Fathom Holdings Inc.

Good day and welcome to the Fathom Holdings fourth quarter and year-end 2021 earnings conference call. All participants will be in a 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 questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. please note that this event is being recorded. I would now like to turn the conference over to Roger Pondell with Pondell Wilkinson. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Fathom Holdings' 2021 fourth quarter and year-end conference call. I'm Roger Pondell with Pondell Wilkinson, Fathom's investor relations firm, and it is my pleasure shortly to introduce the company's founder and chief executive officer, Josh Harley, and Fathom's President and Chief Financial Officer, Marco Fresnall. Before I turn things over to Josh, I want to remind all 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 factor section of the company's IPO registration statement, its latest 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 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 website. And with that, it is my pleasure to turn things over to Josh Harley. Josh.

Thank you, Raj. And of course, thank you to everyone who's on today's call. Our entire team really appreciate your support and your faith in us. Before we review the significant progress Fathom has made since our last call, I want to thank our agents and employees for their ongoing hard work, not just toward our vision, but also helping us grow. while generating value for all of our stakeholders. I also want to say thank you to our Fathom family for their unwavering dedication to creating a culture built on service, and more specifically, serving and placing others first. I cannot begin to express how important that is and the role it's played in our success. One of the things I love is when I hear agents say that they join Fathom for the commission, but they stay for the culture. That fact plays a significant role in why we have one of the lowest agent attrition rates among residents of real estate brokerages. If you want a true representation of whether Fathom agents are happy, our low agent attrition rate is the best indicator. I'm extremely proud that our average monthly attrition rate across all of 2021 was only 1.5%, half of the industry average. A quarter after quarter and year after year, our results continue to demonstrate the power of our truly disruptive business model. And I'm proud to be here sharing our significant growth. We're winning through innovation and by delivering real long-term value to our agents, employees, clients, and, of course, our shareholders. For the fourth quarter, year over year, revenue grew by 79%. Our agent count grew by over 48%. and our transactions grew by over 43%. Importantly, for the third quarter in a row, our real estate business was adjusted to be a bit profitable. I don't believe that any other publicly traded residence or real estate brokerage can make that claim, not even at 30,000 transactions per quarter. While we're continuing to invest capital to enhance our foundation for the sustained long-term growth of our new business lines, those investment dollars are quickly becoming a smaller percentage of our ongoing expenses. We believe that Fathom is on track to continue our strong revenue, agent, and transaction growth, and with the strategic and thoughtful investments we're making in each of our business lines, we look forward to also demonstrating strong, solid profitability in the near future. There are still some who do not fully understand who we are yet, but with time, I believe that more investors will come to understand our business and value us accordingly. If you really dig into our story, you'll realize that not only has Fathom generated impressive performance every year for over a decade, we still have an extraordinary runway ahead of us. A lot of companies sacrifice profitability for growth, but I'm proud to say that we do not have to operate that way. We believe that we can achieve strong profits over time while continuing to grow our business at high rates. Our cash position is strong, And we plan to continue to focus on achieving the positive operational cash flow. Marco, our president and CFO, does a great job pressing the proverbial no button, keeping our spending in check as we march toward profitability. Our steadfast discipline allows us to be good stewards of the money with which you've entrusted us. We believe that Fathom is on track to continue our impressive growth rate for the foreseeable future while also achieving profitability quickly. And we look forward to proving it. The question is, how do we get there? Since going public, we've substantially increased our revenue, continued the expansion of our agent network, maintained strong agent retention, entered new geographic markets, and completed strategic acquisitions designed to further solidify our market position. That's a lot to accomplish in less than a year and a half, but it demonstrates our focus, our commitment, and our ability to get things done. With the addition of our own in-house mortgage, title, and insurance companies, along with additional SaaS offerings, we now have the potential to dramatically increase our revenue and, importantly, our profitability per transaction. I want to reiterate that these companies are not joint ventures. We fully own them. That means that we're not giving up any of the revenue and profitability generated by these businesses, and it means that we've got greater control to set a high bar for our quality of service. That matters a lot. It matters to our clients. It matters to our agents. And it should matter to you because that's how we believe that we can achieve a greater attach rate for these growing businesses. As I mentioned earlier, we grow our agent count by over 48% year over year. We believe that a big part of that is because Fathom continues to have one of the most attractive agent commission plans and one of the most complete offerings in the industry. When it comes to providing the greatest value to agents, We believe that Fathom wins, hands down. Our