Fathom Holdings Inc. Q1 2023 Earnings Call

Speaker 3: The.

Speaker 4: call.

Speaker 5: All participants will be in listen only mode. Should you need assistance please signal conference specialist or press the star key followed by zero.

Speaker 6: After today's presentation, there will be an opportunity to ask questions.

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Speaker 8: Please note that this event is being recorded. I would now like to turn the call to Alex Cuffton with the Gateway Group. Please go ahead, sir.

Speaker 9: Thank you, operator, and welcome everyone to the SADM Holdings 2023 First Quarter Conference call. Alex Cuffman with Gateway Group, SADM's Investrelations firm. Before I turn things over to the SADM matching team, I want to remind listeners that today's call may include forward-looking statements.

Speaker 10: within the meaning of the private securities litigation reform act of 975. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, include no set forth, no risk factor section of the company's 410K for the year at the December 31st, 2022, as well as our latest 410K to another

Speaker 11: Somebody filings made with the SEC, copies of which are available on the SEC's website, www.sec.gov.

Speaker 12: As a result of those forward-looking statements, actual results could differ materially.

Speaker 13: Fathom undertakes no obligations to update any forward looking statements after this. So after this is called, except as required by law.

Speaker 14: EBITDA, which is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, which is now posted on Fathom's website. With that, I'll turn the call over to Fathom's founder.

Speaker 15: Chairman and CEO , Josh Harley. Josh? Thanks, Alex. Good afternoon and welcome to our first quarter, 2023 earnings call. We're pleased to report a strong first quarter as compared to the overall market. And what we feel is a great start to the year. I want to start by thanking our agents and employees across each of our businesses for their hard work and dedication as we...

Speaker 16: as an opportunity to take greater market share by reinvesting the savings they get from being a Fathom agent into their marketing while many other competitors are pulling back on their spend.

Speaker 17: I love to hear that because that's exactly why I started Sather in the first place. Our agents have worked hard to continue to grow and thrive even with all the market uncertainties and we're proud of our recent awards recognition within the industry.

Speaker 18: We will recently rank second by real trends 500 as an industry top mover for 2023 and ranked as the fourth largest public independent brokerage another notable category up from sixth place last year. We're also proud to be ranked as the tenth largest brokerage in transactions.

Speaker 19: in the recent T360 Mega 1000. These achievements are testament to Fathom's commitment to providing top-notch service and support to our agents and our clients and our ability to adapt and thrive in the rapidly evolving residential real estate industry.

Speaker 20: Before turning the call over Marco Fresnall, our president and CFO , for a detailed review of our financial results, I'd like to touch on a few key highlights during the quarter and what gives us confidence in our business regardless of what happens in the housing market or interest rates this year.

Speaker 21: While the first quarter is typically the slowest quarter for transactions and was a challenging quarter for residential real estate overall, we're encouraged by some recent signs of stabilization across our markets along with the moderation in interest rates during the quarter to improve housing affordability. It's interesting to see that even in this market...

Speaker 22: 60% of listings are still stellar within 30 days, and 28% are still seeing multiple offers.

Speaker 23: While we don't know where interest rates will go this year or whether we're close to the bottom in the housing market, we believe that Fathom has a long and positive runway ahead.

Speaker 24: And with the latest rate increase, the Federal Reserve signaled that they may be done raising rates, and inflation appears to be moving in the right direction.

Speaker 25: Our results this quarter continue to demonstrate the power of our truly disruptive business model and how we're able to succeed irrespective of the market environment.

Speaker 26: During the first quarter, Fathom completed approximately 8,532 real estate transactions.

Speaker 27: And while down 15.4% from prior year's first quarter, the decrease compares favorably to our peers in the entire US residential real estate market. In fact, according to the National Association of Realtors, the US residential real estate market saw overall transactions recorded decline 25% compared to Q1 of last year.

Speaker 28: So I'm sure you can see why I'll count that as a win for Vavum.

Speaker 29: As our transaction volume reflects, we continue to take market share from legacy brokerage firms despite the volatile environment and saw year-over-year transaction growth in several of our markets, including Miami, Las Vegas, the Bay Area, and even Boston.

Speaker 30: We also increased our agent network 18% to over 10,628 agents at the end of the quarter, significantly beating the domestic growth of all of our public peers but one who reported so far.

Speaker 31: I'm proud that we're able to continue providing compelling value proposition through innovation and industry leading commission model that resonating well in this market and this environment.

Speaker 32: We also made significant strides towards achieving our goal of adjusted EBITDA breakeven in Q2 and cash flow profitability in Q3 of this year. During the first quarter, we began to see the benefits from the cost reduction measures we've implemented and expect to see the full benefit of these actions in Q2.

