Fathom Holdings Inc. (NASDAQ:FTHM) Q4 2023 Earnings Call Transcript
Fathom Holdings Inc. (NASDAQ:FTHM) Q4 2023 Earnings Call Transcript March 14, 2024
Fathom Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Fathom Holdings Inc. Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Kovtun with Gateway Group. Please go ahead.
Alex Kovtun: Great. Thank you, operator and welcome everyone to the Fathom Holdings fourth quarter and year-end 2023 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 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 the company's Form 10-K for the year ended December 31, 2022, as well as our latest Form 10-Qs, the company’s upcoming 10-K for the year ended December 31, 2023 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 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 website. So with that, I'll turn the call over to Fathom's President and CEO, Marco Fregenal. Marco?
Marco Fregenal: Thank you, Alex, and good afternoon everyone, and a warm welcome to everyone joining us for our fourth quarter and full year 2023 earnings call. I'm incredibly proud of our Fathom family and I'm grateful for your unwavering dedication, hard work, and commitment to excellence. Your efforts have played a pivotal role in shaping Fathom into the exceptional company it is today. Despite the challenges facing 2023, our team's resilience and determination have been truly remarkable. I am deeply thankful for all of you and your significant contributions to our continued success. I am proud of what Fathom has accomplished in 2023. Despite the challenging conditions in the residential real estate market, our team's commitment to our growth strategy allowed us to navigate the obstacles and make significant strides to position Fathom favorably for the upcoming year.
Fathom's total fourth quarter revenue was $74.1 million, a decrease of 11.2% from $83.4 million for the 2022 fourth quarter. The 10.1% decrease in brokerage revenue was primarily due to the decline in brokerage transactions, but it was partially offset by the 20.5% increase in Fathom's ancillary services, particularly in Fathom's mortgage business. Total revenue for 2023 was $345.2 million, a decrease of 16% from $412.9 million for 2022. Adjusted EBITDA loss, a non-GAAP measure improved to a total loss of $2.9 million in the fourth quarter of 2023, compared with an adjusted EBITDA loss of approximately $5.9 million in the fourth quarter of 2022. The improvement in adjusted EBITDA reflects our continued commitment to achieving and remaining adjusted EBITDA positive moving forward.
For the full year, adjusted EBITDA loss was $4.1 million in 2023 versus an adjusted EBITDA loss of $12.2 million for 2022. Our focus on market share expansion from legacy brokerage firms throughout the year remains steadfast. Notably, we experienced a substantial 13.7% growth in our agent network for the full year, which stands out compared to the reported domestic agent growth to all but one of our public peers. Both ongoing agent referral efforts and introduction of walkovers in key regions including Louisiana, Massachusetts, California, field this growth. In the fourth quarter of 2023, we implemented various programs to enhance agent recruitment, including the reintroduction of our producer perks in October, a program designed to attract high performing agents that had yield promising early results.
We also observed a remarkable increase of over 200% in visitors to Fathom's careers page, surging from 2,100 visitors in Q3 of 2023 to an impressive 6,600 visitors in Q4 of 2023. Additionally, our onboarding starts continued to gain momentum in Q4 of 2023, increasing by over 7% from Q3 of 2023. Our agent growth in the fourth quarter further validates that we're winning through innovation and truly disrupted business model that continues to resonate among agents. Our new agents will value Fathom's proprietary cloud based software intelliAgent. They will also benefit from having additional Fathom services to offer their clients, including mortgage and insurance services as we continue to help our agents grow their businesses. Our cost to acquire one agent during Q4 remain low at approximately $1,050, making our break-even on each agent less than 1,150 will earn on their first sale.
We also maintain a strong retention rate, which is exceptionally positive news given the backdrop of agents leaving the industry. Fathom completed approximately 38,139 real estate transactions in 2023, a decline of approximately 14.6% compared to the previous year. Despite the challenges posed by elevated interest rates, which impacted transaction volumes across the real estate market and led to the lowest level of existing home sales in almost three decades, Fathom exhibit resilience. We also observed year-over-year transaction growth in key markets such as Nevada, Missouri and Utah. This notable accomplishment underscores our ability to seize market share from legacy brokerage firms, showcasing our adaptability in a volatile environment. Looking ahead, we're optimistic about the anticipated impact of our producer perks program on agent transactions in 2024.
