Fathom Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Good evening and welcome to the Fathom Realty Holdings Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Alex Kupchon with Gateway Group. Please go ahead.

Speaker 1

Great. Thank you, operator, and welcome everybody to the Fathom Holdings 2023 Third Quarter Conference Call. I'm Alex Kustom with Gateway Group, Fathom's Investor Relations firm. Before I turn things over to the SaaS and management team, I want to remind 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 conditions, many of which are beyond the company's control, including those set forth in the Risk Factors The next section of the company's Form 10 ks for the year ended December 31, 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.sec.gov.

Speaker 1

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 Fathom's Web With that, I'll turn the call over to Fathom's Founder, Chairman and CEO, Josh Harley. Josh?

Speaker 2

Thanks, Alex. Good afternoon and welcome everyone to our Q3 2023 earnings call. We're pleased to share the recent progress We've made advancing our growth strategy despite the volatility in the interest rates and the broader residential real estate market. I want to start by thanking our Fallon 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 Faubin's history.

Speaker 2

But through the hard work of our team, we've been able to demonstrate that we can adapt and thrive even in the challenging economic times. Before turning the call over to our President and CFO, Marco Fregional, for a detailed review of our financial results, I'd like to touch on a few Key highlights during the quarter and the steps we're taking to adjust to the current environment. During the Q3, 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 and agent growth in a very difficult market environment.

Speaker 2

During the Q3, Falcon delivered revenue of $93,500,000 which was in line with our guidance range. We also completed approximately 10,303 real estate transactions and while down 15% from the prior year's 3rd quarter transaction number of 12,077, we do feel good about this number when compared to 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.

Speaker 2

We also increased our agent network 13% to over 11,333 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 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'll continue to do so going forward. Elevated interest rates continue to put pressure on home affordability, so the recent decline in mortgage rates Following the Federal Reserve's November rate pause is encouraging. While we don't have a crystal ball to predict if we're if we've reached the bottom of this current cycle of the industry or if rates will start to normalize in the near term, what we do know is that the industry will eventually recover and Fathom is well positioned to continue growing market share regardless of when that happens.

Speaker 2

Let me provide an update on our Realty business and why we remain well positioned today to grow our agent network and also expand our reach during this difficult market environment. Fathom Realty 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.

Speaker 2

Today, Fathom Realty 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 struggle 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 3rd 3 walkovers so far in Q4 in Louisiana, Massachusetts and California. We promise to grow across all 50 states as well as deeper into each state And we continue to take steps to deliver on that promise.

Speaker 2

Our 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 Fathom's proprietary Cloud based software Intel Agent 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 walkover opportunities and believe that we We'll continue to attract high quality agent teams and brokerages to our unique low cost and disruptive model. So while most of our peers are experiencing flat or Planning agent numbers domestically, our agent value proposition remains compelling and allows us to take share now to better position Our cost to acquire 1 agent during Q3 We remain below at approximately $1,000 making our breakeven on each agent less than the $11.50 that we'll earn back on the first sale. We also maintain strong retention rates, which we believe exceptionally positive news given the backdrop of agents leaving the industry.

Speaker 2

As most of you have no doubt seen, the National Association of Realtors along with several of our country's largest brokerages We're found liable in a recent legal bible 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 compress agent commissions. Unlike our peers who are Who are accused of conspiring and colluding to keep commissions high, we do not put pressure on our agents to maintain higher commission percentages.

Speaker 2

The fact is Our flat fee commission model does not change regardless of whether an agent charges 3% or 2% or even 1%. Lastly, let me briefly touch on our path to profitability profitable growth as we as in the steps that 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 right size our cost structure for the current environment and better position Fathom for improved Operating leverage when the residential real estate market rebounds.

Speaker 2

With current market conditions in mind, we're working with each of our business heads to reduce company wide Expenses by a total of $1,200,000 per quarter going forward, which we expect to see the full benefit of in Q1 of next year. By further rightsizing 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 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.

Speaker 2

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.

