Q3 2023 Fathom Holdings Inc Earnings Call
Good evening and welcome to the Fathom Realty Holdings, Inc. Third quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask question to ask of.
Question You May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Alex.
With Gateway group. Please go ahead.
Great. Thank you operator, and welcome everybody to the Fathom Holdings' 2023 third quarter conference call.
Coupling with Gateway group Fathoms Investor Relations firm.
Before I turn things over to Fathom asset team I want to remind listeners that today's call may include forward looking statements within the meaning of the Securities Private Securities Litigation Reform Act of 90 95, such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section of the company's Form 10-K for the year ended.
731, 2022, as well as our latest Form 10-Q, and other company filings made with the SEC copies of which are available on the Sec's website at Www Dot S. EC Dot Gov. As a result of those forward looking statements actual results could differ materially fathom undertakes no obligation to update any forward looking statements.
After today's call except as required by law.
Please also note that during this call we will be discussing adjusted 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 fathoms website.
With that I'll turn the call over to Fathom founder Chairman and CEO, Josh Harley Josh.
Thanks, Alex Good afternoon, and welcome everyone to our third quarter 2023 earnings call. We're pleased to share. The recent progress we've made advancing our growth strategy. Despite the volatility in interest rates and the broader residential real estate market.
I want to start by thanking our fathom family across each of our businesses for their hard work and dedication as we continue to navigate the real estate market. This has been one of the most difficult years in <unk> history.
But through the hard work of our team we've been able to demonstrate that we can adapt and thrive even in a challenging economic times before turning the call over to our president and CFO Marco Fresno for a detailed review of our financial results I'd like to touch on a few key highlights during the quarter and the steps were taken to adjust.
To the current environment.
During the third quarter, we witnessed continued pressure on transactions throughout the industry.
In September the residential real estate market changed rapidly as mortgage rates exceeded 8% and we experienced an increase in cancellations, which impacted our transactions during the quarter. Despite this volatility and the highest mortgage rates in 20 years, we were encouraged by performance in agent growth and a very difficult market environment.
During the third quarter <unk> delivered revenue of $93 5 million, which was in line with our guidance range. We also completed approximately 10303 real estate transactions involved down 15% from the prior year's third quarter transaction number of 12077, we do feel good about this number went up.
Parents, the entire U S residential real estate market.
We continue to take market share from legacy brokerage firms and even saw year over year transaction growth in several of our markets. We also increased our agent networks, 13% to over 11330 through agents at the end of the quarter, which compares favorably to all but one of our public peers domestic agent growth.
While the residential real estate industry remains challenging we continue to believe that our future remains bright and by continuing to grow our agent base. We're positioning fathom for continued success once the industry rebounds.
We're making meaningful progress in advancing our growth strategy, expanding our agent network optimizing our business for profitable growth and taking market share with an industry, leading commission model that it continues to resonate well in this environment and we believe we will continue to do so going forward.
Will eventually recover and fathom is well positioned to continue growing market share regardless of when that happens let.
Let me provide an update on our realty business and why we remain well positioned today to grow our agent network and ultimately expand our reach during this difficult market environment.
The royalty continues to be among the fastest growing residential real estate brokerages in the U S and we're proud of our growth. This year as we expand our presence nationwide to reach more buyers and sellers today Fathom royalty operates in 37 states and the district of Columbia, We believe our model allows us to succeed irrespective of the market environment.
And we're well positioned to attract an ever increasing number of real estate agents from legacy firms during downturns in the industry when agents struggled to generate leads and close sales.
We continue to believe that we are the most attractive home for agents long term as we help them ultimately earn more money with an industry, leading flat fee Commission split to agents.
During the third quarter, we grew our agent network by 13%, which included the existing agent referral efforts underway. We also recently announced three walk over so far in Q4 in Louisiana, Massachusetts, and California, we promised to grow across all 50 states as well as deeper into each state and we continue to take steps to deliver on that.
Problems are agent growth this quarter further validates that we're winning through innovation and a truly disruptive business model that continues to resonate among agents.
Our new agents will have full access to establish a proprietary cloud based software intelligent and will also benefit from having additional fathom services to offer their clients, including mortgage and insurance services as we continue to help all of our agents grow their business.
We see a strong pipeline of work over opportunities and believe that where we will continue to attract high quality agents teams and brokerages to our unique low cost and disruptive model.