This initiative will further enhance our market position and contribute to sustained growth in the coming year. Now, let's discuss our mortgage business. While acknowledging its significant negative impact on our financial performance in 2023, our dedicated team has exerted tremendous effort to turn things around in 2024. One notable stride is our strategic expansion of our mortgage operations in Texas by acquiring Austin based Elite Financing Group. This move fortifies our existing presence in Dallas for work market and extends our reach into Austin, enabling us to cater to a broader clientele across Texas. Recognizing the increase in demand in Latino segment, we have established a dedicated division within Encompass Lending Group to work closely with our Latino division at Fathom.
Thus far, we're encouraged by the results for the first two months of this year, which showed an impressive 89% increase in file start compared to the same period in 2022. This positive momentum fuse our optimism for our mortgage business continued success and growth in the months ahead. While Q4 is a challenging quarter for Verus Title, we are encouraged given the 16% increase in file starts for the first two months compared to last year. Moreover, we expect our recent announcement regarding the joint venture with agents in Texas to significantly improve our attachment rate and EBITDA. During 2023, we're pleased that Fathom continue outperforming many of its peers regarding agent growth and transactions in a challenging market environment.
Although, the residential real estate industry remains difficult, we believe that our future remains bright and by continuing to grow our agent base, we're positioning Fathom to continue success once the industry rebounds. We are making meaningful progress, advancing our growth strategy, expanding our agent network, optimizing our business for profitable growth and creating an industry-leading commission model that continues to resonate well in the current real estate environment and will continue to do so going forward. Now, let's briefly discuss our goals for 2024. First, we remain focused on accelerating Fathom's agent growth with the goal of returning a historical agent growth rate of 25% to 30%. Moving ahead, we focus more on attracting high quality agents, teams and brokerages as our agent value proposition remains compelling in the current environment and our pipeline of opportunities remains robust.
We believe we are the most attractive home for agents in the long-term as we help them ultimately earn more money with an industry-leading flat fee commission split to agents. Our goal remains to be one of the top four or five brands in every market where we operate and we continue to progress towards those targets. We are now in 41 states and we’re striving to be in all 50 states by the end of the year. We also plan to launch various marketing programs and new technology enhancements in the coming months to provide greater value to our agents, improving productivity and ultimately make them more successful. Our second goal is to achieve operating cash flow breakeven as early as the second quarter of 2024, while remain committed to returning to positive adjusted EBITDA for the full year in 2024.
During the fourth quarter, we announced we revised an agent commission structure that we believe will add an estimated $3.1 million in EBITDA for 2024. We believe this slight increase in agent fees will have a minimal impact on our agents, while helping Fathom achieve our objectives and provide our agents with an ever improving agent offering. We also remain focused on identifying additional opportunities for operational efficiency to further reduce our expenses. In Q4 of 2023, we implemented cost reductions totaling approximately $1 million per quarter, which should take full effect in Q1 of 2024. More importantly, this cost reduction should not sacrifice our growth trajectory as we have increased the size of recruiting team and plan to continue growing the recruiting team in 2024 to support agent growth efforts.
Now turning our attention to ancillary businesses, we recognize the potential for these businesses to significantly augment our revenue enhance profitability per transaction over time. Early indicators for 2024 are promising, suggesting the initiatives implemented in Q4 are starting to yield positive results. Notably, we are witnessing a substantial increase in file sarts for our mortgage and title businesses. This positive trend aligns with our strategic objectives and reinforces our belief in our ancillary businesses long-term viability. We do expect both businesses to outpace the growth of our core brokerage business and contribute in a significant manner to our EBITDA in 2024 and beyond. This week, we also announced a new joint venture between our title subsidiary and Fathom Realty top producers in Texas called Verus Title Elite to improve agent productivity and ultimately enhance profitability.
This strategic collaboration should elevate agent productivity, enhancing profitability for all parties involved. Verus Elite aims to provide our agents with elevated support, creating platforms that foster success and presents lucrative opportunities for increased earnings. By forging this joint venture, we’re confident we can further bolster attach rates going forward. This will be the first of such joint ventures and we look forward by creating others in the coming months. Finally, we continue to focus our balance sheet to navigate the current environment and position Fathom for growth opportunities in 2024. We believe our current cash position and overall liquidity provides us with a runaway to grow the business and execute our strategy through operating cash flow breakeven.