Speaker 3

Thank you, Josh. I'll start a detailed review of our Q3 2023 results and then we'll finish with a discussion on guidance. 3rd quarter revenue declined 16% year over year to $93,500,000 compared with $111,300,000 for last year's Q3. This decrease was primarily attributed to a 15% decrease in transaction volume, along with a 3% decrease in Average home prices during the quarter. GAAP net loss for the Q3 was $5,500,000 or a loss $0.34 per share compared with a loss of $6,000,000 or a loss of $0.38 per share for the 2022 Q3.

Speaker 3

Adjusted EBITDA loss and non GAAP measure was $253,000 in the 3rd quarter 1st is adjusted EBITDA loss of $2,300,000 for the Q3 of 2022. The $2,000,000 improvement in adjusted EBITDA This quarter was largely driven by a reduction in expenses and additional agent fees that went into effect in January. Notably, this improvement was 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. We believe that going forward, after Q1, we'll continue to deliver approximately 70% of the increase in gross profit to the adjusted EBITDA line.

Speaker 3

G and A expense was $9,800,000 in the 3rd quarter or 10.5 percent of revenue compared with $11,500,000 or 10.4 percent of revenue for the same period a year ago. Again, to be noted, G and A did not meaningfully increase as a percentage of revenue despite a In total, our operations and support, technology and development and G and A expenses decreased by almost $2,000,000 from $15,400,000 in Q3 of 2022 to $13,400,000 in Q3 of 2023. This reduction reflects the benefits of our expense reduction initiatives implemented earlier this year and will continue to see a decrease next quarter into Q1 of As Josh mentioned earlier, we plan to reduce company wide expenses by a total of $1,200,000 per quarter going forward to further right size the company's expenses in the current market environment. Expenses related to marketing activities were $796,000 for the 3rd quarter compared to $1,500,000 for last year's Q3. The decrease in marketing expenses related to leveraging internal resources and optimizing advertising expenditures.

Speaker 3

Now I'll spend some time reviewing our business segment results in more detail. We closed 10,303 real estate transactions in the quarter, a 15% decrease from last year's Q3, but below the 20% reduction the overall market experienced. We ended Q3 with 11,333 agents, which represents a 13% growth rate over Q3 of 2022, while the National Realtor saw membership decline of approximately 1.6%. We have seen an increase of 25% in 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 $200,000 compared to $105,000,000 for the same period last year, which represents a 16% decrease, of which About 3% is related to decrease in prices of homes and 13% is attributed to decrease in transaction.

Speaker 3

Adjusted EBITDA in real estate division is approximately $1,600,000 an increase of $1,000,000 compared to adjusted EBITDA of 560 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 $1,900,000 in the 3rd quarter compared to $2,800,000 in the prior year period. Mortgage adjusted EBITDA for Q3 was a loss of $293,000 compared to an adjusted EBITDA loss of 400 and 1,000 for the same period last year. Our team continues to identify opportunities to reduce expenses to right size our mortgage business going forward as well as increased revenues by recurring additional loan officers. Going forward, we do expect our mortgage business to increase given the addition of the Elite Financial Group and its Moreover, recently, we've seen some positive movement in interest rates.

Speaker 3

This improvement allows borrowers 64% in mortgage applications in Q3 of 2023 versus Q3 of last year. DIA in our insurance business generated revenues of $1,700,000 for the quarter compared to revenues of $1,800,000 for the same period a year ago. This represents a A decrease of approximately $100,000 Adjusted EBITDA increased 50% from $370,000 in Q3 of 20 to over $558,000 in Q3 of 2023. This reflects the great work our DI A team has done in Q3 to adjust expenses while varistatin had revenue of $883,000 for the quarter compared to about $958,000 revenues for Q3 of 2022. Adjusted EBITDA was a negative $22,000 compared to a Negative $24,000 adjusted EBITDA in Q3 of 2022.

Speaker 3

Now moving to our Technology segment. Revenues increased 19% to $836,000 compared to $702,000 for last year's Q3. Adjusted EBITDA loss for the quarter increased by 38% From a loss of 372,000 in the Q3 of last year to a loss of 514,000 in the current quarter. This represents an increased investment in Asian Technologies. Our LiveVite team continues to increase its footprint 125,000 neighborhood reports being created.

