Fathom Holdings Inc.

Good day and welcome to the Fathom Holdings first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then 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 this event is being recorded. I would now like to turn the conference over to Roger Pondell with Pondell Wilkinson. Please go ahead.

Thank you, Matt, and welcome, everyone, to Fathom Holdings' 2022 first quarter conference call. I'm Roger Pondell with Pondell Wilkinson, Fathom's investor relations firm, and it is my pleasure today to introduce the company's founder and chief executive officer, Josh Harley, and Fathom's president and chief financial officer, Marco Freschanal. 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 factors section of the company's latest Form 10-K, and subsequent Form 10Qs 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, management will be discussing adjusted EBITDA, a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most recently comparable GAAP measure is included in today's press release, which is now posted on Fathom's website. And with that, I will turn things over to Josh Harley. Josh?

Thank you, Roger, and of course, thank you to everyone who's on today's call. Our entire team deeply appreciate your support and, of course, your faith in us. Before we review the significant business and financial progress FABEN has made since our last call, I want to thank our agents and our employees for their unwavering hard work and success in moving us forward toward our vision and, of course, in helping us grow as a company. Quarter after quarter, our results continue to demonstrate the power of of our truly disruptive business model. And I'm proud to be here sharing the reasons why we have and believe we'll continue to achieve significant growth. We're winning through innovation and by delivering real long-term value to our agents, our employees, our clients, and our shareholders. Now, the latest real trends brokerage rankings that came out reported that Fathom Realty is now the sixth largest independent real estate brokerage in America and the 10th largest brokerage overall. which includes franchises. Over the last four years, we've jumped from the 16th spot to the 11th to the 9th, and now the sixth largest. And there's no, and that's, by the way, that's for a very good reason why we're skyrocketing up the chart, namely due to the fact that the value we provide agents who join Fathom is unmatched by our peers. I once heard someone state that an agent's commission split only matters in the absence of value. But what if all things were equal in regards to technology and resources, support, et cetera? Then splits matter a lot. And that's why I believe we're winning. There's really nothing outside of empty offices that our peers can give their agents that we cannot. And yet we can offer everything to our agents for a fraction of the cost. In fact, the average agent who joins Fathom saves between $12,000 to $15,000 per year. Today, our industry is seeing a softening. And while this softening may prove to be a headwind for our peers, we believe that we can turn it into a tailwind for us. Where else are agents going to recoup their lost income if they close fewer homes? If an agent is on a 70-30 split and closes 20% fewer homes, the simple act of moving over to Fathom will increase their take-home income by around 9%. Now, nobody's suggesting the market will see a 20% dip, and I was merely presenting a worst-case scenario example, but you can see how our model can be even more disruptive to our peers in a down market. For the first quarter, year over year, our revenue grew by 81.4%. Our agent count grew by more than 49%, and our transactions grew by over 47%. Importantly, for the fourth quarter in a row, our real estate business was adjusted to be a bit more profitable. I don't believe that any other public real estate brokers can make that claim. And with a long runway ahead of us, we feel very confident in our business, even in today's economic uncertainty. While we're continuing to invest capital to enhance our foundation for sustained long-term growth of our newer business lines, those investment dollars are quickly becoming a smaller percentage of our ongoing expenses. We believe that Fathom is on track to continue strong revenue, agent, and transaction growth, and with the strategic, thoughtful investments we're making in each of our business lines, we look forward to also demonstrating profitability, which is a high priority for us. Now, 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 a high rate. Our cash position is strong, and we plan to continue to focus on achieving positive operational cash flow. Marco, our president and CFO, does a great job in pressing the proverbial no button, keeping our spending in check. Now, as we march toward profitability, so our steadfast discipline allows us to be good stewards of the money with which you can trust us. Despite the current state of the stock market and what some believe to be a headwind in the broad real estate sector, As I mentioned, we believe that FABMA is on track to continue an impressive growth rate while also achieving profitability quickly. We look forward to proving it, and I'd like to share with you how we'll achieve those goals. Now, since going public, we've We have substantially increased revenue, continued expansion of our agent network, maintained strong agent retention, which we believe is the best in the industry, entered new geographic markets, and completed strategic acquisitions designed to further solidify our market position and accelerate our path to profitability. That's a lot to accomplish in less than two years of being public, but it demonstrates our focus, our commitment, and our ability to get things done. Now, with the addition of our own in-house mortgage, title, and insurance companies, along with additional SaaS product offerings, we have the potential to significantly increase our revenue and, importantly, our profitability per transaction as we continue to integrate those operations into each of our markets. Now, as I mentioned earlier, we grew our agent count by more than 49% year over year. We believe a big part of that growth is because Fathom continues to have one of the most attractive and 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 Fathom wins, hands down. One of the best parts of our extraordinary agent growth is that our cost to acquire one agent during Q1 remained at approximately $990, making our break-even on each agent less than the $1,100 we earn on their very first sales. 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 more than 21X, and that does not take into account the revenue we're generating from our mortgage, title, and insurance companies or potential revenue from leads that we can generate for our agents. We believe that Fathom is in a unique position to maintain our solid and growth rate through 2022, even at a time when the broad real estate market is turbulent. Fathom can prove to be a hedge against other real estate brokerages whose revenue transactions and agent count could suffer from industry headwinds. I want to spend just a minute on this point because I think it's critical to better understand this. While the overall real estate industry outlook is not exactly ideal, there are a few important things to remember. First, homes are still selling faster than what is typical in a normal market. In April, around 57% of homes were under contract within two weeks, and around 43% of homes were under contract within one week. Additionally, around 55% of homes were sold for above listing price. One more step that I believe adds an additional level of confidence is the fact that rents are also rising at a high rate, which keeps homeownership attractive relative to rentings. I'm not suggesting that these metrics are not off their tops, but these tops were pretty