In the last few quarters, we have seen an increase in the number of smaller real estate brokerages interested in merging with larger companies. We believe that market consolidation will increase in 2024 and 2025. It is with that in mind that we’ll continue to be opportunistic in our approach in acquiring smaller brokerages. In summary, we remain encouraged by the trends we’re seeing across our business, despite a more challenging quarter and year for Fathom and real estate industry. Even with today’s economic uncertainty and subdued real estate market conditions, we believe that Fathom has a long and positive runaway ahead and we expect to turn the corner towards profitability growth in the coming quarters, while starting to show the operating leverage in our business.
We are entering 2024 in a position of strength and optimism for the opportunities in front of us. With that, I’d like to pass the call over to Joanne Zach, our Senior Vice President of Finance, so she can discuss our financial results in more detail.
Joanne Zach: Thanks, Marco. I’ll start with a detailed review of our fourth quarter and full year 2023 results. Fourth quarter total revenue declined 11% year-over-year to $74 million compared with $83 million for last year’s fourth quarter. This decline was primarily due to a 13% decrease in brokerage revenues that was partially offset by a 21% increase in ancillary revenues, which were primarily related to our mortgage business, which benefited from slightly declining interest rates in the later part of Q4 and from our strategic expansion of mortgage operations in Texas. For the 2023 year, total revenue decreased 16% to $345 million compared to $413 million in the prior year. For the year, brokerage revenues declined by 17% and ancillary revenues declined by 11%.
Overall revenues are lower in 2023 compared to 2022 due to lower transaction volumes attributable to rising home prices and for much of the year surging mortgage rates that made 2023 the least affordable market in decades. GAAP net loss for the fourth quarter 2023 was $8.4 million or a loss of $0.50 per share compared with a loss of $9.9 million or a loss of $0.63 per share for the 2022 fourth quarter. Our net loss was lower in Q4 2023 due to improved margins on our brokerage transactions attributable to our fee increase initiated in January 2023 and to our cost savings efforts that began in 2022 and carried forward in 2023, partially offset by an increase in stock compensation costs and increases in interest and income tax expenses. GAAP net loss for the full 2023 year was $24 million or a loss of $1.47 per share, compared with a GAAP net loss of $27.6 million or a loss of $1.73 per share for 2022.
This reduction in net loss was attributable to our strategic cost saving efforts in all areas, which included reductions in headcount, reductions in third-party vendor costs and payroll reductions for the management team, partially offset by an increase in stock compensation cost, an amortization of intangible assets and increases in interest and income tax expenses. Adjusted EBITDA loss, a non-GAAP measure was $2.9 million in the 2023 fourth quarter versus adjusted EBITDA loss of $5.9 million for the fourth quarter in 2022, primarily due to a $1.5 million reduction in net loss, which included an increase in non-cash stock compensation cost of $1 million and an increase in income tax expense and interest expense of $0.3 million and $0.1 million, respectively.
For the full year 2023 adjusted EBITDA loss was $4.1 million versus an adjusted EBITDA loss of $12.2 million for 2022 due to a $3.6 million reduction in net loss, which included an increase in non-cash stock compensation cost of $3.9 million and an increase in non-cash depreciation and amortization of $0.6 million. G&A expense totaled $10.1 million for the 2023 fourth quarter, a decrease of 6.3% compared with $10.8 million for the fourth quarter of 2022. General and administrative expenses totaled $38.8 million for the full 2023 year, a decrease of 10.3% compared with $43.2 million for the full 2022 year due to our cost cutting initiatives, partially offset by a $2.5 million increase in stock compensation cost in 2023 compared to 2022. On a sequential basis G&A increased by $300,000, primarily due to the additional G&A brought on by a mortgage operations expansion in Texas and to increased expenditures related to agent recruiting.