focus is not just on adding more agents, but also helping those agents become more productive, close more sales, and ultimately earn more money. We believe that we are accomplishing that by providing more training and more technology to help our agents get in front of more buyers and sellers. As well, we're helping agents reduce the amount of time required to manage the transaction process, giving them even more time to network and sell. To prove that point, based on our internal data, agents who join Fathom increase their sales by an average of nearly 49% after four years. In fact, many of our agents report doubling their sales after the first year with Fathom. In addition, as we grow our agent base and familiarize our agents with our newly acquired brands, we are inherently growing our referral opportunities, not just for our realty business, but for all brands. One of the beautiful things about our incredible agent growth is that our cost to acquire one agent during the period remained at approximately $985, making our breakeven on each agent less than the $1,100 we earned on their first sale. I also want to point out that the average lifetime value of an agent is currently over $21,000 on just the real estate side of the business. The ratio of that lifetime value to our cost of agent acquisition is over 21X. And that does not take into account the revenue we're generating from our mortgage title insurance companies or potential revenue from the lead that we can generate from our agents. Fathom is in a unique position to potentially grow even faster at a time when the real estate market is turbulent. I truly believe Fathom could benefit from a downed housing market and that we have the potential to accelerate our growth in 2021, turning a headwind for most real estate companies into a tailwind for us. Moreover, Fathom could prove to be a hedge against other real estate brokerages whose revenue, transactions, and agent count could suffer from these headwinds. I want to spend just a minute on this point because I think it's very important. While most analysts do not predict a housing bubble, they do believe that the industry could see fewer homes sold in 2022 as compared with 2021 due to rising home prices, rising interest rates, and a shortage of inventory. While this is not good for the majority of real estate companies, Fathom offers real estate agents who join Fathom from other brokerages the ability to net more income than they did in 2021, even if they sell fewer homes. And that's important. That could result in more agents joining Fathom if they begin to feel the squeeze. In other words, Fathom could further accelerate our growth while other brokerages struggle. There are only two ways for a real estate agent to ultimately net more income. Increase their revenue by closing more sales, which is hard to do in a down market, or decrease their expenses. We believe that we can help agents do both. The vast majority of real estate agents, the largest expense is not their marketing. It's the splits they pay their brokerage, with many paying over $30,000 per year. In real estate, there's an adage that suggests that splits only matter in the absence of value. However, what if all things were equal? With Fathom, an agent can get all of the technology, training, resources, and support they're used to getting at one of the legacy brands, yet save an average of $12,000 or more per year in commission splits paid to the brokerage. In essence, an agent could close 20% fewer homes and yet earn more income than they did the year before. With a potential market shift looming, Fathom could be highly attractive to agents. Fathom could also see greater market share per agent over time as our agents increase their total income on each sale. With more income per sale, Fathom agents have more money available to invest in marketing and growing their businesses. When agents with legacy brands are struggling to earn a real living due to fewer sales and lower income, that may create a need to pull back on their marketing spend in order to pay their bills. Fathom agents could potentially invest more in their marketing than their peers, helping increase their market share and Fathom's market share overall. In fact, we're already seeing some of that benefit through our career site, which saw a 181% increase in unique visitors in 2021 compared with 2020. We believe that is a strong indicator of future growth. Now, going back to shipping markets, it's important to note that if home prices fall, many of our competitors may see a strain on their profitability because they take a percentage split on every transaction but that would not be the case for fathom we earn this the same transaction fee from the age regardless of whether the agent earns a ten thousand dollar commission or an eight thousand dollar commission we believe this should allow us to continue to capture market share from real estate companies with old traditional commission models as our agent base grows those agents generally bring more transactions with them. And as we add more transactions, we have more opportunities to capture mortgage, title, and insurance revenue. Fathom's ability to attract an ever-increasing number of real estate agents by providing them with greater income potential along with technology, training, and support they need to grow their business is even more evident today, especially during these unprecedented and changing times. Now, as I mentioned earlier, Our results for Q4 and all of 2021 were outstanding. Clearly, Fathom is moving in a very positive direction, attracting higher-pricing agents and selling more homes in higher-priced markets, which could significantly benefit our mortgage, title, and insurance companies, as well as the leads business that we're building. Fathom Realty recently grew its geographic reach with the addition of New Hampshire and Montana. And as I'm sure you saw from recent press release, We also expanded our Utah presence through the acquisition of iPro Realty's 435 agents. We're now licensed in 36 states and D.C. with plans to open several more markets in the coming