While most of our peers are experiencing flat or declining agent numbers domestically our agent value proposition remains compelling and allows us to take share now to better position fathom for higher overall growth rate once the market recovers.
Our cost to acquire one agent during Q3 remained low at approximately $1000 and making a break even on each agent less than the 1100 and $50 that will earn back on their first sale. We also maintained strong retention rates, which we believe exceptionally positive news given the backdrop of agents, leaving the industry.
As most of you have no doubt seen the National Association of Realtors, along with several of our country's largest brokerages were found liable and a recent legal battle over agent commissions I have no doubt that we will see this go to the appeals court and even higher should it be necessary.
It might be years before we see any changes in the real estate industry. As a result of these lawsuits, but what I can say is that we might be one of the only real estate brokerages to be a beneficiary of any changes that compressed agent commissions. Unlike our peers, who are who were accused of conspiring in colluding to keep commissions high we do not put pressure on our agents to.
Maintain higher commission percentages. The fact is our flat fee Commission model does not change regardless of whether an agent charters, 3% or 2% or even 1%.
Lastly, let me briefly touch on our path to profitability profitable growth as we have.
The steps, we're taking to optimize our business in the current environment.
In Q2, we achieved our goal of adjusted EBITDA breakeven and we've continued to make tremendous progress in reducing our cash burn in Q3, we fell short of maintaining adjusted EBITDA due to the slower home sales in September as a result of further fed rate increases, but we have since identified additional opportunities to further rightsize our cost.
Sure.
For the current environment and better position fathom for improved operating leverage when the residential real estate market rebounds, with current market conditions in mind, we're working with each of our business heads to reduce companywide expenses by a total of $1.2 million per quarter going forward, which we expect to see the full benefit us in Q1 of next year.
<unk> by further right sizing the company's expenses, we've set a target to achieve cash flow breakeven as early as Q2 of next year, while remaining committed to getting back to par.
Positive adjusted EBITDA in Q1 of next year and going forward.
It's important to note that even though we are finding ways to cut costs, we will not sacrifice our ability to continue growing and attracting agents as a matter of fact, we've increased the size of our recruiting team and plan to continue doing so by growing that recruiting team in 2024.
In summary, we remain encouraged by the trends, we're seeing across our business. Despite a challenging quarter for fathom and the real estate industry with that I'd like to pass it over to Marco for a financial update.
Thank you Josh I'll start with a detailed review of our third quarter 2020 'twenty results.
And then we'll finish with a discussion on guidance.
Third quarter revenue declined 16% year over year to $93 5 million compared with $111 3 million for last year's third quarter.
This decrease.
Was primarily attributed to a 15% decrease in transactional volume along with a 3% decrease in the average home prices during the quarter.
GAAP net loss for the third quarter was $5 5 million or a loss of 34 cents per share compared with a loss of six.
6 million or a loss of 38 cents per share for the 2022 third quarter.
Adjusted EBITDA loss, a non-GAAP measure was 253000 in the third quarter versus adjusted EBITDA loss of $2 3 million for the third quarter of 2022.
The 2 million improvement in adjusted EBITDA. This quarter was largely driven by a reduction in expenses and additional agency that went into effect in January notably this improvement was achieved despite the 16% decrease in revenue this quarter compared to Q3 of 2022.
While we experienced an adjusted EBITDA loss this quarter. Our goal is to reach adjusted EBITDA breakeven by Q1 of 2024 will live there going forward. After Q1, we will continue to deliver approximately 70% of the increase in gross profit.
Adjusted EBITDA line.
G&A expense was $9 8 million in the third quarter or 10, 5% of revenue compared with $11 5 million or 10, 4% of revenue for the same period a year ago.
To be noted the G&A did not meaningfully increase as a percentage of revenue despite a 16% decrease in revenue.
In total our operation and support technology and development and G&A expenses decreased by almost 2 million from $15 4 million in Q3 of 2022 to $13 4 million in Q3 of 2023.
This reduction reflects the benefits of our expense reduction initiatives implemented earlier this year and we'll continue to see a decrease next quarter into Q1 of 2024.
As Josh mentioned earlier, we plan to reduce companywide expenses by a total of $1 2 billion per quarter going forward to further rightsize the company's expenses in the current market environment.
Expenses related to marketing activities were 796000 for the third quarter compared to $1 5 million for last year's third quarter. The decrease in marketing expenses related to leverage internal resources and optimizing advertising expenditure.
