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Fathom Holdings Inc. (NASDAQ:FTHM) Q4 2022 Earnings Call Transcript

Fathom Holdings Inc. (NASDAQ:FTHM) Q4 2022 Earnings Call Transcript March 22, 2023

Operator: Good day! And welcome to the Fathom Holdings, Fourth Quarter and Year End 2022 Earnings Conference Call. All participants will be in listen-only mode. . Please note that this event is being recorded. I would now like to turn the conference over to Alex Kovtun, with Gateway Group. Please go ahead, sir.

Alex Kovtun: Thank you, operator, and welcome everyone to Fathom Holdings 2022 fourth quarter and year end conference call. I'm Alex Kovtun with Gateway Group, Fathom's Investor Relations firm. Before I turn things over to the Fathom 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 section of company's latest Form 10-Q, and its upcoming Form 10-K and other company filings made with the SEC, copies of which are available on the SEC's website at www.sec.gov.

As a result of these forward-looking statements, actual results may differ materially. Fathom undertakes no obligation to updated 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 website. With that, I'll turn the call over to Fathom's Founder, Chairman and CEO Josh Harley. Josh.

Josh Harley: Thank you, Alex. Good afternoon, and welcome everyone to our fourth quarter and full year 2022 earnings call. I want to start by thanking our agents and employees across each of our businesses for their ongoing hard work and dedication during this challenging time for our industry. Their commitment to supporting our growth, vision and serving others in the communities we operate in is a testament to the Fathom culture. Our agents have worked hard to continue to grow and thrive, even with all the market uncertainties, and we're proud of how they have adjusted and overcome this constantly shifting market. As a testament to their success, Fathom Realty continued to climb in the latest RISMedia Power Broker Report. For 2022 Fathom Realty ranked 12th in sales volume, up from 16th in 2021 and we also ranked 10th in the total number of transactions in 2022.

Now, before turning the call over to our President and CFO, Marco Fregenal for a detailed review of our financial results, I'd like to touch on a few key highlights from our results and why we remain optimistic about the business and year ahead, regardless of what happens in the housing market. 2022 was an extremely challenging year for Residential real-estate as rapidly increasing mortgage rates, combined with limited inventory led to an all-time low in housing affordability and a double digit decline in transactions in the U.S. industry wide. Although we felt this pressure within our business, we still managed to deliver solid financial results. For the full year 2022, total revenue grew 25% as Fathom Realty continued to take market share from legacy brokerage firms, despite the volatile environment.

Fathom completed approximately 44,700 real-estate transactions in 2022, up approximately 14% compared to the prior year. Importantly, the double digit percentage increase in transactions on our platform compares favorably to the entire U.S. Residential Real-Estate market, which according to the National Association of REALTORS saw an overall transaction decline, 18% in 2022. We also increased our agent network to over 10,000 agents at the end of the year, which further validates that we're winning through innovation and a truly disruptive business model continues to resonate amongst agents. Even with today's economic uncertainty and subdued real-estate market conditions, we believe that Fathom has a long, positive runway ahead of us. So let's start first with our Realty business.

During the last housing recession, specifically in 2010, I started Fathom as an asset light technology enabled business, because I wanted to build a company that can endure all market environments, while empowering agents to realize their full potential. Today Fathom Realty operates in 37 states and the District of Columbia, and we anticipate entering all 50 states within the next 18 month. Our presence continues to grow across the country, and I believe that our opportunities and ability to serve agents are greater than they ever have been. Fathom Realty is among the fastest growing residential real-estate brokerages in the United States. We are uniquely positioned to offer an industry leading agent commission model without having to sacrifice the agent experience, which is especially important for agents who are price sensitive during the downturn in the industry.

Our focus is not just on adding more agents, but also helping our agents become more productive with the right training and technology, to close more sales and ultimately earn more money. Even though we charge a small fraction of what other brokerages charge their agents, our Realty business delivered six consecutive quarters of adjusted EBITDA profitability prior to this last quarter, where we saw an increased number of real-estate transactions terminate. On a positive note, existing home sales in the United States increased 14.5% in February, ending a 12 month streak of declines. While we are hopeful that trends continue to move in the right direction, we remain focused on what we can control, and we believe we are positioned to thrive both today and into the future.

The technology that powers our Realty operations remains a key point of differentiation that sometimes gets overlooked. As we've highlighted before, by owning our technology, we can generate long term savings and ultimately charge our agents far less than others with a competitive agent commission structure, while building a model to generate margins similar to or even better than our peers over time. In addition, we license our proprietary technology to outside agents and brokerage through a recurring revenue subscription model, further increasing the long term revenue potential for Fathom and the differentiation of our brand within the industry. Today, there are over 750 brokerages, licensing our technology and data, touching over 450,000 agents.