months. Ultimately, our long-term plans are to expand into all 50 states and eventually Canada. Now, one more thing I should point out is the announcement we made in December about raising our fees for Fathom agents, which took effect in January of this year. The annual fee for agents was raised by 20% from $500 to $600 per year, and the transaction fees were raised 11% from $450 to $500 for the first 12 completed transactions. We're happy to report that these increases did not negatively affect our agent retention or growth rate since implementing this change, most likely because our average agents are still saving around $12,000 or more as compared to traditional brands. Now, I want to talk about our Intel agent next and the advantage that our platform creates. The obvious advantage being that it allows Fathom to reduce costs per agent over time while improving operational efficiencies. Our technology platform allows us to significantly reduce our reliance on third-party technology providers. In fact, as of this month, we're officially using all Fathom-built technology for our realty operation, which includes agent and brokerage websites, CRM, transaction management, personal management, and more. Outside of finance reporting systems and social media products, there isn't much else that we're using outside of Intelligent for our realty business. Intelligent gives us the power to control the full lifecycle of the home buyer and seller, gaining a greater understanding of our data and how to use it to further improve our offerings while ultimately generating leads for our agents. Plus, we can now identify potential clients for our mortgage insurance and power companies long before they're under contract as they raise their hands requesting more information as our sas company live by is also making some incredible headway with the recent launch of live by local we now provide tech and or data to more than 750 companies across the country with over a hundred thousand agents touching our product our mortgage operation in compass lending is currently licensed in across 41 states in bc We've made significant investments in our mortgage operation and are already seeing a very positive return on that investment in the form of improved tax rate and market share. As you saw, we recently announced the acquisition of Cornerstone First Financial out of Washington, D.C. market. Cornerstone brought a unique marketing approach to Encompass Lending, which we plan to roll out across the country in each of the markets where Encompass has a foothold. Our title company, Bears Title, is growing exceptionally as well. And I could not be more proud of our team's effort. VAERS is licensed now in 29 states, and we're seeing impressive improvements in our tax rate every single month. In fact, our Q4 title revenue alone was as high as what they generated by, what was generated by VAERS in all of 2020 prior to the acquisition. Industry-wide, online notarization was up 547% in 2022, I'm sorry, 2020, And while 2021 numbers for this online trend are not out yet, the industry is seeing that trend continue. It's important to note that this trend benefits our title model, as more agents accept this new virtual or remote norm. Our insurance company, Dagley Insurance, is currently licensed in 47 states and D.C., and we are gaining traction with Fathom agents every single month. One important statistic to note is that over 43% of the insurance quotes we sent out in 2021 were converted into policies. We believe that over time, our insurance operation could help us improve our revenue and profitability during the seasonally slower winter months and help us through the cyclical nature of the real estate industry. Total personal lines grew by over 17.5% in the fourth quarter year over year, and total premiums grew by over 16%. But keep in mind, we did not acquire Dagley Insurance until April of 2021, so we feel very good about our progress so far. Now, as you know, our mortgage, title, and insurance operations were all added through strategic acquisitions, and we're working diligently to integrate each business fully to ensure strong attach rates. We also made several strategic real estate brokerage acquisitions in a very short time period. We expect that any future acquisitions we consider will primarily be focused around opening new real estate markets or expanding our footprint in smaller markets, current markets, to hit critical mass faster. Each acquisition we pursue is expected to be immediately accretive to our business as we continue on a path of profitability. We intend to continue growing quickly, and while acquisitions are not our primary growth strategy, we will use acquisitions strategically as opportunities arise. Now, final points, and then I'll turn it over to Marco. Over the last three quarters, our real estate business was adjusted EBITDA positive, which we believe demonstrates that we're on the right path. We have strategically built an end-to-end integrated real estate brokerage service company, offering residential real estate brokerage mortgage title insurance and SaaS services. We continue to enhance our underlying proprietary technology in addition to expanding our SaaS offerings. And in 2022, we'll continue to focus on strengthening our infrastructure and business integration as we seek to expand our footprint and our family of brands, both organically and via acquisitions. Our focus has been and will continue to be to execute our long-term vision of being among the top three residential real estate brands in the country. Now, on our last call, we shared that assuming we reach between 100,000 to 110,000 transactions per year, We believe that we can generate a just a bit of exceeding $40 million. While we're not prepared to provide a timeline for this transaction milestone, we do feel confident we can continue to maintain the strong agent and transaction growth we've demonstrated consistently for over a decade. Now, as you can tell, we believe that Fathom is a great future, and we're incredibly excited and proud. With that, I will turn the call to Marco. Marco, it's all yours.