We're also continuing to identify opportunities to further right-size our cost structure for the current environment and better position Fathom for improved operating leverage as the residential real estate market returns.

Importantly, we believe these cost reductions were made without sacrificing our ability to grow. And in fact, we have allocated some of those savings to further strengthen our recruitment efforts.

These cost reduction initiatives, combined with the increase in agent transaction fees that became effective in January of this year, have positioned our business for profitable growth ahead.

Southern Realty continues to be among the fastest growing residents of Real State brokerages in the US and we're proud of our growth as we expand our reach nationwide. Today, Southern Realty operates in 37 states and the District of Columbia. Southern brings a unique model to the residents of Real State Market as we offer agents all the tools.

the technology, training, and resources are larger traditional peers do, but at an industry leading flat-the-commissions with agents.

More than ever, that remains a key point of differentiation during this period of high inflation and interest rates when agents across the industry struggle to generate leads and close sales.

With our focus on servant leadership, our agents often say that they join Fathom for the higher income potential, but they stay for the culture.

Our unique, low-cost, and disruptive model has allowed Fathom to attract high-quality agents and enjoy agent retention rates approximately twice the national average.

with smaller number of transactions.

The technology that powers our Realty operations remains a key part of our differentiation as well as we can generate long-term savings and ultimately charge our agents far less than others by owning it outright. We also license our proprietary technology to over 750 brokerages through a recurring revenue subscription model that drives incremental,

high margin revenue while enhancing awareness and differentiation of a brand within the industry.

I'd like to provide an update of our agent trends and the steps we're taking to grow the .Thousands of Fl michael W.

Our cost to acquire one agent during Q1 remained low at approximately $900, making our breakeven on each agent less than the $1,150 that we'll earn back on their first sale. We also maintain strong retention rates, which are approximately twice the national average and remain exceptionally strong given the backdrop of the COVID-19 pandemic.

of agents leaving industry. More importantly, 71% of agents who left them sold zero or only one home per year. And based on historic trends, when to participate, only to participate in additional attrition in the coming year will continue to be primarily from low-producing agents. We recently launched an enhanced agent referral program.

is wealth positioned to achieve even a breakeven next quarter. As we mentioned on our last call, we believe 2023 will be a pivotal year for Fathom as we turn the corner on profitability and really start to show the operating leverage in our business. Plus our ancillary businesses have the potential to dramatically increase our revenue and profitability per transaction over time.

To close, we remain optimistic about the year ahead and believe that we're well positioned to continue growing our business in 2023. With that, I'd like to pass it over to Marco for our financial update. Thank you, Josh. I'll start with a detailed review of our first quarter 2023 results, and we'll finish with the discussion on guidance. When the size of our 92 LastMs scores gamma 11.1, and we see a smaller frame of events March 2023.

First quarter revenue declined 14% year-over-year to $77.5 million compared with $90.1 million for last year's first quarter.

Gap net loss for the first quarter was 5.7 million or a loss of 36 cents per share, compared with a loss of 6 million or a loss of 37 cents per share for the 2022 first quarter. Adjust the bid at loss and non-gap measure was 1.4 million in the first quarter.

versus the justity bid that lost of 2.1 million for the first quarter of 2022.

The $700,000 improvement in adjusted EBITDA's quarter was largely driven by reduction in expenses and additional agent fees that went into effect in January .

Notably, this improvement was achieved despite the 14% decrease in revenue this quarter compared to Q1 of 2022.

G&A expense was $9.6 million in the first quarter, or 12.4% of revenue, compared with $10.9 million, or 12% of revenue, for the same period a year ago.

Again, it should be noted that GNA did not meaningfully increase the percentage of revenue despite a 14% decrease in revenue.

In total, our operations and support technology development and GNA expenses decreased by almost 2 million from 14.5 million in Kiwanda 2022 to 12.5 million in Kiwanda 2023.

This reduction reflects the benefits of our expense reduction initiative that commenced last quarter.

Expense related to marketing activities were $716,000 for the first quarter compared with $1.2 million for last year's first quarter. The decrease in marketing expenses is related to leveraging internal resources and optimizing advertising expenditures. Now I will spend some time reviewing our business segment results in more detail.

We closed a 5,8,532 real estate transactions in the quarter, a 15.4 decrease from last year's first quarter, but well below the 25% reduction the overall market experience. We end the key one with 10,628 agents, which represents an 18% growth over key one of 2021-22. 2021-22.