Speaker 3

We continue to focus on our balance sheet given the dynamic real estate market condition. Our cash burn for the quarter was $2,500,000 and was largely due to $1,300,000 decrease in accounts payable, $500,000 in additional investments in our SaaS platforms for our agents, plus increases in prepaid and certain financing outpace. We ended the quarter with a cash position of $6,600,000 and given the aforementioned cost reductions of $1,200,000 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 Q3 under the stock repurchase plan and approximately $4,000,000 remains under the authorization. Before turning the call back to Josh, let me briefly touch on guidance.

Speaker 3

Given the continued uncertainty in the macro We will not be providing guidance for the Q4 ending December 31, 2023. We will revisit guidance expectations next year. With that, I'll turn the call back to Josh for closing remarks.

Speaker 2

Thank you, Marco. We remain focused on And are taking necessary steps to better position Fathom in the current environment and once the market recovers. I want to thank the entire Fathom team on their hard work

Operator

We will now begin the question and answer session. The first question is from Tom White of D. A. Davidson. Please go ahead.

Speaker 3

Hey, this is

Speaker 4

Wyatt 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 NAR and more recently a broader set of brokerages Might result in any meaningful shakeup in where agents decide to hang their license or which platforms they migrate to?

Speaker 2

I think it's a fantastic question. I've been on top of the lawsuits actually long before you guys started seeing it in the news and watching and monitoring it. The first thing I would say is that I think we're a long time away from any changes actually happening. As I mentioned in the call, I think it's going to be a while. We're going to go into appeals.

Speaker 2

If we lose there, we're going to go to the next level. But What I think about this, I mean, when you look at some of the claims that were made, there was a lot of bias in this lawsuit That unfortunately, the plaintiffs were allowed to share things that they probably shouldn't have been able to share and the defense was not allowed to share things that were A little strange. I mean things that were for example, one of the arguments when the claims was the idea that sharing commissions was unethical and unfair. And yet in the state of Missouri, which is where the lawsuits were, it's completely illegal. It's actually in the books as it's being allowed and yet the judge would not allow the defense Attorneys to share that with the jury.

Speaker 2

So I thought that was incredibly strange. I think there's a lot of things that happened in the trial that I think if we're able to redo it, get a redo, 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 happen is we're going to see a couple of changes. 1, if you look at the listing agreements between The listing agent and the sellers, it actually says already basically that Commission is negotiable and has a blank of here's how much we're going to pay the buyer's agent and that's negotiable. I think the difference is even though it's already there, The difference is we probably need to make it very clear to the sellers that listen, my commissions are negotiable.

Speaker 2

You do not have to pay the buyer's agent. So I think if we make some of those changes, then we'll satisfy a lot of what this loss Number 2, the idea of commission sharing, I think that's I think if the industry goes away from that, I think it's going to 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 consumer. So I think it's very we need to be very careful and very thoughtful On the laws and rules we changed to make sure we're protecting consumer along the way. So at the end of the day though, if that happens, if the seller says, oh, wait a minute, I don't have to pay 2% to 2.5% or 3% or whatever number is to the buyer's agent, then I'm going to pay less.

Speaker 2

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 amount that you agree with, then you're going to be liable for that commission amount. And by the way, that too has always been negotiable. I think the difference is people has got so used to the idea that that's just the way things are that a lot of people don't try to 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.

Speaker 2

But sorry, DOJ, it's not agent steering, the consumer may steer them. The consumer might look at 2 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 Different ones based on what's going to ultimately cost them less. So I think there might be some steering.

Speaker 2

So you might see sellers come back and say, okay, we'll pay some more. The regards, 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' agents 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 may see compression happen on the buyer's agent commission. If that happens, this has been our thesis since the beginning.

Speaker 2

This has been a thesis since I started Fathom. Where does that agent go to recoup that lost income? I said this before, I mean, same idea if their commission is down 20%, simply the act of moving to fathom Means that they'll actually make 9% more income. Well, the same thing is true if their commission is down 20%. If they come to fathom, they can recoup So it's work smarter, not harder.

Speaker 2

So I do think that long term, there will be Fabry will be a beneficiary of I don't want to see those changes made. So I do think it will hurt the buyers and our clients. But if they do, I think the fathom ends up Being a beneficiary of those changes.

Speaker 4

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 faced with the prospect of another year of low total sales turnover May finally decide to move their businesses over to some of the virtual or lower cost offerings like Fathom and others.

