Fathom Holdings Inc.

Good afternoon and welcome to the Fathom Holdings third quarter 2022 earnings conference call. All participants will be in 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 your telephone keypad. 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, Investor Relations for Fathom Holdings. Please go ahead.

Thank you very much, Chad, and welcome, everyone, to Fathom Holdings' 2022 third quarter conference 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 Freschinole. 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 Fathom's latest Form 10-K, subsequent Form 10-Qs, 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. In addition, results discussed for the third quarter and for any portion of the fourth quarter of 2022 are not necessarily indicative of results for the full fourth quarter or any other future period. Fathom undertakes no obligation to update any forward-looking statements after today's call except as required by law. Lastly, please also note that during today's 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 comparable GAAP measure is included in today's press release, which is now posted on Fathom's website. And with that, it's my pleasure to 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 really appreciates your support. I want to start by thanking our agents and employees across each of our businesses for their ongoing hard work and dedication, not just toward our vision, but also helping us grow particularly during the current challenging time for our industry. I also want to say thank you to our Fathom family for their unwavering commitment to creating a culture built on service, and more specifically, serving and placing others first. If you want to know what makes Fathom so strong in the communities we serve, it's this very principle of servant leadership. Before turning the call over to Marco for a detailed review of our financial results, I'd like to touch on several subjects. First, the key attributes of our model that are enabling growth in today's business environment. Second, our recent growth. Third, several new and exciting updates that could have a significantly positive impact on our business over the coming years. Fourth, some challenges that we faced in the third quarter are likely to face to the rest of the year. including the present market conditions. And lastly, why we believe that Fathom can actually benefit from the broader market headwinds over the long term. We've had the opportunity to speak with a lot of investors over the last few months who are new to Fathom and how we operate. In fact, we just concluded 14 excellent one-on-one meetings at the LD Micro Conference in Los Angeles. It's really gratifying when an investor has that aha moment as they realize how different we are from other publicly traded real estate companies. While we certainly 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 with more resilience and every day our thesis is being proven true. 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 more than 86,000 brokerages and the 6th 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, Statham is the only publicly traded residential real estate brokerage platform with this model. More specifically, throughout 2022, we only charged our agents a small flat fee of $500 for each transaction, with many of our agents closing enough transactions that we only charged them $99 per additional sale during the year. While these commission split amounts seem low compared to traditional brokerages, the leverage of our operating model allows us to generate higher margins while some of our peers haven't been able to do so, even when charging their agents much higher fees. To address it in practical terms, the average agent who joins Salvin from a traditional model brokerage takes home around $12,000 to $15,000 more in commission annually. This makes us highly attractive to agents and allows us to enjoy agent retention rates approximately twice the national average. We don't just attract more agents, we keep them. If you want to know whether agents are happy, there's no greater indicator. We're the only company that I know of who publicly shares our attrition rate. Over the last 12 months, our attrition rate has averaged only 1.5% per month, down from the 1.7% we announced last quarter. More importantly, only 6% of agents in that 1.5% figure close 11 or more homes per year. However, over 72% of the agents in that 1.5% figure close zero or one sale per year. In other words, we see extremely low attrition rate among our highest producing agents. We believe the overall value we provide agents who join Falcon is unmatched by our peers. I know I'm a little biased. It's true. But our agent growth and our low agent attrition speaks volumes in backing up my belief. Keep in mind, we do not charge a monthly fee to our agents compared with the traditional brokerages who charge anywhere from $100 to $150 per month. This helps us attract and keep agents who are price sensitive during down months, especially in this market. In addition, attracting more agents to our low-cost commission model, our proprietary technology platform, and wholly-owned mortgage, title, and insurance businesses should allow Fathom to generate significantly more revenue and profit per transaction over time. On top of that, we currently license our proprietary technology to outside agents and brokerages through a recurring revenue subscription offering, further increasing the long-term revenue potential for Fathom Holdings and the stickiness of our brand. When you combine our asset-light virtual platform with the savings we generate long-term from fully owning our technology, you get an important key distinction for Fathom, namely, and as I mentioned earlier, we're able to charge our agents far less than our public peers while building a model to generate margins similar to or even better than our peers over time, even those who charge agents seven to 10 times more than we do. As some of our earliest investors were quick to realize, it's not just that FABIM wins because of our unique commission model, but because of the walls we've built around the business. We believe it would be extremely