Adjustity of the data in the real estate individuals is approximately $1.3 million, an increase of $400,000 compared to the adjusted data of $900,000 in Q1 of 2022. This increase was achieved despite the 15% decrease in transactions this quarter compared to the same quarter last year.

and reflects an increase in fees and favorable impact of cost-cutting measures.

Our mortgage business generator revenues of 1.5 million in the first quarter compared to 2.9 million in prior year period.

mortgage adjusted EBITDA for key loans of negative $600,000. Our team continues to identify opportunities to reduce expenses to right size our mortgage business going forward, as well as increase revenues by increasing additional loan offers.

DIA, our insurance business, generated revenues of $1.6 million for the quarter compared to revenues of $1.4 million for the same period a year ago. This represents an increase of 7.5%.

Adjusted a bit that increased 260 per percent from 100,000 in K1 of 2022 to 391,000 in K1 of 2023. This reflects the great work our DIA team has done in K1, so it just expenses while still growing revenue. There are still revenues of 596,000 per quarter compared to 1.

refi business due to higher interest rates.

However, in March and April we have seen a significant increase in the number of file stars from FADM agents in the North Carolina and Dallas markets, which should represent an increase in the attach rate in Q2.

However, in March and April we have seen a significant increase in the number of file stars from FADM agents in the North Carolina and Dallas markets, which should represent an increase in the attach rate in Q2. Now let's move on to our technology segment.

They're using revenues increase 17% to 756,000 compared to 645,000 for last year's first quarter. Adjust the bid outlaw for the quarter decreased by 46% from 395,000 first quarter of last year to 212,000 in the current quarter.

5,000 neighborhood reports created.

We continue to focus on our balance sheet given dynamic real estate marketing conditions and end of the quarter with a cash position of $6.7 million.

We recently completed a convertible no private placement to provide additional operating liquidity and flexibility as we execute our goal of getting to break even.

We believe our cash position and additional private placement provides us with the adequate run away to grow the business and execute our strategy to profitability.

Some guidance.

Given the continuing uncertainty in the macro environment, we are only providing guidance for the second quarter ending on June 30, 2023. For the second quarter, we expect revenues in the range of $88 million to $90 million and adjusted EBITDA in the range of breakeven to $100,000 to $200,000 positive.

As a reminder, guidance is a forelooking, which is as we noted in the beginning of the call subject to risk and uncertainty.

I want to thank the entire team at Fathom for their hard work, passion, and commitment to excellence. The last six months have been some of the most difficult months in Fathom's history, but through the hard work of our team, we have been able to demonstrate that we can outperform the market even in challenging economic times. With that, I'll turn the call back to Josh for closing remarks.

Thank you, Marco. We remain focused on execution and are well positioned to achieve a breakeven profitability Q2 with our model and can thrive throughout various real estate cycles. With that, operator, let's open up the call for questions.

Thank you, Marco. We remain focused on execution and our well-positioned achieve a breakeven profitability Q2 with our model and can thrive throughout various real estate cycles. With that, operator, let's open up the call for questions. We will now begin the question manager session.

To ask a question, you may press star 1 or the telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question will come from John Campbell with Stevens, Inc. You may now go ahead.

Hey, this is AJ Hayes stepping in for John Campbell. Congrats on the quarter and appreciate you guys taking our questions. First thing on your guys' EBITDA inflection, just kind of wanted to see, is there any additional steps needed to get there? How dependent on the market is this outlook? How dependent is that on your outlook for the market?

As we are today on May 10th, we have a good feel for the quarter. So that's the first and foremost. We are definitely seeing an improvement in file starts in Q2 compared to Q1. There are two components to that. First is certainly seasonality....

And second, I think Josh mentioned earlier that many of the Fathom agents are using their savings that they get from Fathom and they invest in marketing. So we are anticipating an increase in revenue and transactions. In terms of the cost structure, I believe about 85-90% of our 3 million.

has been already built into Q1 numbers, so there's a little bit more in Q2. So I think the overall answer to your questions is that we feel pretty good about the guidance we're given, and we're not assuming a significant increase in the market. If the market does

continue to increase even in a greater way than we are anticipating. I think that our numbers could be better, but we feel fairly confident about the guidance we're giving given what the market conditions are today.

Gotcha. And then maybe shifting the focus kind of to hitting positive cash flow in 3Q23, you guys reiterated that target again, which is great to hear, but given the uptake in interest expense as a result of that new convert, can you kind of walk us through the moving pieces there? Did you change your underlying assumptions needed to hit this target, such as the macro, the existing home sales maybe?

mortgage gain on sale, and this might be much of the same as kind of what you answered in the last question, but maybe trying to get a sense was there may be already a degree of conservatism or wiggle room in that inflection. Any color there would be much appreciated.

on this might be much of the same as kind of what you answered in the last question, but maybe trying to get a sense was there may be already a degree of conservatism or wiggle room in that inflection. Any color there would be much appreciated. Sure. Great question.

