Fathom Holdings Inc.

Good day and welcome to the Fathom Holdings Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in lesson-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 your touchtone phone. To withdraw your question from the queue, please press star, then two. please note this event is being recorded. I would now like to turn the conference over to Roger Pondell, Investor Relations for Fathom Holdings. Please go ahead.

Thank you, Sarah, and welcome everyone to today's call. I'm Roger Pondell with Pondell Wilkinson, Fathom's Investor Relations firm. 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 Fresnall. Before I turn the call over to Josh, I want to remind everyone 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 Fathom's latest Form 10-K, 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. In addition, Results discussed for the second quarter and for any portion of the 2022 third quarter are not necessarily indicative of results for the full third quarter or any other future period. 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. Important disclosures about this measure and a reconciliation of it to the most recently or the most directly comparable gap 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 the call over to Josh Harley. Josh?

Thank you, Roger. And, of course, thank you to everyone on today's call. Our entire team really appreciates your support. I want to start by thanking our agents and employees for their ongoing hard work not just toward our vision, but also in helping us grow. 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. Before turning the call over to Marco so he can review our financial results in detail, I'd like to touch on several subjects this afternoon. First, the key attributes of a model that are enabling growth in a changing climate. Second, our recent growth some challenges we face in the second quarter and are likely to face the rest of the year third present market conditions and fourth why we believe fathom can actually benefit from the broader market headwinds over the long term i'll also provide a quick update on our progress with integrating past acquisitions as well as any m a activity we've had the opportunity to speak with a lot of investors over the last few months who are new to fathom how we operate it's really gratifying when investor has that aha moment as they realize how different we are from other publicly traded real estate companies. While we acknowledge that Fathom is not immune to the challenges being felt around our industry, we continue to believe that we've built a better mousetrap. First, Fathom Realty is among the fastest growing residential real estate brokerages in the United States. In fact, in just 12 years, we've grown to become the 10th largest brokerage in the country, out of over 86,000 brokerages and the sixth largest independent brokerage. What's truly unique about our real estate brokerage is that we offer agents the opportunity to keep significantly more of their hard-earned commission dollars through a disruptive and differentiated flat fee commission model. In fact, it's so differentiated that we're the only publicly traded real estate brokerage platform with this commission model. To address it in practical terms, The average agent who joins Fathom from a traditional model brokerage takes home around $12,000 more in commission annually. This makes us highly attractive agents and allows us to enjoy agent retention rates approximately twice the national average. We don't just attract more agents, we keep them. The overall value we provide agents who join Fathom is unmatched by our peers. In addition, as we attract more agents to our low-cost commission model, our proprietary technology platform and wholly-owned mortgage, title, and insurance businesses, Fathom should allow us, rather, should allow Fathom to generate significantly more revenue and profit per transaction over time. Further, we license our proprietary technology to outside agents and brokerages through recurring revenue subscription offerings. further increasing the long-term revenue potential for Fathom Holdings and the stickiness of our brand. When you combine our asset light virtual model with the savings we generate long-term from owning our own technology, you get an important key distinction for Fathom. We're able to charge our agents less than other brokerages while building a model to generate margins similar to our peers over time. Even those who charge agents seven to ten times more than we do As some of our earliest investors were quick to realize, it's not just that Fathom wins because of our unique commission model, but because of the walls that we've built around our business. We believe it would be extremely challenging, if not impossible, for most of our competitors to change to Fathom's model, given their cost and franchise structures. In spite of softening market conditions for the second quarter year over year, revenue grew by 52.2%. Importantly, for the fifth quarter in a row, our real estate business was adjusted EBITDA profitable. Think about that. We charge a smaller fraction of what other brokerages charge their agents, and yet we believe that over the long term, we can achieve profitability far faster than they have. Even with today's economic uncertainty, we believe Fathom has a long runway ahead of us. In Q2, our agent count grew by 37.6%, which we believe is positive, as we had tough comparison to last year's second quarter, during which we made a sizable brokerage acquisition. In addition, our transactions grew by over 31.5%, again, coming off a 74% growth in the previous Q2. Not only is our agent growth continuing to outpost, uppace most of our competitors, we're seeing increased interest from agents on our