Now let me touch on our agent trends and steps we are taken to grow the Fathom network. We focus toward a great degree on serving our agents so that we attract and retain the best in the industry. When it comes to providing the greatest value to agents, we believe that Fathom wins hands down. When you combine our competitive agent commission structure, new agent referral program and the technology and training we offer to agents, we believe it's a very strong proposition that is resonating well in this environment. Last quarter, we launched an enhanced agent referral program called Free4Life, and revised agent commission structure. Both initiatives were well received and our agents' referral program continues to have a positive impact on our recruiting efforts.

Even with the changes that we implemented on January 1 to the commission structure, agents will still save an average of well over $2,500 per sell versus the industry average permission split. We're also excited about our new agenda referral program, which we believe is the most attractive incentive industry, as it's based solely on an individual agent's efforts. So while the market is in a down turn currently, we remain well positioned to attract agents, help grow their book of business and put more money in their pockets, especially in a time where inflation is placing pressure on their bank accounts. We can make this claim given our track record of supporting agents on our platform. Historically, the average agent who joins Fathom increases their sales transactions by 49% within four years of joining, and the average lifetime value of an agent is currently over $21,000 on just the Realty side of the business, demonstrating the power of our model.

Our cost to acquire one agent during Q4 remained low at approximately $1,000, making our breakeven on each agent less than the $1,150, which we'll earn back on their first sale. We also maintained our strong retention rates, which are approximately twice the national average and remain exceptionally strong given the backdrop of agents leaving the industry over the last year. During Q4 2022, our attrition rate averaged approximately 1.6% per month. More importantly, 90% of agents who left Fathom sold four homes or less per year. Given the current market conditions and historical examples, we do anticipate the industry attrition rate to increase as more agents struggle. We certainly will not be immune as may €“ and may see an increase as well, but we believe they'll continue to be primarily from low producing agents.

Now during 2022 we also launched several initiatives to bring together our agents, including our inaugural Team Think Tank to discuss strategies for building and running successful real-estate teams. We also launched our Veteran Division to provide specialized resources, support and opportunities for Fathom's current and former military service members, as well as veteran home buyers and sellers and those still on active duty. We've also received a lot of positive feedback from our Chaplin C program, and we're exploring ways to expand it, in ways to touch even more of our people. These are just a few of the examples of the many ways in which we support agents and our communities. Now, in spite of the market conditions, we remain optimistic about the year ahead and believe that Fathom as a whole is on track for revenue agent transaction growth in 2023.

goodluz/Shutterstock.com

As we look ahead, we expect to turn the corner towards profitable growth in the coming quarters while starting to really show the operating leverage in our business. While our mortgage, title and insurance companies are relatively small today, they have the potential to dramatically increase revenue and profitability per transaction over time. As we navigate the current challenging market, Fathom has continued to identify opportunities to optimize expenses across our business segments. We had already reduced expenses by approximately $3 million per quarter, which we should see the full benefit of in the first quarter of 2023. Importantly, we believe these cost reductions were made without sacrificing our ability to growth. Fathom was built to thrive in both good times and challenging times.

We remain focused to reaching total company adjusted EBITDA breakeven in the second quarter of 2023 and generating cash low in the third quarter of 2023. Let me repeat that, because I think it's important. We remain focused on reaching total company adjusted EBITDA breakeven in the second quarter of 2023 and generating cash flow positive in the third quarter of 2023, even in today's market environment. With that, I'd like to pass over to Marco for a financial update.

Marco Fregenal: Thank you, Josh. I'll start with a detailed review of our fourth quarter and full year 2022 results, and then I'll finish with the discussion on guidance. Fourth quarter revenue declined 12% year-over-year to $83.4 million compared with $95.5 million for last year's fourth quarter. For the full year, revenue increased 25% to $413 million, compared to $330.2 million in the prior year. As we all know, the industry as a whole experienced a significant decrease in revenues in Q4 due to the full impact of the increase in interest rates during the latter part of the year. GAAP net loss for the fourth quarter was $9.9 million, compared with a loss of $3.6 million for the 2021 fourth quarter. For the full year GAAP net loss was $27.6 million, compared to a loss of $12.5 million in 2021.