I don't have to worry too much more. Go ahead.

Well, I think we continue to apply the same model in terms of Q3. The components that lead us to, if you continue the curve of adjusted a bit in Q2 to the improper ability in terms of our cache hole positive in terms of Q3.

One aspect of that is the seasonality of the industry. Second, when we look at our ancillary businesses, all our ancillary businesses continue to grow. Even in a tough market, they continue to gain market share. DIA, for example, has done a really great job in continuing to increase its revenue, and EBITDA, 265% in EBITDA, increases.

is a phenomenal result. So we continue, it's a combination of our in filiary business continue to gain market share and continue to grow. The combination of the full execution of our three million dollars per quarter in cost reduction and certainly the aspect of the seasonality. We are not anticipating.

in our numbers a significant increase in the market in terms of upside. Some have argued that the Fed may start lowering interest rates in Q3 and Q4. We are not putting that into our model and so we are really somewhat conservative in terms of the upside, in terms of getting to the cash flow breakeven in Q3 but it's really a combination of all those factors.

I want to add some color if I may though. I want to make sure you understand that we didn't do that because we were worried about not being able to.

color if I may though I want to make sure you understand that we didn't do that because we were worried about not being able to reach you know the

or reach cashflow profitability is really just out of just being wise. You know, you don't know what you don't know. We don't want to be foolish. We want to make sure that we have, you know, some additional buffer there for the just in case it sometimes happens in this world, especially in this market. So we're just trying to be prudent, trying to be thoughtful about the business.

But we said the same time, you know, we have to ask ourselves, do we really want to do this because we feel very confident that we're going to be able to continue to achieve what we've said we don't achieve. So far that hasn't changed. But again, so raising, you know,

bringing that extra capital was really just, I guess, add a little extra touch of wisdom in the business.

to bring in that extra capital was really just to, I guess, add a little extra touch of wisdom in the business. That makes sense.

Thank you for the color there. One more question if I may and then I'll pass the mic along. But I wanted just to narrow in on the mortgage business here for a second. Josh, you had said attach rates improved in mortgage as well as title. But can you maybe provide an exact number for mortgage and maybe title or maybe just like a general...$$

kind of estimate there. And then Marco you may have briefly touched on this but what was this improvement attributable to? Was it anything specific? And then also is gain on sale, is that something that's starting to normalize in what's maybe your updated outlook in terms of gain on sale?

I'll start with you.

Well, first of all, a question directed at me. As far as the tax rate goes, we haven't shared the attach rate and what the exact numbers are attached rate, other than the fact that we're seeing improvements. I feel strongly that we probably need to keep it that way for right now. I know none of our peers actually share those specific numbers either. I think there's, I start to realize there's a reason for that. Things kind of ebb and flow, but we are seeing improvements. We do feel a lot better about the attach rates.

We're starting to see a lot more agents, you know, really buy into and understand the fact that these are part of our Fathom family. And the more we support, you know, our ancillary services, the more we support that Fathom family, the more it benefits everybody. So you know, while we're not prepared to give the exact attached numbers, we are we are definitely seeing improvements.

Our improvement in the mortgage business is a combination of several factors. One, the leadership in our mortgage company continues to recruit more loan officers and continue to grow the revenue base. And I think we look forward to demonstrating that when we announce our Q2 numbers and subsequently Q3 numbers. Whether or not we victorious through Twitter or from Twitter has not helped So having said that, I hope you all enjoy.

So it's a combination of adding more loan officers to the team. Second, we focused the attach rate to a certain extent. We took a more focused approach and focused our mortgage business to a certain extent in the North Carolina and in the Texas area. We focused our mortgage business to a certain extent in the North Carolina and in the Texas area. We focused our mortgage business to a certain extent in the North Carolina and in the Texas area.

and so therefore giving us the ability to grow our market share into those states much deeper. So that certainly has helped the attach rate. We've also implemented a variety of pilot programs in Q1 in terms of marketing programs and we'll be able to give an update on those in Q2.

Once they're fully executed and it will be able to do that. And then the last part is the gain on mortgage. So certainly the market has become a little more consistent and stable. We go back to Q3 and Q4 last year. It was a high-wing unstable market in terms of the gain on mortgage. There's plenty of data out there that shows how mortgage companies

Profitability of mortgage companies have decreased significantly in terms of what's happened in Q3 and Q4. So yes, we're definitely seeing a more stable market. Not a great market yet, certainly not compared to the one of last year in Q2, but it's definitely more stable. We're not seeing the ups and downs in profitability of the loan.