Now I'll spend some time reviewing our business segment results in more detail.
We closed 10300, <unk> three real estate transactions in the quarter, a 15% decrease from last year's third quarter, well below the 20% reduction in the overall market experience.
We ended Q3 with 11333 agents, which represented 13% growth rate over Q3 of 2022.
Well the National Association of Realtors saw membership declined by approximately one 6%.
We have seen an increase of 25% in the Onboarding starts in Q3 over Q2, which should result in increase in number of agents joining fathom going forward.
Revenue for the real estate Division was $88 2 million compared to 105 do you have any for the same period last year, which represents a 16% decrease of which about 3% as it relates to a decrease in prices of homes and 13% is attributed to a decrease in transaction.
Adjusted EBITDA in our real estate Division was approximately $1 6 million, an increase of 1 million compared to adjusted EBITDA to 566000 in Q3 of 2022.
This increase was achieved despite a 15% decrease in transactions this quarter compared to the same quarter last year and reflects our increasing fees and favorable impact of cost cutting measures.
Our mortgage business generated revenues of $1 9 million in the third quarter compared to $2 8 million in the prior year period.
Adjusted EBITDA for Q3 was a loss of 293000 compared to an adjusted EBITDA loss of 406000 for the same period last year.
Our team continues to identify opportunities to reduce expenses to rightsize, our mortgage business going forward as well as increased revenues by recruiting additional loan officer.
Going forward, we do expect our mortgage business to increase given the addition of the elite financial group and its 21 mortgage professionals.
Moreover, recently, we've seen some positive movement in interest rates. This improvement allows borrowers to see rate options at par.
This combined with the additions we made to the team are resulted in an increase of 64% and mortgage applications in Q3 of 2023 versus Q3 of last year.
The IAA in our insurance business generated revenues of $1 7 million for the quarter compared to revenues of $1 8 million for the same period a year ago. This represents a decrease of approximately $100000.
Adjusted EBITDA increased 50% from 370000 in Q3 of 2022 to over 558000 in Q3 of 2023.
Reflects the great work our D. I 18 has done in Q3, but just expenses, while still growing revenue.
Their status.
They're starting to had revenue of 883000 for the quarter compared to about 958000 in revenues for Q3 of 2022.
Adjusted EBITDA was a negative 22, <unk> thousand compared to a negative 24000 and adjusted EBITDA in Q3 of 2022.
Now moving to our technology segment revenues increased 19% to 836000 compared to 700 in 2000 for last year's third quarter.
EBITDA loss for the quarter increased by 38% from a loss of 372000 in third quarter of last year to a loss of 514000 in the current quarter. This represents an increased investment in agent technologies.
Our live by team continues to increase its footprint across the country to reach over 245 MLS It and 420000 agents at the end of the quarter led by powers more than 40 million community pages with over 125000 neighborhood reports being created.
We continue to focus on our balance sheet, given the dynamic real estate market conditions are.
Cash burn for the quarter was $2 5 million and was largely due to $1 $3 million decrease in accounts payable of 500000 in additional investments in our staff platforms for our agents plus increases in prepaid and certain financing update.
We ended the quarter with a cash position of $6 6 million and given the aforementioned cost reductions of $1 2 million per quarter combined with the increase in revenue from additional agent growth, we believe our cash position and overall liquidity provide us with the adequate runway to grow the business and execute our strategy through operating cash.
Flow breakeven by Q2 of 2024.
We did not purchase any shares in the third quarter under the stock repurchase plan and approximately 4 million remains under the authorization.
Before turning the call back to Josh Let me briefly touch on guidance.
Given the continued uncertainty in the macro environment, we will not be providing guidance for the quarter ending December 31, 2023, we will revisit guidance expectations next year.
With that I'll turn the call back to Josh for closing remarks.
Thank you Marco we remain focused on execution and are taking necessary steps to better position style in the current environment and what's the market recovers I want to thank entire fathom team on their hard work as we navigate this market and continue to serve our clients with that operator, let's open the call up for questions.
We will now begin the question and answer session to ask a question you may have.
Talk to us or if you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two my first question is from Tom White of D. A Davidson. Please go ahead.
Hey, this is why on for Tom Thanks for taking our questions. My first one is for Josh.