Speaker 4

How

Speaker 2

do you

Speaker 4

guys make sure that Fathom maximizes its capture of these smaller independents or teams if in fact this does happen?

Speaker 2

Yes, it's a fantastic Question. So I think you probably saw a recent press release. We put out 3 press releases just in the last week or so. The number of What we call walkovers, right? Walkovers kind of like an acquisition, but instead of actually acquiring their business that the broker owner It's basically shutting down their operations, just moving their agents over.

Speaker 2

Sometimes 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 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.

Speaker 2

Now, obviously, it comes down to what was opportunity cost, does it make sense? Some of these opportunities, we don't have to pay a single dollar for. Some of them, We do, but they're a little bit larger operations and moving the business over and we don't have the cost of the actual acquisition. There's a lot of a lot less So we've got due in regards to making due diligence, I'm kind of losing that term. So there's a lot less we have to do So our costs are a little bit lower there as well.

Speaker 2

But to your point, that is happening and we're seeing a lot more people come to us. And to make sure that we're 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 of our team is actually dedicated to just a small broker owners with 20 agents, 70 agents, 100, 150 agents and so on. That's all they do is they're reaching out to these small brokers and saying, listen, We've been where you are. We know what you're going through.

Speaker 2

You don't have to do this alone. Come over to Fathom, let's do this together. And so that message resonates with a lot of people who right now are struggling, who forget thriving, forget surviving, they're barely making it and They probably see the writing on the wall, so they either have to do something or just close-up shop. And by moving to a fathom, it allows them to continue to keep their family together, Allows them to actually make money if they're coming over as a broker as a managing broker for us. And so it can be a real win win for them if they move over to Fathom.

Speaker 4

That's really helpful. Thank you.

Operator

The next question is from John Campbell of Stephens Inc. Please go ahead.

Speaker 5

Hi, guys. Good afternoon.

Speaker 2

Good afternoon. How are you?

Speaker 5

I am well. Thank you. I'm doing well. Thank you. Look forward to seeing you guys next week.

Speaker 5

On the brokerage additions, let's stay on that topic real fast. Obviously, your press machine has been on fire lately. You've had a flurry of those additions. Josh, you referred to those as walkovers. I'm assuming at least the ones of late, those are all organic additions, so no cash or equity payouts?

Speaker 2

I'll let Marco speak to that part of it.

Speaker 3

Yes. So it depends, John, a great question. It depends on the size. In some cases, there are some Small cash part and some stock. But again, we are not making acquisitions.

Speaker 3

We can we do implement some signing bonus For some of the larger ones to make the move, but it is a significant lower amount compared to a full acquisition. And so the cost is very advantageous for both sides, for them and for us. And so we're beginning as I mentioned earlier, we've seen our onboarding starts increase 25% this quarter. And so it's a combination of just single ages as well as a combination of Smaller company. So I do we both Josh and I do believe that this is going to significantly increase, and we're seeing that already from the interest And having conversations.

Speaker 3

And this is pretty much across the country.

Speaker 5

Okay. Makes sense. You guys are, I'm sure, given the Conditions probably a little bit more of a price maker at this point. But I want to touch also on the agent count additions. I think in the press release you might have Outline a couple of those, but maybe if you could shortcut us how much of those agent additions hit in the Q3 versus those agents Coming over into 4Q.

Speaker 2

The announcements we made on those press releases were all Q4.

Speaker 5

All Q4. Okay. So that's coming. Okay, great. And then Josh, you hit on this a couple of different ways, but as far as the trigger point, What exactly would you point to?

Speaker 5

Is that mostly macro driven, just prolonged pressures where people are seeking ways to help grow their business and maybe Find ways to reduce costs, get better technology or is it maybe a little bit also of kind of growing fears around the legal landscape and potential Large scale industry changes.

Speaker 2

Are you referring specifically to the walkovers like the trigger point of why they would move over? Right. It really comes down to There's a lot of these broker owners, if we're going to be real, a lot of these broker owners that are if the broker owner themselves have to be producing agents as well. So they may close 20, 30 homes a year on their own and they've got 20 or 30 agents that are on their in their company who each close 5, 10, And so unfortunately that the agents that they have in their team don't close enough business for them to pay their bills. And our agents business is down 20%.