challenging, if not impossible, for many of our competitors, especially our public peers, to shift to Fathom's model, given their high cost and franchise structures. Despite today's market conditions in the residential real estate sector, for the third quarter, our year-over-year revenue grew by more than 10%. Importantly, for the sixth quarter in a row, our real estate brokerage operation was adjusted even to profitable. Think about that. We charge a small 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 that Fathom has a long, positive runway ahead of us. In Q3, our agent count grew by 33%, which we believe is particularly noteworthy since we had a tough comparison to last year's quarter, during which we made a sizable brokerage acquisition. In addition, our transactions grew by 5%, again, coming off 42% transaction growth in the previous Q3, while simultaneously managing through current market conditions. As we see other real estate companies share their quarterly results, I believe that our revenue, agent, and transaction growth will prove to be even more impressive. 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 and the unprecedented speed of interest rate hikes. Still, we are seeing improvements in this business as we right-size our expenses to current and future market conditions. Now, Marco will speak in more detail about that in a few minutes. Our cost to acquire one agent during Q3 remained low at approximately $1,020, making our break even on each agent less than the $1,150 that we'll earn 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 acquisition is around 21X. And that does not take into account the revenue we're generating from our mortgage, title, insurance, and technology companies. Now, when I started this call, I referenced several changes that we believe could have a significantly positive impact on our business over the coming years. I'd love to share those changes with you now. The first change is to our commission model. Effective January 1st, 2023, we'll be raising transaction fees by approximately $50 across the board. That means that our current $500 transaction fee will increase to $550, and our $99 transaction fee will increase to $150. Raising prices is always difficult, but given inflation and the ongoing Fed rate increases, we felt that we had no choice, and we're confident that our agents will fully understand Even with these small changes, agents will still be generating significantly more income than they could by hanging their license with the traditional brokerage charging large splits. An important point to remember is that our commission fee is not based on the price of a home. So we have very little compression risk as housing prices come down. We will also be increasing the annual cap on the number of sales in which we charge the full fee for individual agents from 12 sales to 15 sales, and we're increasing the cap for team members from four sales to five sales. You'll recall that once an agent hits their cap, their fee per transaction decreases from the $550 to the $150. The last time we raised fees, we did not lose a single agent that I or my team is aware of as a result of the raised fees. This is in large part because even at a $550, our agents are still saving an average of over $3,000 per sale versus the industry average commission split from a traditional brokerages. We have also decided to eliminate stock grants for closed transactions. Dilution per transaction has increased too much for our comfort level as our shares have become so deeply undervalued For this reason, we felt it was important to end those grants. This, too, will become effective January 1st of 2023. Okay. On to some exciting changes that we're making to our business. Effective immediately, we're rolling out a new agent referral program called Free for Life that I believe is superior to any other agent referral program out there. The program has three levels. The first level is similar to our previous program. When a Fathom agent refers another agent who joins our company, the referring agent will receive $250 in stock grants for each agent they refer. These grants have a two-year vesting period. The second level is called Cap for Life. Once an agent refers four agents who join Fathom, and each of those agents close a minimum of two sales per year, that referring agent will be capped for life, meaning the referring agent will only have to pay the $150 per sale from then on. They'll never have to pay the $550 transaction fee in the future. This is in addition to the $250 in stock grant that agents receive. The third level is called free for life. Once an agent refers a total of eight agents who join Fathom, and each close a minimum of two sales per year, The referring agent will be free for life, meaning they'll never have to pay another annual fee or residential real estate transaction fee. Again, this is in addition to the $250 in stock grants the agent receives. We believe this program will be incredibly exciting for agents. In fact, we actually rolled out the cap for life level in beta on September 1st. And as a result, we had the best referral month ever. with over 40 percent increase in agent referrals for September. Now understand, without doing the math, you may be thinking that we're giving away the farm, but even in the worst-case scenario, we're ahead. To help you vendors better understand the benefits to Fathom, let's explore the math for Cap for Life in a typical scenario. So a Fathom agent who closes six sales per year refers four agents who each close six sales per year. In this scenario, we're ahead by more than $13,000 in incremental revenue, as we now have six agents paying a $600 annual fee, along with their $550 transaction fees. Plus, we now have five agents who have the potential to refer another agent, rather than just one. Now, let's run the same math for free-for-life, using a Fathom agent who closes six sales per year and referring a total of eight agents who each close six sales per year. In this scenario, we're ahead by more than $27,000 in additional revenue per year. And again, we now have nine agents who have the potential to refer other agents rather than only one. While we do not believe