Curious whether you guys think this latest round of lawsuits targeting the AAR and more recently a broader set of brokerages might result in any meaningful shake up and where agents decided to hang their license or which platforms. They migrate to.
So I think it's a fantastic question I've been.
On top of the lawsuits actually long before you guys started seeing in the news.
Watching and monitoring it.
The first thing I would say is that I think we're a long time away from any changes actually happened as I mentioned in the call I think it's going to be a while we're going to go into appeals. If we lose there we're going to take over the next the next level, but what I was thinking about this I mean, when you look at some of the claims that were made there was a lot of bias.
Yeah in this lawsuit that unfortunately, the plaintiffs were allowed to share things that they probably shouldn't have been able to watch a lot of share and the defense was not allowed to share things that works.
Strange I mean things that were.
For example, one of the arguments on the claims was the idea that sharing commissions was unethical and unfair.
And yet in the state of Missouri, which is where the lawsuits where it's completely illegal it's actually in the books is being allowed and yet the judge would not allow our.
Hence attorneys to share that with the journey. So I thought that was incredibly strange.
I think theres a lot of a lot of things that happened in the.
Trial that I think if we're able to redo it I get it.
We do.
And then I think things will probably turn out differently, but even if they don't at the end of the day, what I think is going to ultimately happens we're going to see a couple of changes one.
Well, if you look at the listing agreements between the age of the listing agent and the sellers.
It actually says already.
Basically that the commission's negotiable and has a blank us here's how much we're going to pay the buyers' agents and that's negotiable I think the difference is even though it's already there the differences, we'd probably need to make it very clear to the sellers that listen my commissions are negotiable you do not have to pay the buyer's agent.
So I think if we make some of those changes.
And then.
Satisfy a lot of what the philosophy about number one number two you know the idea of commission sharing I think that's it.
I think if the industry goes away from that I think it's gonna be a shame I think it actually hurts the consumer I'm trying not to be biased here, but I do think it hurts the consumers I think it's very we need to be very careful and very thoughtful on the laws and rules would change to make sure we're protecting the consumer along the way.
So at the end of the day, though if if that happens if the seller says Oh wait a minute I don't have to pay 2%, two 5% or 3% or whatever the number is to the buyer's agent.
And then I'm gonna pay less well right now the way it has always worked and the way. It currently works is the buyer's agent actually signs an agreement with the buyer that says if the seller does not pay me this agreed upon.
Upon a mouth, if you agree with when you're going to be liable for that commission and by the way that to US has always been negotiable like the difference as people who've got so used to the idea that that's just the way things are a lot of people don't try and negotiate.
So I think some of that will change.
If that changes if the buyer realizes oh crap I've got to pay the buyer's agents because the seller is not going to pay there might be some steering that happens.
But sorry, Doj, it's not agents steering the consumer may steer them sooner might look at two properties and say well. This property is willing to pay my agent and this one is not willing to pay my agent. Therefore, I'm going to go with that one because I'm going to be on the hook for paying that commission. So that the client may decide to steer you know different ones based on whats going to ultimately costs them less so I think there might be.
Steering so you might see sellers come back and say, okay, well, okay. Some more the regards so let's say that none of that even happens I don't mean to go on too long, but I will say is that if there is a compression for buyers' agents because buyers are just now have to.
Get paid directly from the buyer and the buyer may not have as much money because they have to pay for closing costs and everything else and we.
They see compression happened on the buyer's Agent's Commission if that happens this has been our thesis since the beginning there's been a thesis when I started to solve them.
Where does that agent go to recoup that lost income.
I've said this before I mean same idea if their commissions down 20% simply they ought to move in our fathom. It means that they will actually make 9% more income well the same thing's true if their commission is down 20%.
I come to fathom, they can recoup that so its work smarter not harder so I do think that long term.
There will be five it would be a beneficiary of those changed I don't want to see those changes made so I do think it will hurt the buyers.
And our clients and if they do I think the fathom ends up being a beneficiary of those changes.
Got it. Thank you for the detail I really appreciate it and just one follow up there's been some chatter about how some of these smaller independent brokerages out there are faced with the prospect of another year of low total sales turnover may finally decided to move their businesses over to some of the virtual or lower cost offerings.
Like that and others.
How do you guys make sure that fathom maximizes its capture at the smaller independents are teams if in fact that does happen.