career site. Now, we actively tracked unique visits and activity on the site, and we saw a 65% increase in page views in Q2 compared with the same quarter of 2021. In fact, page views jumped more than 14% just from May to June of this year. Agents are beginning to feel the proverbial squeeze, and we believe that our career site traffic is a strong indicator of future growth. Now, as I stated earlier, Adjusted EBITDA for our real estate business was positive this quarter. However, total adjusted EBITDA was negatively impacted primarily by our mortgage operation due to the unprecedented speed of interest rate hikes. Marco will speak in more detail about that in a few minutes. Our cost to acquire one agent during Q2 remained low at approximately $985, making our break even on each agent less than the $1,100 we earned on just their very 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 more than 21X, and that does not take into account the revenue we're generating from mortgage, title, and our insurance companies. A few minutes ago, I referenced soft market conditions. I'll add a few thoughts to clarify what I meant. We're living through unprecedented times right now. Inflation is at a 40-year high. Inventory is still in relatively short supply. And we've not seen interest rates rise this quickly in well over 50 years, which is concerning for potential buyers and hurting mortgage companies. These outside influences are having a negative impact on all real estate companies. And as I said earlier, we're not immune to these market conditions. Moreover, none of us have an accurate crystal ball to distill what's to come, although we are assuming that we will continue to see some pressure throughout the end of this year. While we believe these macroeconomic conditions will prove to be much more impactful on our competitors than it has been to us, we are mindful of the challenges that remain. Over time, we do believe that we can turn the otherwise adverse market conditions into a tailwind for us. Our conviction to this thesis has not changed. In fact, it's only strengthened. Due to these market conditions, our focus remains on reaching just a bit of profitability. I've asked our CFO to work with each of our business heads to reduce expenses by a total of $750,000 per quarter by Q1 of next year. We're determined to right-size the company's expenses. The principal reason these kinds of market conditions could benefit Fathom is that we could see more agents joining our brokerage when those agents begin to see their income affected. In fact, July was our second best recruiting month in Fathom's history, with a 35% increase compared to July of last year. This is especially noteworthy because generally, summer months are the busiest time of year for agents, so they're less prone to change brokerages. Now remember, 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 downturn, or decrease their expenses. We believe that we can help agents do both. For the majority of real estate agents, their largest expense is not their marketing. I wish it was. But in fact, it's the splits they pay their brokerage. Without them, an agent has access to all the technology, training, resources, and support they're used to getting at one of the legacy brands, yet saves 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 still earn more income than they did the year before. We believe that this is a key reason why our agent count continues to rise and why so many brokerages are interested in joining the Fathom family. As you know, our mortgage, title, and insurance operations were all added through strategic acquisitions and we're continuing to work diligently to integrate each business fully to ensure strong attach rates. While this process has been slower than we'd like due to our focus on achieving break-even for the entire company, we are highly committed to getting there as soon as possible and to making sure the expenses throughout the company are in line with the current environment and our long-term goals. Since taking Fathom public, we've also made several strategic real estate brokerage acquisitions. We're receiving a fair number of inquiries on a regular basis from smaller brokerages who are interested in joining us. While we're eager to move forward on many of these opportunities, we remain very selective and thorough in our due diligence process prior to proceeding with any particular acquisition. And we've been very careful to educate potential acquisition candidates and help them to reevaluate their expectations as virtually all company evaluations have decreased across the board. Although this has added some time to the acquisition process, we expect to continue evaluating and completing strategic acquisitions over the coming quarters. We believe valuations could become even more attractive if current macro headwinds persist or accelerate. The prevailing wisdom is that real estate brokerages can't grow or gain market share right now due to some of the unprecedented macro changes we discussed. While Fathom is certainly not exempt from those challenges, Our model and our execution continue to drive solid growth to date. Last but not least, I want to acknowledge stock market volatility and its impact on Fathom's price per share. I know it's of little consolation to you that other publicly traded real estate brokerage platforms are also experiencing dramatic decreases in their public market valuations. Trust me, my family still owns around 38% of Fathom. I feel exactly what you feel. That said, I'm incredibly confident that we will deliver sustainable long-term value. In fact, I'm excited about Fathom's future. Thank you so much to all of you who share in that vision. With that, I'll turn the call over to Marco. Marco, it is all yours.