that we'll have thousands of agents exceed the free-for-life level, imagine how many more agents who may not have otherwise referred anyone we'll try to ultimately refer one, two, or even three agents. I hope you can see why we're so excited to roll out this new agent referral program. So to recap the changes, we're raising transaction fees across the board by $50. We're raising the cap from 12 sales to 15 sales. We're eliminating stock grants for transactions. And lastly, we're rolling out a new agent referral program with three levels, 250 in stock grants for each agent referred, capped for life and free for life. At this point, I want to transition from the company and focus on the current market conditions. When I started this call, I referenced the difficult market. And I'd like to 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 short supply. And we have not seen interest rates rise this quickly in well over 50 years. which is concerning for potential buyers and putting a halt on the refinance business altogether. These outside influences are having a negative impact on all real estate companies, and as I said earlier, we are not immune. 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 through the end of this year. As such, we're taking extra precautions to protect ourselves and even leverage the market to our benefit. We believe these macroeconomic conditions will prove to be much more impactful on our competitors than on us. But we're mindful of the challenges that remain. Over time, we believe that we can turn the otherwise adverse market conditions into a tailwind for us. Our conviction to this thesis has not changed and has in fact strengthened. Our focus remains on reaching a just to be able to break even in the first half of next year. Although our fourth quarter projections, which Marco will discuss momentarily, are lower than originally hoped and planned, With market conditions in mind, we are working with each of our business heads to reduce company-wide expenses by a total of $1.5 million per quarter by Q1 of next year. This is twice the amount we discussed on last quarter's call. We're determined to right-size the company's expenses, and we have set a target to achieve cash flow break-even as early as Q3 of next year. It's important to note that even though we are finding ways to cut costs, we will not sacrifice our ability to continue growing. While the current residential real estate market is challenging, I do believe Fallon can benefit from it. That's because we could see more agents joining our brokerage when those agents begin to see their income negatively affected at their current brokerage. Our model resonates with the agents who hear about us for the first time and actually take the time to learn more. Remember, there's 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 we can help agents do both. For the majority of real estate agents, their largest expense is not their marketing. It's the splits they pay their brokerages. With Fathom, agents have access to all the technology, training, resources, and support they're used to getting at one of the legacy brands, yet they save an average of $15,000 or more per year in commission splits paid to the brokerage. In essence, an agent could close 20% fewer homes, which could be likely given the current market, and still earn more income with Fabbin than they did the year before with the traditional brokerage. We believe it's a key reason why our agent count continues to rise and why so many agents and even full brokerages are interested in joining the Fabbin family. Now, a word about acquisitions, then I'll turn the call over to Marco. 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 full company, we are highly committed to getting there as soon as possible while making sure expenses throughout the company are in line with the current environment and our long-term goals. Since taking FAB in public, we've also made several strategic real estate brokerage acquisitions, each of which was immediately accretive to our business. 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 highly selective and thorough in our diligence process prior to proceeding with any acquisition. We have been careful to educate potential acquisition candidates and help them reevaluate their expectations as virtually all company valuations have decreased. Given there is typically a big disconnect between what owners believe to be their company's current value and what we believe to be actual market value, we did not make any brokerage acquisitions in Q2 or Q3 of this year, and we do not believe that we'll close any acquisitions in Q4. For now, as market conditions continue to play out, we are choosing to keep more cash in reserve and minimize any extra dilution. However, we do expect to continue evaluating and completing strategic acquisitions over the coming years. We believe valuations could become even more attractive if current macro headwinds persist to accelerate. To be clear, we have many opportunities ahead of us. even without making additional acquisitions. In fact, we anticipate opening several new geographic markets in the next 30 to 60 days, and we'll keep you apprised when we do. One final point I'd like to make is this. 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 in industry. As I said earlier, while Fathom is certainly not exempt from these challenges, we believe that our market or our model positions us well, and our execution to date continues to drive solid growth. Last but not least, I believe you know that Marco and I and many others in our organization are significant Fathom shareholders and care as deeply as you do about our stock price. I know it's of little consolation to you that, Other public and trader real estate brokerages platforms are also experiencing dramatic decreases in their public market valuations. My own family owns around 38% of Fathom, and I feel exactly what you feel. That said, our entire team is working diligently, and I'm confident that we will deliver sustainable long-term value. So thank you so much to all of you who share that vision and to continue to support us. With that, I will turn the call over to Marco. Marco, it is all yours.