Yeah. It's a fantastic question. So I think you probably saw a recent press release, we put out three press releases just in the last week or so the number of what we call walkover strike work overs kind of like an acquisition, but instead of actually acquiring their business that the broker owners, especially shutting down their operation just moving their agents over.
Times, they'll end up being the managing broker under fathom, sometimes they'll just end up running a team and the rest of the agents are just part of fathom, we're starting to see more and more of these small broker owners coming to US now we are reaching out to a lot as well we've got just an ever increasing number of opportunities now obviously it comes.
Down to you know what was the opportunity cost of that makes sense.
Some of these opportunities we don't have to pay a single dollar for some of them, we do but they are little bit larger operations and moving that business over and we don't have the cost of the actual.
Acquisition, there's a lot of.
A lot less.
And we've got to do with regards to making $2 then you kind of lose matter.
So there's a lot less with doing that process. So our costs are a little bit lower there as well but.
To your point that is happening and we're seeing a lot more people come to us and to make sure that we are one of the biggest recipients of it.
As Marco and I indicated earlier, we've actually been investing more in our recruiting team. We built part one part of our team is actually dedicated to just the small.
Broker owners with 20 agents 70 agents 100 hundred 50 agents and so on.
That you know that that's all they do is they are reaching out to a small broker owners and saying listen we've been where you are are we know what you're going through you don't have to do this alone come over to fathom will students together and.
So that that message resonates with a lot of people who right now are struggling who.
Forget thriving forget surviving there they're barely making it in there they're probably did probably see the writing on the wall. So they either have to do something or just close up shop and.
And by moving her father and allows us to continue to keep their family together allows them to actually make money if theyre coming over as a broker as a managing broker force.
So it can be a real win win for them if they move over to fab.
That's really helpful. Thank you.
The next question is from John Campbell of Stephens, Inc. Please go ahead.
Hey, guys good afternoon.
Good afternoon, how are you I am well. Thank you I'm doing well. Thank you and look forward to seeing you guys next week.
On the brokerage editions, let's stay on that topic real fast obviously your print your press machine has been on fire lately, you've had a flurry of those additions.
Josh you refer to those as work overs I'm, assuming at least the ones of those are all organic additions, so no cash or equity payout.
Well I'll, let mark speak to that part of it.
Yes, so it depends and I.
Great question it depends on the size and in some cases there are some.
While cash part and some stock, but the but again, we're not making acquisitions a weekend, we do implement some signing bonuses for some of the larger ones to make the move but it is a significant lower amount compared to our full acquisition and so the cost is a is there.
Pages for both sides for them and for Us and so we're beginning as I mentioned earlier, we've seen our onboarding starts increased by 25% this quarter and so it's a combination of just a single agents is that while the combination of smaller companies. So I do we both Josh and I do believe that this is going to signet.
In Greece.
And we've seen that already from the interest in having conversations and this is pretty much across the country.
Okay. It makes sense you guys are I'm sure given the conditions are probably a little bit more of a price maker at this point, but.
Wanted to touch also on the agent count additions I think I think in the press release, you might've outlined a couple of those but.
Maybe if you could shortcut us how much of those agent additions here in the third quarter versus those agents coming over into <unk>.
Now the announcements we made on those press releases were all Q4.
All Q4, okay. So that's that's coming okay, great and then Josh you hit on this a couple of different ways, but you know.
As far as the trigger point what is it what exactly would you point to is that is that mostly a macro driven you know just prolonged pressures where people are seeking ways to help grow their business and maybe find ways to reduce costs, you know get better technology or is it maybe a little bit also have kind of growing fears around the legal landscape and potential.
In March.
March golf industry changes.
Are you, referring specifically to the walk over like a target right and why they would move over right. It really comes down to it.
There's a lot of these broker owners, if we're gonna be real lobbies broker owners that are.
If the broker owner themselves have to be producing agents as well. So they may close 2030 homes and grow on their own and they've got 20 or 30 agents that are on their in their company, who each close 510 15 homes per year each.
And so unfortunately that would be.
The agents that they have in their team don't close enough business for them to pay their bills. So that means they have to continue to also produce.
And if their business is down 20% and our Asia business is down 20% a lot of them find themselves in a position where they were making some pretty decent money and now they're actually losing money because we're having to pay for in office space or having to pay for technology for all of their agents and they realize that gosh I've got 20 agents on my team 30 agents my team and I'm actually losing money.
Having to provide them with leads and provide them with technology provide them with training brother and office space and so if they can shutter if they can shed all.