Speaker 2

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 they're having to pay for an office So having to pay for technology for all their agents and they realize that, gosh, I've got 20 agents on my team and 30 agents on my team and I'm actually losing money because I'm having to provide them With leads and provide them with technology and provide them with training for an office space. And so if they can shutter, if they can shed All of those expenses are moving or fathom 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 That group that came over in Stockton, we've got a presence nearby, but we're not in Stockton. So now we've got a great operation there. So that it's really been coming down to money. They just can't make it on their own and the option is in the most case to Shut down or join forces and joining forces just makes more sense versus giving up something they worked so many years to build.

Speaker 5

Yes, makes sense. I feel like you've preached this message for the last couple of years. And unfortunately, it takes a fall out in the macro to see some of this come out. But I think a lot of it is playing out as you kind of called out. On the gross margin, maybe this is for Marco, but you've got a lot of moving parts there Below the surface, you have the fee increases and whatnot.

Speaker 5

I was 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 the 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?

Speaker 3

Sure. Gross margin for us is a little bit more complex than other companies because of all the ancillary businesses. And because if you recall, when agents reach a certain volume, they cap and then transactions go down to $150 from $5.50 So typically Q3 and Q4, you're going to see a little bit of reduction in gross profit for Fathom, right? Now We've said that before that over time because agents are joining us throughout the year that they work itself out, right. So We think the growth path as the market sort of goes back to normal, right?

Speaker 3

And we can see going back to maybe 5 1,000,000 transactions a year across the country and Fathom continues to grow. I mean, we should see gross profit margins at 13%, That's kind of our goal to get to that number. If you look at gross margins now, we're looking around 10.5%, 11%, But we would like to get to 13%, 14% gross margin. Now that will help once we also get Our mortgage company and title company to adjusted EBITDA positive, right? Because what happens is once it gets adjusted EBITDA positive, As we mentioned earlier, we're going to get we're going to be able to drive $0.70 on the dollar down to the bottom line, right?

Speaker 3

And so our gross profit continues to increase. So We think longer term, couple of years, we can get to the between 14%, 15%, something like that, and we'll feel really comfortable about that. We might be able to get higher than that, Well, that's kind of when we budget and we forecast, that's the number we're looking for, 14%, 15%.

Speaker 5

Okay, very helpful. Thank you.

Operator

The next question is from Darren Aftahi of ROTH MKM. Please go ahead.

Speaker 6

Hey, this is Dylan on for Darren. Thanks for taking my questions. Wanted to sort of start With the commentary about guidance and not giving guidance. So Just sort of walk us through how you get to your other outlook of cash flow from operations being positive as early as 2Q of next year and a return to adjusted EBITDA in 1Q when sort of seasonally Q1 transactions are Typically lower than they are in 4Q? Just sort of where are the puts and takes?

Speaker 6

I know you talked about $1,200,000 in cost savings.

Speaker 3

Yes. Okay. So let's talk Q1. If you recall Q1, our adjusted EBITDA for Q1 of 2023 is approximately negative $1,400,000 Okay. And so that's number 1.

Speaker 3

2nd, we are implementing cost cuttings of $1,200,000 per quarter. Okay. And so when you look at the negative $1,400,000 combined with the cost cutting of 1,200,000 Combined who and keep in mind that Q1 of this year already had seen a reduction in transactions, That's right. And now that we added Aegis throughout 2023, we should see an increase in revenue in 2024. So the combination of adjusted EBITDA and negative $1,400,000 for Q1 of this year combined with a reduction in expenses of $1,200,000 Combined with the improvement in our mortgage business and our 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.

Speaker 3

And then if you continue that progress down to Q2 And then you looked at in Q2 of 2023, our adjusted EBITDA was $462,000 right? And then you implement the $1,200,000 then that gives us The certainty to hit operational cash flow breakeven. Now Having said all that, this is how we feel today. The market is still somewhat uncertain. We have seen some progress in the last week or so In interest rates, the Fed, if you look at futures, the bond market in futures, I think they're projecting cuts In April, May of next year, our mortgage business that we said are beginning to see par rates, which is a big indication of that Compared to the increase in our mortgage business, so when we put all this together, the increase in our business, what we've done in Q1, the cuts, When you put it all together, we feel fairly confident that we can achieve the goals of adjusted EBITDA breakeven in Q1 and cash flow breakeven operational cash flow breakeven in Q2.