And I think that's a good start. We're hoping that by Q2 and Q3, things continue to give them more stabilized and easier to sort of anticipate what the market would do. But we certainly feel better today about our mortgage business than we did in Q4. And we are very hopeful that as we continue to work hard.

We'll see better results in Q2 and Q3. Great. Thank you so much and good luck the rest of the year Thank you. Thank you Our next question will go through Darren with Roth Capital Partners

Thank you so much and good luck the rest of the year. Thank you. Thank you. Our next question will come from Darren with Roth Capital Partners. You may now go ahead. Hi, my name isilles Roth Central and welcome to ourChair.

Hey, this is Donal for Darin. Thanks for taking the questions. If I start firstly with marketing, could you sort of talk about both the reduction in marketing spend but then sort of...

the confidence you may have with referrals to sort of offset that lower spend and still grow agents? Great question, Dylan, great question. So the reduction in marketing is not so much focused on so much on recruiting. It's really more focused on a variety of really optimizing our marketing machine. So

We have, we've optimized a lot of our internal resources. We've optimized on how we spend dollars in terms of our advertising campaigns. And so a combination of that plus some shifting of dollars resulted in that decreasing market.

However, we actually have increased our recruiting team.

And so where the dollars look like have been decreased, which they are, we actually have increased our recruiting team.

The second part of your question was the referral rate. As Josh indicated, the month of March, we had the highest internal referral rate ever in our history. And we feel confident that's going to continue as agents continue to see the benefit of our free-for-life program. And we always said that's going to take some time for agents to fully benefit that, right? But certainly Q2.

Sorry, Q1 in March, we've seen a significant increase in that. And we anticipate that continue to maintain itself as we continue to increase the number of agents that we recruit.

Q1 in March, we've seen a significant increase in that. And we anticipate that continue to maintain itself as we continue to increase the number of agents that we recruit. MS.

The sequential net ads and agents, how many were from referrals versus what you could call more organic?

For March it was 60% for the whole quarter, Marco. Do you have that number off the top of your head? So, yeah, so we don't give the net number, Dylan, in terms of that. We can give you that on the gross number, the internal referral was 60% on the gross number. And then when you look at the net number, keep in mind that Q1 has the highest turnover.

one, we not only fathom, but the whole industry sees a significant higher turn for centers as agents leave the industry because they don't want to pay all their annual fees that they have to pay in key one. But by the way, if you go back in time and you listen to some of our earlier, you know, especially a QM last year or even earlier than that.

You'll see, we actually spoke that about 35% of our growth was agents referring to other agents. And now to see that number hit 60% is pretty exciting. I appreciate the color. That's helpful. And then just the follow-up for me. On the productivity side, I mean, obviously...

the demand is down from lower home sales in the market, but could you sort of talk about, I guess.

the type of agents you're recruiting or your existing base, like how are you seeing their productivity evolve over time as like as an improving the potential number of transactions they can handle? So for Q1 it was fairly consistent across

When you compare that against the other public companies, I think you see that our decrease in percentage was about half of what everyone's seeing. What we see in the market is fairly consistent around 25%. I guess some states in the West Coast are seeing a higher percentage.

In some states in the East Coast are seeing a lower percentage, but across the board is 25%. Across our agents it's fairly consistent on the 15%.

Great, I'll pass it on. Thank you.

Again, if you have a question, please press star then one. Our next question will come from Tom White with DA Davidson. You may now go ahead. Hey, this is why it's well known for Tom. Thanks for taking our questions. I've just got a quick one here, more on the longer term regarding the 80 value proposition.

I think it really comes down to probably better training. If you think about how, number one, obviously, how do we add more agents, and then once we add those agents, how do we help them improve their productivity per agent? One of the things we've said in the past is the average agent who joins Fathom increases their business by 49%.

naturally, but one area that I think we can see great improvement, we've been exploring this more is increased training, increased coaching for individual agents to say, okay, you have this savings, now what? Not everyone knows where to spend that money. Can we help coach them and show them how and where? Can we help train them to be better at their job, be better at their craft? And so I think that's an area that we can dramatically improve inside our own.

So I think there's three really strong ways to, three really strong ways that we can do to be able to increase the number of transactions per agent.

Great. Thank you very much. Again, if you have a question, please press star then 1.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference record over to Josh Harley for any closing remarks.

Thank you, of course. Thank you for joining our call today and your interest in Fathom. For those of you who are Fathom shareholders, thank you for your trust. We will continue to work hard and look forward to sharing future updates with you. Have a wonderful week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.