All of those expenses and move on without them and we can now compensate them to be the managing broker for those agents, especially in markets, where we don't already have a presence like in Stockton that group that came over in Stockton.
We've got a presence in nearby but we've not been stocking. So now we've got a great a great operation there.
So it's really been coming down to some money.
They just can't make it on their own and the option is the most case to shut down or join forces and joined forces just makes more sense versus giving up something they worked for so many years to build.
Yeah. It makes sense I'm I feel like you've preached this message for the last couple of years and Unfortunately. It takes you know a fallout in the macro data to see some of those come out, but I think a lot of it's playing out as you've kind of called out on.
On the gross margin maybe this is for Marco but you've got a lot of moving parts. There below the surface you got the fee increases and whatnot.
So hoping you could help us.
Kind of piece out why it sequentially declined as much as it did and then I know again a lot can change as you look out to next year, but maybe if you could give some kind of indication just broadly of what you're expecting out of gross margins for next year.
Sure.
Margin for us is a little bit more complex than other companies because of all the the ancillary businesses and because if you recall.
When agents will reach a certain volume they cap and then transactions go down $250 from fine. So typically Q3, and Q4, you're going to see a little bit of a reduction in gross profit for fab right. Now is that that before there over time because agents are joining us throughout the year that their work itself.
Right. So we will you know we think the gross spot gross by the market.
But it goes back to normal right and and we can see going back maybe 5 million transactions a year across the country and fathom continues to grow I mean, we should see gross profit margin that 13, 14% that's kind of our goal to get to that number. If you look at gross margins now we're looking around 10 and a half at 11%.
But we would like to get to 13, 14% gross margin now that will help once we also get a.
Oh yeah.
Our mortgage company entitled Company to adjusted EBITDA positive right because what happens is once they get to adjusted EBITDA positive as we mentioned earlier you know we're going to get we're going to be able to drive 70 cents on the dollar down to the bottom line right and so our gross profit continues to increase so we think longer term couple of years, we can get to.
The fourth you know could between 14 and 15, something like that and what you really come about that we might be able to get higher than that but that's kind of the when we budget and we forecast. That's the number we're looking for 14 and 15%.
Okay very helpful. Thank you.
Again, if you have a question. Please press Star then one.
Next question is from Darren <unk> of <unk>.
Rock N can please go ahead.
Hey, this is Dylan on for Darren Thanks for taking my questions.
I wanted to sort of start with the with the commentary.
About guidance and not not giving guidance.
So so.
Just sort of walk us through how you get to your.
Other outlook of cash from operations being positive as early as <unk> next year and a return to adjusted EBITDA in one queue when sort of seasonally Q1 transactions are typically lower than they were in <unk>, just sort of where the puts and takes I know you talked about the $1 2 million in income.
Savings.
Yep.
Okay. So let's talk Q1, if you will.
Recall Q1, our adjusted EBITDA.
Q1 of 'twenty to 'twenty three is approximately a negative.
One 4 million.
Okay.
And so that's number one second.
We are implementing cost cutting is up $1 2 million per quarter.
Okay.
So when you look at the negative one 4 million.
Combined with the cost cutting at 1.2 million combined who and keep in mind that Q1 of this year already that's seen a reduction in our in transactions right and now that we added agents go out 2023, we should see an increase in revenue in 2024, so the combination of.
Adjusted EBITDA at a negative one point for Q1 of this year combined with a reduction in expenses about $1 2 million combined with the improvement in our mortgage business and our each insurance business and title business.
And the increase in agents that gives us confidence that we will hit adjusted EBITDA positive in Q1 of 2023 and then if you continue that progress down through Q2, and then you looked at in Q2 of 2023, our adjusted EBITDA was 462000, right and then you implement the $1 2 million.
And that gives us a you know that's the certainty.
Two.
To still hit our operational cash flow breakeven now having said all that this is how we feel today. The market is still somewhat uncertain. A we have seen some progress in the last week or so and interest rates.
The fed the if you look at futures the bond market in futures I think they're projecting a cuts in April may of next year.
Our mortgage business that we said are beginning to see par rate, which is a big indication of that compared to the increase in our mortgage business and when you put all this together English in our business. While we have done in Q1 that the cops are when you put it altogether, we feel fairly confident that we can achieve the goals of our adjusted EBITDA.
