Fathom Holdings Inc.

of 2022 to 391,000 in Q1 of 2023. This reflects the great work our DIA team has done in Q1 to adjust expenses while still growing revenue. Barrett's title had revenues of $596,000 for the quarter compared to $1.1 million in revenue for Q1 of 2022. Adjusted EBITDA was negative $330,000 compared to a $50,000 positive adjusted EBITDA in Q1 of 2022. The decrease in revenue in adjusted EBITDA is primarily due to the significant decrease in purchase and the refi business due to higher interest rates. However, in March and April, we have seen a significant increase in the number of file starts from FATMA agents in the North Carolina and Dallas markets, which should represent an increase in the tax rate in Q2. Now let's move on to our technology segment. Revenues increased 17% to $756,000. compared to $645,000 for last year's first quarter. Adjusted EBITDA loss for the quarter decreased by 46% from $395,000 in the first quarter of last year to $212,000 in the current quarter. Our Live By team continues to increase its footprint across the country to reach over 235 MLSs and 400,000 agents at the end of the quarter. Live By powers more than 3.6 million community pages with over 125,000 neighborhood reports created. We continue to focus on our balance sheet given dynamic real estate market conditions and end of the quarter with a cash position of 6.7 million. We recently completed a convertible no private placement to provide additional operating liquidity and flexibility as we execute our goal of getting to break even. We believe our cash position and additional private placement provides us with the adequate runaway to grow the business and execute our strategy through profitability. We did not purchase any shares in the first quarter under the stock repurchase plan, and approximately $40 million remain under that authorization. Now, before turning the call back to Josh, let me briefly touch on guidance. Given the continued uncertainty in the microenvironment, we are only providing guidance for the second quarter ending on June 30, 2023. For the second quarter, we expect revenues in the range of $88 million to $90 million, and adjusted EBITDA in the range of break-even to 100,000 to 200,000 positive. As a reminder, guidance is a forward-looking, which as we noted in the beginning of the call, is subject to risks and uncertainty. I want to thank the entire team at Fathom for their hard work, passion, and commitment to excellence. The last six months have been some of the most difficult months in Fathom's history, but through the hard work of our team, we have been able to demonstrate that we can outperform the market even in challenging economic times. With that, I'll turn the call back to Josh for closing remarks.

Thank you, Marco. We remain focused on execution and are well positioned to achieve a break-even profitability in Q2 with our model and can thrive throughout various real estate cycles. With that, operator, let's open up the call for questions.

We will now begin the question and answer session. To ask a question, you may press start button on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from John Campbell with Stevens Inc. You may now go ahead.

Hey, this is AJ Hayes stepping in for John Campbell. Congrats on the quarter and I appreciate you guys taking our questions. First thing, on your guys' EBITDA inflection, just kind of wanted to see, is there any additional steps needed to get there? How dependent on the market is this outlook? How dependent is that on your outlook for the market in your brokerage business? How dependent is it on a recovery in mortgage and better attach rates and maybe mortgage gain on sale? Just trying to get a sense of what underlying assumptions may be built into this outlook here.

Thank you. Thank you for your question. You know, we, as we are today on, you know, May 10th, we have a good feel for the quarter. So that's the first and foremost. We are definitely seeing an improvement in file starts in Q2 compared to Q1. There are two components to that. First is certainly seasonality. And second, I think Josh mentioned earlier that many of the FATM agents are using their savings that they get from FATM and they invest in marketing. So we are anticipating an increase in revenue and transactions. In terms of the cost structure, I believe about 85% to 90% of our $3 million has been already built in in the Q1 numbers, so there's a little bit more in Q2. So I think the overall answer to your question is that we feel pretty good about the guidance we're giving And we're not assuming a significant increase in the market. If the market does continue to increase even in a greater way than we were anticipating, I think then our numbers could be even better. But we feel fairly confident about the guidance we're giving, given what the market conditions are today.

Gotcha. And then maybe shifting the focus kind of to hitting positive cash flow in 3Q23, you guys reiterated that target again, which is It's great to hear, but given the uptake in interest expense as a result of that new convert, can you kind of walk us through the moving pieces there? Did you change your underlying assumptions needed to hit this target, you know, such as the macro, the existing home sales, maybe mortgage gain on sale? And this might be much of the same as kind of what you answered in the last question, but maybe trying to get a sense was there may be already a degree of conservatism or wiggle room in that inflection. Any color there would be much appreciated.

Sure, great question. I don't have so many terms, Mark. Go ahead.