Speaker 6

Thank you. And as a second question, obviously, the transaction number is down sequentially, but Could you provide any color on sort of attach rates or take rates, however you want to define them on some of your ancillary services? Are you at least being able to see more interest from consumers being talked into using some of your services from agents

Speaker 3

Sure, sir. Look, there's no question that especially the end of September, we had a bump in interest rates that then went all the way to over 8%. A variety of Buyers got stuck and had to terminate transactions. They start again in October. The mortgage business is tough on the attach rate right now, because buyers are shopping every Possible oneeight of a point.

Speaker 3

So there's no question that attach rate in the mortgage business has become more difficult as we've seen the increase in the interest rate. 1 eighth of a point actually can be the deciding factor whether someone can close the house or not. We continue to see Decent attach rate for Verus and certainly for DIA. If you look at DIA, our mortgage business, they've been able to increase profit, Adjusted EBITDA by 50%, while keeping the revenues the same, so it's operational. And what happens is because we're getting more business from Fathom, We don't have to spend additional dollars in lead generation, right?

Speaker 3

And so the attach rate in our insurance business has really benefited from there. So I would say a very good attach rate on insurance, a good attach rate on DIA I'm sorry, Verus, but mortgage is tough. It's very tough right now on the attach rate because everyone is shopping around 1 eighth of a point And it's just a reality of 8% mortgages. Once interest rates can decline to the 6s, I think that will help us in terms of attach rate.

Speaker 6

Got it. Thank you. That's it for me. I'll pass it on.

Speaker 3

Thanks, Noah.

Operator

The next question is from Raj Sharma of B. Riley. Please go ahead.

Speaker 7

Hi. Thank you for taking my questions. How are you guys doing?

Speaker 2

Good, Raj. How are you?

Speaker 7

Yes, I'm doing great.

Speaker 3

Hope you're doing well as well.

Speaker 7

Yes. Thank you. I am. I had a couple of questions which have already been answered. And then, on the referral rates, can you talk about your referral programs and How well they're doing and how you kind of measuring them and what percentage of the 17% agent growth Can be attributed to referrals and also can you comment on churn?

Speaker 2

Yes. Well, let me I will touch on the kind of the program itself. I'll let Marco, I'm not sure how much we were I know it's something we haven't Publicly as far as what the actual what percentage rather what the numbers are of the referrals. I'm not Sure, if Marco is willing to go into that detail, if he has that detail in front of him. The program, as you know, is designed to Encourage our agents to refer more agents to the company, right?

Speaker 2

We got the first three agents that they refer, they get $250 in stock grants. And then from there, once they get to that 4th agent, as long as all 4 agents, when they came to the company close at least 2 transactions, They become cat for life, so their transaction fees go down from $5.50 per transaction down to $150 per transaction. Now they still have to pay their annual fee, when they've got any other fees that may come up as well, Commercial and the rest. But once they get to 8 transactions, I'm sorry, 8 referrals, again, each one closing at least 2 transactions before they joined in a year, then they go to free for life. Now that's no fees whatsoever.

Speaker 2

The idea was we want to encourage more agents to try, Right. We have a big group of agents that were already referring at least 1 agent per year. We thought, okay, if we roll out a program like this, How many will actually achieve the capital life and the free for life compared to how many will at least try? How many will go from 1 to 2 or from 1 to 3 that may never have referred more than 1? Or how many people will Would have never referred to you before and now at least try to get to Capital Life and we'll add 1, 2, right?

Speaker 2

So the idea was that for every one person that actually We may have 100 more people who actually will have referred someone who would have never referred someone before And may never actually end up achieving capitalized. I want them to, I'd encourage them to, because again, it's a win for them and a win for us. But unfortunate human nature is they get excited about the program. Some will refer 1, 2 and then give up and others will push through and end up getting to Cap for Life, we've got quite a few agents who've achieved Cap for Life, a few who've 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.