Even in Q1 and cash flow brachia operational cash flow break even in Q2.
Thank you and then as a second question.
Obviously, the transaction numbers down sequentially, but could you provide any color on.
Sort of attach rates or take rates that'd be willing to sign them up on some of your ancillary services.
Are you at least being able to see more interest from consumers being talked into using some new services from from agents where were those were those are lives.
Sure.
Look I, there's no question that especially at the end of September.
We had a bump in interest rates that then went all the way to an over 8% and a variety of buyers got stuck in and had to terminate transactions as you know they they start again and are in October.
The mortgage business is a it's tough on the attachment right now because buyers are shopping every possible one eighth of a point. So theres no question that attach rate in the mortgage business has become more difficult as you know as we've seen the increase in the interest rates. So you know one eighth of a point actually you know Ken can.
<unk> be the deciding factor whether someone can close the house, we're not we continue to see as you know.
Decent attach rate for virus and certain for D. I E. If you look at the I E. Our mortgage business, they've been able to increase profit our adjusted EBITDA by 50%, while keeping the revenues the same so it's operational and what happens is because we're getting more business for fathom, we don't have to spend additional dollars.
And regeneration right and so the attach rate in our insurance business has really.
Benefited from that so I would say.
Very good attach rate on insurance, a good attach rate on D. I, a I'm sorry, Oh, there is but but mortgage is tough it's very tough right now on the attach rate because everyone is shopping around one eight of a point and that's just the reality of the 8% mortgages once interest rates can decline.
Through the fix it I think that will that will help us in terms of attach rate.
Got it thank you.
That's it for me I'll pass it on.
Thanks, so much.
So again, if you have a question. Please press Star then one the next question is from Raj Sharma with B Riley. Please go ahead.
Hi, Thank you for taking my questions.
Oh.
How are you guys doing.
And then Raj how are you.
Yeah, I'm doing great hope, you're doing well as well.
Yeah. Thank.
Thank you.
Am I had a couple of questions, which have already been answered and then on the referral rates can you talk about uniform programs and how well, they're doing and how you're kind of measuring them and what percentage of the.
17% agent growth.
Can be attributed to referrals and also can you comment on churn.
Yeah, well, let me I will touch on the kind.
The program itself I'll, let I'll, let Marco I'm not sure how much we were I know its something we havent shared.
Publicly as far as what the actual what percentage was rather what the numbers are of the referrals.
I'm not sure if mark who is willing to go into that he told me he has that detail in front of them.
The program as you know is designed to incur.
We encourage our agents to refer more agents of the company. When we got the first three agents that they refer to they get $250 and stock grants.
And then from there once they get to that fourth agent as long as all four agents when they came to the company close at least at least two transactions.
Some cat for life. So their transaction fees go down from $550 per transaction down $250 per transaction now they start to pay their annual fee.
And they've got any other fees that may come up as well.
<unk> and the rest, but once they get to eight transaction I'm, sorry, eight referrals again, each one closing at least three transactions before they joined.
In a year then they go to free for life now that's no fees whatsoever. The idea was we want to encourage more agents to try to we have a big group of agents that were already referring at least one agent per year, we thought okay. If we roll a program like this.
How many will actually achieve the cap the lives and the free for life compared to how many will at least try how many will go from one to two or from one to three that may never have referred more than one or how many people will would've never referred even before and now at least try to get to cap the license and will add one two.
So the idea was that for every one person that actually achieves capra life we.
May have a 100 more people who actually will.
We will have referred someone who would have never referred someone before and may never actually in the end up achieving capitalize I want them to encourage them to because again, it's it's a win for them and win for us, but unfortunate human nature as you know they've got excite about the programs. Some will refer one two and then give up.
And others will push through and end up getting to just kept for life. We've got quite a few agents who've achieved kept for life a few hoover's.
Achieved free for life, but not that many but if you look at the number of referrals that have happened.
It's gone up dramatically.
The exact number is I don't have off top of my head I know Mark has shared with me not too long ago, but I'm not sure if mark or how's that sure. So I'll turn that over to Marcos to speak more to it.
Yes prior to implementing the program. We are getting are between 30, and 33% referral rate and I'll simply making their program where over 40% referral rate.
We have seen a significant increase in recruiting due to the due to implementing the program.
Late last year.
I think we got some answers yet.
Increased about 25% to 35% higher than what we were seeing before so it's it's been effective I'd love to see it be more effective but.