Adjusted EBITDA loss, a non-GAAP measure was $5.9 million in the fourth quarter, versus adjusted EBITDA loss of $2 million for the fourth quarter in 2021. For the full year, adjusted EBITDA loss was $12.2 million, compared with the loss of $8.2 million in 2021. GAAP expense was €“ I'm sorry, G&A expense was $8.5 million for the quarter or 10.2% of revenue compared with $9.1 million or 9.5% of revenue for the same period a year ago. For the full year, G&A expense was $43.2 million or 10.4 million of revenue €“ 10.4% of revenue compared to $32.7 million or 9.9% of revenue in 2021. On a sequential base, G&A was reduced by $3 million from $11.5 million in the third quarter of 2022. Our gross profit was $6.4 million in the fourth quarter, down from $9.3 million for the fourth quarter of 2021.

Gross profit decreased to 7.7% of revenue in the fourth quarter compared to 9.8% for the same period a year ago. For the full year, gross profit grew to $49.7 million, which is about 9.9% of revenue compared to $29.7 million or 9% of full revenue for 2021. Expenses related to marketing activities were $1.3 million for the 2022 fourth quarter and $5.2 million for the full year. The increase in marketing expenses related to the increase in recruiting activities, opening new markets and launching the ancillary businesses. Now I'll spend some time reviewing our business segment results in more detail. As with all real-estate companies, Q4 is a difficult quarter for our real-estate division. We closed approximately 9,250 real-estate transactions in the fourth quarter, a 14% decrease from last year's fourth quarter.

While our full year included approximately 44,700 real-estate transactions, a 14% increase relative to the prior year. Now to add some additional color to that, while we only saw an increase of 14%, the overall real-estate market was down 16%. Revenue for the quarter was $79.5 million and revenue for the full year was $390.6. Adjusted EBITDA in the real-estate decision was a loss of $1.3 million, making the first time in the last seven quarters that we had a negative adjusted EBITDA. This was primarily due to the negative impact from the increase in real-estate - interest rates. Our mortgage business generated revenues of $1.3 million in the fourth quarter compared to $2.7 million in the prior year period. The mortgage adjusted EBITDA for Q4 was a negative $1.2 million.

Our team has done a great deal of work in reducing expenses to right-size the expenses for the mortgage business going forward. We have also done a great deal of work in launching new marketing programs to increase the attach rate, and look forward to sharing those results in Q1. VIA , our insurance business generated revenues of $1.3 million in Q4 and a total of $6.1 million for the year, with adjusted EBITDA of negative $55,000 for the quarter and a positive adjusted EBITDA of $530,000 for the year. In Q4, we've seen an increase in the attached rate of our insurance business, exceeding 7% of Fathom's by-side transactions in North Carolina and in Texas. Verus Title had revenues of $614,000 for the quarter and $3.9 million for the year. The Title adjusted EBITDA for the quarter was a negative $266,000 and a negative $218,000 for the full year.

We have seen an increase in file starts in Q2, mostly related to an increase in the market activities, as well as attach rate. Now moving to our technology segment, revenues in the fourth quarter totaled $705,000, which is consistent with Q4 of 2021. Adjusted EBITDA loss for the quarter in our technology segment was $350,000 compared with the loss at $225,000 in the fourth quarter of 2021. Our LiveBy team has significantly increased its footprint across the country to reach 400 MLS and 450,000 agents. LiveBy powers more than 3.5 million community pages with over 100,000 neighborhood reports created. We continue to focus on our balance sheet and ended the quarter with a cash position of $8.3 million, which we believe provide us with the adequate run away to grow the business and execute our strategy through profitability, especially given that we're laser focused on our goal to reach adjusted EBITDA positive by Q2 of 2023.

We did not purchase any shares in our fourth quarter under our stock repurchase plan, and approximately $40 million remains under the authorization. Now, before turning the call back to Josh, let me briefly touch on guidance. Given the uncertainty in the macro environment, we are only providing guidance for the first quarter ending March 31, 2023. For the first quarter we expect revenues in the range of $75 million to $77 million and adjusted EBITDA loss in the range of $1.3 million to $1.5 million. As a reminder, guidance is forward looking, which as we noted in the beginning of the call is subject to risks and uncertainties. I like to thank the entire team across all our companies. Q4 was a difficult quarter for everyone, and I could not be more grateful and proud of the leadership and hard work demonstrated by our leaders and team members doing these challenging times.

With that, I'll turn the call back to Josh.

Josh Harley : Thank you, Marco. Despite the volatility in the markets, we remain focused on execution and getting to cash flow profitability in the third quarter of 2023. As we turn the corner on profitability, we believe that 2023 will be a pivotal year for Fathom. With that, operator, lets open the call for questions.

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