transactions and some some one time expenses and marketing.
In Q3, which will not have going forward.
And then increasing in recruiting.
Okay.
Okay. So volume has an impact okay yep yep.
Yeah, absolutely volume has an impact, especially once you pass the adjusted EBIDTA breakeven right because if you remember what happened between Q1 and Q2.
The increase in gross profit keep between Q1 and Q2, we delivered 75% of the bottom line right and so obviously it has a significant impact and that's why as we continue to grow our business.
And and gross profit then it will have a significant tax increase our bottom line as well. So that was the that was pretty much that the negative effect.
Okay, but on an absolute basis, the real estate brokerage opex was up sequentially right. So some of it I can see increased marketing.
Is the recruiting team.
As for the Opex the volume it does not really impact that that still feel like there's still something missing.
Yeah, that's correct that was an increase in in operational in terms of we hire a few people as we grow we had and we had a significant marketing event that tinman.
Which is a significant marketing event for us.
Q3, just a marketing expense. So those expenses were a one time expense in Q3, and we don't have that expense in Q4, I think as you get into Q4, you're going to see that that will increase eating transactions to stay somewhat stable now again theres a decrease in transaction, it's going to have a negative effect right. It's just the reality.
At that breakeven point.
But those are additional expenses in opex, there, but the most part of onetime expense for the quarter.
Okay, Great and do you feel pretty confident about the season the cap changes.
Leasing.
Sure.
Gross profit by $45 million per year of course right.
Yeah, Yeah, I think your question, you're breaking up a little I think your question is can you repeat your question I want to make sure I heard it correctly is that is the increase in the gross profit generated by <unk>.
The change in the fee and the changing the cap right yeah yeah.
No I, yes. So there are a couple of factors in that increasing piece right. One factor is just basically a $50 increase in average transaction right and so you can see how many transactions. We've done you can multiply by 50 and you can see that impacted the second impact is based on changing increasing from 12 to 15.
<unk>.
We roughly have well between 12 and 1500 agents that cap every year catwalk.
Catherine this year, and so and those agent when they kept they typically do a lot more than than 12. So you could have between 12 and 1500 agents done three transactions times. The difference between $5 50, 150, you arrive at a number right that and do that and then he also increasing in agents increase in annual fees. So when you put it.
Good things together we.
We feel that the assumption of four to 5 million is very reasonable.
Great I appreciate that clarity thank you very much.
Thank you George talk to you soon thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Josh Harley for any closing remarks.
Thank you operator of course, thanks to everyone, who joined our call today and of course for your continued support we're extremely proud of all we've accomplished and we continue to work diligently toward achieving our collective objective and adding greater value to our company for the benefit of all of our stakeholders has a wonderful evening and of course had a wonderful I'm happy to see.
The holiday season, and thank you again.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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