But I think we're very pleased with the effective tax so far.
It's definitely well worth the squeeze as they say.
Great and then.
And then the churn number is that sequentially lower higher same.
I just realized we didn't actually start that in the scripted way yeah, No sharp turn right turn for the quarter was one 9% so a little higher.
The significant increase came from agents that is zero one transactions, we saw an increase of 73% of agents.
That Q3 of this year compared to Q2 of this year the agents that close you're going one part you know prior when leaving so they.
The increase in churn from typically one point between one four to about 1.9, 74% of that really came in that increase in the zero to one and and if we go to zero to three transactions is probably close to 85% increase so I you know the messages, yes, we lost the appeal more agents.
But the agents that we lost or typically lower producing acres.
Got away, it's right in line with what was happening the industry our industry year over year saw one 6% decrease in agent population.
From end of September to September 2023.
And so you can imagine that obviously, we're not immune to that.
So we felt we probably saw that same one 6% decrease while at the same time, we've been grew by 13%.
That number could have been a little higher because we didn't have that.
Pressure.
Right.
And then thank you and then and then I know that Youre, not youre, not giving guidance and it's a it's a.
While the trial period to give guidance.
It's tough to tell but is there any sort of since and I know you also closed these work overs, which you said happened in Q4, but any sense on what we should assume as ongoing agent growth.
In this environment is it.
Is it is it okay to assume and think that it would be mid teens.
For the next foreseeable few quarters.
I think it's safe we continue I mean, we looked at last quarter.
14% this quarter, 13% I think it's safe to assume that we're going to we can continue to maintain at least that.
Obviously, our goal is to push beyond that I mean, I'm I've been working harder and harder with the team to see if.
If I can help move those numbers higher you know through these work overs, but yeah.
We feel very confident we can at least maintain what we've been sharing them, but our goal ultimately the goal is to increase that dramatically.
Not satisfied with 13% growth by any means.
And a lot of our brands will be very happy with it but we're not we.
Yeah.
We try to be as transparent as possible and that's why we shared the number that all board and stars have increased by 25%.
I Hope we gave you some indication that doesn't mean, they joined the ads I mean, they're starting their on boarding process, but where you know and I think you know we're trying to share even though we're not giving guidance, we're trying to share as much as we can in order to to help you.
Continue to model the business and that's why we shared that 25% increase in onboard and start.
And this was for the month of October or.
That's cute that's Q3 compared to Q2.
Got it sequentially and that's the and that's the agent growth in transactions and number of transactions done is that purely a function of the market.
Or.
Do you try to solve for that in the in the work overs, you accept and the and the agents you acquire or.
You know as your referral rates go up is it safe to assume that you're also the agents are more productive or you have a bigger share.
The transactions would go up any sort of help and that would be good.
So typically Q4 is you know, Florida is a lower quarter right and so you have the you have the seasonality of the industry, which as you know there's a reduction in in Q4 and roughly.
20% or so.
For Q3 to Q4, having said that one of the things that makes this year kind of interesting is that we you know throughout the throughout the year Ah seasonality did not play as much factor this year because of interest rates. So I think what you you know you can look at the typical seasonality.
<unk> of the industry, you can discount some of that as well and for US you know we are adding more agents you can look at the net number of agents quarter over quarter for this whole year. The numbers kept increasing right until we will see greater transactions coming in from these other agents who are joining us right, so, but but there definitely will.
A reduction in our in transactions from Q4 from Q3 to Q4, but you know we we hope that.
It will be in par or perhaps even flat to last year.
And that's kind of the indication that we have right now, but you know I think it's very important to know that this market is very fluid right now.
Anything can happen in this market and there are a lot of other factors that are happening in the world right now that can affect the market as well right and so that's why it's very difficult to give guidance because it's not so much that we're running the business we have visibility into our business. There's so many other factors going on besides given interest rate right what's that.
And in the World overall that we just sell more prudent not to give guidance.
Right right fair enough. Thank you again for answering my questions I will take this offline. Thank you.
Thank you.
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There are no further questions at this time. This concludes our question and answer session I would like to turn the conference back over to Josh Harley for closing remarks.
Thank you for joining our call today and for your interest in Fathom for those of you who are fathom shareholders. Thank you for your trust will continue to work hard and look forward to sharing future updates with you. So would that have a wonderful week.
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