Expenses related to marketing activities were $0.9 million for the fourth quarter of 2023 compared to $1.3 million in the fourth quarter of 2022. For the full year 2023 marketing expenses decreased by $1.9 million to $3.3 million in 2023 compared to $5.2 million for the full year 2022. The 28.5% and 35.8% reduction in marketing expenses in Q4 and for the full year, respectively, reflect the benefits of our expense reductions implemented in late 2022 and early 2023. Now I’ll spend some time reviewing our business segment results in more detail. As with all real estate companies Q4 was a difficult quarter for our real estate division. We closed approximately 8,290 real estate transactions in the quarter, an 11% decrease from last year’s fourth quarter.
For the full year, we closed approximately 38,140 real estate transactions, a 14.7% decrease relative to the prior year. We ended the fourth quarter with 11,795 agents, which represented a 13.7% growth rate over the fourth quarter of 2022, while The National Association of Realtors saw a membership decline of approximately 1.6%. We have seen an increase of 26% in onboarding starts in year-to-date over Q4, which should result in an increase in the number of agents joining Fathom going forward. Revenue for the Real Estate division was approximately $69.4 million in the fourth quarter compared to $79.5 million for the same period last year, which represents a 12.8% decrease attributable to a decrease in transactions in the price of homes. Adjusted EBITDA income in the Real Estate division was approximately $0.2 million in Q4 2023, an increase of $1.5 million compared to adjusted EBITDA loss of $1.3 million in Q4 of 2022.
For the full year, adjusted EBITDA income was $5.7 million in 2023 compared to $2 million for the full year 2022. These improvements were achieved despite the decrease in transactions for Q4 2023 and for the 2023 year and reflect our increase in fees implemented in January 2023 and the favorable impact of our continued cost cutting measures. Our mortgage business generated revenues of $1.8 million in Q4 2023 compared to $1.3 million in the prior year period. Mortgage adjusted EBITDA for Q4 2023 was a loss of $0.8 million compared to an adjusted loss of $1.1 million for the same period last year. For the 2023 year, although our mortgage business revenues declined by $1.1 million to $7.3 million compared to $8.3 million in the prior year. Adjusted EBITDA loss for 2023 improved to $1.9 million compared to a $2.9 million adjusted EBITDA loss in 2022.
This is due to continued strategic cost cutting measures. Our team continues to identify opportunities to reduce expenses to right size our mortgage business going forward, as well as to increase revenues by recruiting additional loan officers. DIA, our insurance business generated revenues of $1.4 million for the quarter and a total of $6.3 million in revenues for the year. DIA had positive adjusted EBITDA of $0.2 million for the 2023 quarter and $1.6 million for the full 2023 year, compared to adjusted EBITDA loss of approximately $0.1 million for the 2022 fourth quarter and $0.5 million of adjusted EBITDA income for the full year 2022. Verus Title had revenues of $0.7 million for the quarter and $3.1 million for the year. Verus Title’s adjusted EBITDA for the 2023 quarter was a negative $0.2 million and a negative $0.6 million for the full year.
We anticipate that our new Texas joint venture, scheduled to commence business in early Q2 2024 and similar joint ventures with our top producing real estate agents will add meaningful revenues and adjusted EBITDA for our title business. Moving to our Technology segment. Revenues increased 10% to approximately $0.8 million compared to $0.7 million for last year's fourth quarter. Adjusted EBITDA loss increased from a loss of $0.2 million in the fourth quarter of last year to a loss of $0.5 million in the current quarter reflecting our increased investment in managing and enhancing our technology platform. Our LiveBy team has significantly increased its footprint across the country to reach over 245 MLSs and 420,000 agents at the end of the quarter.
LiveBy powers more than 4 million community pages with over 125,000 neighborhood reports created. We continue to be keenly focused on our balance sheet given the dynamic real estate market conditions. We ended the quarter with a cash position of $7.4 million, which includes the $4.2 million in net proceeds from the offering we completed in December. We did not purchase any shares in the fourth quarter under the stock repurchase plan and approximately $4 million remains under that authorization. With that, I will turn the call back over to Marco for closing remarks.
Marco Fregenal: Thank you, Joanne. We remain focused on executing and taking necessary steps to better position Fathom in the current environment in preparation for when the market recovers. I want to thank the entire Fathom team on its hard work as we navigate this market and continue to serve our clients. With that operator let's open the call for questions.
See also 30 Most Spoken Languages in the World in 2050 and 20 Best Products For Acne-Prone Skin in 2024.
To continue reading the Q&A session, please click here.