Speaker 2

I don't know what the exact number is. I don't have that top of my head. I know Marco shared with me not too long ago, but I'm not sure if Marco has that to share. So I'll turn that over to Marco to speak more to it.

Speaker 3

Yes. Prior to implementing the program, we were getting between 30% 33% referral rate. And after implementing the program, we're over 40% referral rate. So we have seen a significant increase in recruiting Due to the due to implementing the program late last year.

Speaker 2

Yes, an increase of about 25% to 35% higher than what we were seeing before. So it's been effective. I'd love to see it be more effective, But I think we're very pleased with the effect it's had so far. It's definitely well worth the squeeze as they say.

Speaker 7

Great. And then the churn number, is that sequentially lower, higher, same?

Speaker 2

I just realized we didn't actually put that in the script, did we?

Speaker 3

Yes. No, churn for the quarter was 1.9%, So a little higher. But the significant increase came from agents that did 0 and 1 transactions. We saw an increase of 73% Of agents, that Q3 of this year compared to Q2 of this year, the agents that closed 0 to 1 Prior when leaving. So the increase in churn from typically 1.3%, 1.4% to about 1.9%, 74% of that really came in that increase in the 0 to 1.

Speaker 3

And if we go to 0 to 3 transactions, it's probably close 85% increase. So the message is, yes, we lost a few more agents, but the agents that we lost were typically Lower producing agents.

Speaker 2

Which was quite a way, it's right in line with what was happening in the industry. Industry year over year saw 1.6% decrease and agent population from end of September to end of September 2023. And so you can imagine that obviously we're not immune to that. So we probably saw that same 1.6% decrease, while at the same time we've been grew by 13%. I think that number could have been a little higher if we didn't have that pressure.

Speaker 7

Right. And then thank you. And then I know that you're not giving guidance and it's a volatile Period to give guidance and it's tough to tell. But is there any sort of sense and I know you also Close these walkovers, which you said happened in Q4. But any sense on what we should assume As ongoing agent growth in this environment, is it okay to assume and think that it would be mid

Speaker 2

I think it's safe that we continue I mean, we look 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've been working harder and harder with the team to see if I can help move those numbers higher through these walkovers. But we feel very confident we can at least maintain what we've been sharing.

Speaker 2

But our goal ultimately, our goal is to increase that dramatically. We're not

Speaker 3

We try to be as transparent as possible and that's why we shared the number that our onboarding starts have increased by 25%. And so that hopefully also gives you some indication. That doesn't mean they joined the ad. That means they're starting the onboarding process. But we're and I think 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 help you continue to model the business.

Speaker 3

And that's why we shared that 25% increase in onboarding starts.

Speaker 7

And this is for the month of October or?

Speaker 3

That's Q3 compared to Q2.

Speaker 7

Got it, sequentially. And that's the agent growth. The number of transactions done, is that purely a function of the market or Do you try to solve for that in the walkovers you accept in the agents you acquire or As your referral rates go up, is it safe to assume that you're also the agents are more productive where you have a bigger share Your transactions would go up. Any sort of help in that would be good?

Speaker 3

So typically Q4, as you know Q4 is a lower quarter, And so you have the seasonality of the industry, which is there's a reduction in Q4. And roughly, it's 20% or so Q4 Q3 to Q4. Having said that, one of the things that makes this year kind of interesting is that we throughout the year, Seasonality did not play as much factor this year because of interest rates. So I think what you can look at the typical Seasonality of the industry, you can discount some of that as well. And for us, we are adding more agents.

Speaker 3

If you look at the net number of agents quarter over quarter For this whole year, the number kept increasing, right? And so we'll see greater transactions coming in from these other agents who are joining us, right? So But there definitely will be a reduction in transactions from Q4 from Q3 to Q4. But 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 I think it's very important to know that this market is very fluid, right?

Speaker 3

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 even interest rate, right? What's happening in the world overall That we just felt more prudent not to give guidance.

Speaker 7

Right, right. Fair enough. Thank you again for

Operator

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.

Speaker 2

Thank you for joining our call today and For those of you who are Fathom shareholders, thank you for your trust. We'll continue to work hard and look forward to sharing future updates with you. So with that, Have a wonderful

Operator

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

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Earnings Conference Call
Fathom Q3 2023
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