high to begin with. The biggest concern moving forward is really housing affordability. For April, home prices were up 15% year over year. The 30-year fixed mortgage rate was up 67%. Of course, inflation has not been kind to households across the country. With all that said, there's still far more demand than inventory. inventory is still near historic lows. And while some are beginning to be priced out of the market, there's still more demand than the market can satisfy. On top of that, interest rates are not that far off normal. Prior to 2010, seeing interest rates in the 5% to 7% range was the norm. And another point I want to make here is that even if we, as an industry, see fewer homes sold throughout 2022 as compared to 2021, we, Fathom, feel confident that our agent and transaction growth will outperform any decrease in the number of transactions for the industry as a whole. While these market conditions are not good for the majority of real estate companies, and as I mentioned earlier, Fathom offers real estate agents who join us from other brokerages the ability to net more income than they did even in 2021, even if they sell fewer homes. That could result in more agents joining Fathom if, or perhaps when they begin to feel the squeeze. There are only two ways for a real estate agent to 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, and that's a truly distinguishing characteristic about Fathom. For the vast majority of real estate agents, their largest expense is not their marketing. Their largest expense is the splits they pay their brokerage, with many paying more than $30,000 per year. In real estate, there's an adage that suggests splits only matter in the absence of value. I said that earlier. However, again, what if all things are equal? With Fathom, the agent can get all the technology, training, resources, supports they're used to getting at one of the legacy brands and yet save an average of $12,000 or more per year in commissions for what's paid to the brokerage. In essence... An agent could potentially close 20% for your homes and yet earn more income than they did the year before. With the potential market shift looming, Fathom is highly attractive to increasing number of 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 the fewer sales and lower income, that may create a need to pull back on a marketing spend in order to pay their bills. Fathom agents could potentially invest more in marketing than their peers, helping increase their market share and ultimately our market share as they sell more houses. In fact, we're already seeing some of that interest show through our career sites. We actively track our unique visitors, and it showed that our career site experienced an 85% increase in visitors in Q1 as compared to the same quarter in 2021. We believe that it's a strong indicator of future growth. We believe that Fathom's ability to track an ever-increasing number of real estate agents by providing them with greater income potential along with the technology training and support they need to grow their businesses is even more evident today, especially during these changing times. Fathom Realty recently grew its geographic reach with the addition of Montana and New Hampshire in Q1. We also expanded our Utah presence through the acquisition of iPro Realty's 400 plus agents. Now we plan to open several more markets throughout 2022. 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 Q1 starting in January. The annual fee for agents was raised 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 continue to have no impact on our agent retention or growth rate. most likely because our agents are still saving an average of around $12,000 or more as compared with traditional split brands. I want to talk next about IntelliAgent and the advantage that our platform creates. The obvious advantage being that it allows Fablin to reduce costs per agent over time while measurably improving operational efficiencies. Our proprietary technology platform allows us to significantly reduce our reliance on third-party tech providers. In fact, as of March, we're officially using all Fathom-built technology for our realty operation, which includes agent brokerage websites, CRM, transaction management, personal management, and more. Outside of financial reporting systems and social media products, there really isn't anything else that we're using outside of IntelliAgent for our realty business. IntelliAgent gives us the power to control the full lifecycle of of the home buyer and home 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 title companies long before they're under contract as they raise their hands requesting more information. Throughout 2021, we made significant investments in our mortgage title insurance operations, and we continue to see very positive return on that investment in the form of improved attach rate and market share. In Q1, we acquired Cornerstone First Financial in Washington, D.C. Cornerstone brought a very unique marketing approach to encompassed lending, which we plan to roll out across the country. Each of our markets were encompassed as a foothold. 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 stronger attach rates. We also made several strategic real estate brokerage acquisitions in a very short period of time. We expect that any future acquisitions we continue, we consider will primarily be focused around opening new real estate markets or expanding our footprint in smaller current markets to hit critical mass faster. Each acquisition we pursue is expected to be immediately accrued to our business as we continue our path to profitability. While acquisitions are not our primary growth strategy, we will use acquisitions strategically as opportunities arise. We've been actively looking to brokerages across the country and will share more of these opportunities as more of these opportunities turn into acquisitions and walkovers. Now, in March, we initiated a $10 million share repurchase plan. The plan was designed to qualify for the safe harbor under SEC Rule 10B-18. So certain purchases under the plan were also designed to allow us to make repurchases during otherwise closed trading windows under our insider trading policy in compliance with the SEC Rule 10b-51. So as many of you know, Rule 10b-18 limits our purchases to a percentage of average daily trading volume. So as of the end of April, 310,000 shares in the amounts of about 2.9 million were repurchased through the plan. Right now, it's hard to think that there is any asset available for us to buy that is greater value to Fathom and our shareholders than our own stock. So we remain committed to our buyback and will be thoughtful in how we move forward. Final points, and then I'll turn it over to Marco. Over the last four quarters, our real estate business, Fathom Realty, generated just a bit of positive results. I mentioned that earlier, 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 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 throughout the rest of 2022, we'll continue to focus on strengthening our infrastructure and business integration as we seek to expand our footprint of 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 real estate brands in the country. On our last call, we shared that assuming we reach between 100,000 and 110,000 transactions per year, we believe that we can generate a justly but exceeding $40 million. While we're not prepared to provide a timeline yet for that transaction milestone, we are confident that we can maintain the strong agent and transaction growth that we've achieved consistently for more than a decade. Now, as I hope you can tell, we believe Fathom is a great future. We are proud of what we've been able to achieve and remain incredibly excited about the years ahead. With that, I'll turn the call over to Marcos. Marcos, it's all yours.