Well, I think, look, we continue to apply the same model, right, in terms of Q3. The components that lead us to, if you continue the curve of adjusted EBITDA in Q2 to the profitability in terms of our cash flow positive in terms of Q3, One aspect of that is the seasonality of the industry. Second, when we look at our ancillary businesses, all our ancillary businesses continue to grow. Even in a tough market, they continue to gain market share. DIA, for example, has done a really great job in continuing to increase its revenue, and EBITDA at 265% and EBITDA increases is a phenomenal result. So we continue, it's a combination of our ancillary business continue to gain market share and continue to grow, the combination of the full execution of our $3 million per quarter in cost reduction, and certainly the aspect of the seasonality. We are not anticipating in our numbers a significant increase in the market in terms of upside. Some have argued that the Fed may start lowering interest rates in Q3 and Q4. We are not putting that into our model. And so we are really somewhat conservative in terms of the upside, in terms of getting to the cash flow breakeven in Q3. But it's really a combination of all those factors.

I want to add some color if I may, though. I want to make sure you understand that we didn't do that because we were worried about not being able to reach, you know, the break even or reach cashflow profitability is really just out of just being wise. You know, you don't know what you don't know. We don't want to be foolish. We want to make sure that we had, you know, some additional buffer there for the, just in case it sometimes happens in this world. especially in this market. So we're just trying to be prudent, trying to be thoughtful about the business. But at the same time, we have to ask ourselves, do we really want to do this? Because we feel very confident that we're going to be able to continue to achieve what we've said we'd be able to achieve. So far, that hasn't changed. But again, so bringing that extra capital was really just to, I guess, add a little extra touch of wisdom in the business.

That makes sense. Thank you for the color there. One more question, if I may, and then I'll pass the mic along. But I wanted just to narrow in on the mortgage business here for a second. Josh, you had said attach rates improved in mortgage as well as title. But can you maybe provide an exact number for mortgage and maybe title or maybe just like a general kind of estimate there? And then, Marco, you may have briefly touched on this, but What was this improvement attributable to? Was it anything specific? And then also, is gain on sale, is that something that's starting to normalize in maybe your updated outlook in terms of gain on sale?

I think the first part of the question is directed at me. As far as attach rate goes, we haven't shared the attach rate and what the exact numbers are attach rate, other than the fact that we're seeing improvements. I feel strongly that we probably need to Keep it that way for right now. I know none of our peers actually share those specific numbers either. I think there's, I start to realize there's a reason for that. You know, things kind of ebb and flow, but we are seeing improvements. We do feel a lot better about the tax rates. We're starting to see a lot more agents, you know, really buy into and understand the fact that these are part of our Fathom family. And the more we support, you know, our ancillary services, the more we support that Fathom family, the more it benefits everybody. So while we're not prepared to give the exact attached numbers, we are definitely seeing improvements.

Our improvement in the mortgage business is a combination of several factors. One, the leadership in our mortgage company continues to recruit more loan officers and continue to grow the revenue base. And I think we look forward to demonstrating that when we announce our Q2 numbers and subsequently Q3 numbers. So it's a combination of adding you know, more loan officers to the team. Second, we focused the tax rate, to a certain extent, we took a more focused approach and focused our mortgage business to a certain extent in the North Carolina and in the Texas area. And so, therefore, giving us the ability to grow our market share into those states much deeper. So that certainly has helped the tax rate. We've also... implement a variety of pilot programs in Q1 in terms of marketing programs, and we'll be able to give an update of those in Q2 once they're fully executed, and we'll be able to do that. And then the last part is the gain on mortgage. So certainly the market has become a little more consistent and stable. We go back to Q3 and Q4 last year. It was a highly unstable market in terms of the gain on mortgage. There's plenty of data out there that shows how Mortgage companies, profitability of mortgage companies have decreased significantly in terms of what happened in Q3 and Q4. So, yes, we're definitely seeing a more stable market. Not a great market yet, certainly not compared to Q1 of last year in Q2, but it's definitely more stable. We're not seeing the ups and downs in profitability of a loan, and I think that's a good start. We're hoping that by Q2 and Q3, things continue to get even more stabilized. and easier to sort of anticipate what the market would do. But we certainly feel better today about our mortgage business than we did in Q4, and we are very hopeful that as we continue to work hard, we'll see better results in Q2 and Q3. Great.

Thank you so much, and good luck the rest of the year.

Thank you.

Thank you.

Our next question will go through Darren Astahi with Roth Capital Partners. You may now go ahead.

Hey, this is Dylan for Darren. Thanks for taking the questions. If I start firstly with marketing, could you sort of talk about both the reduction in marketing spend, but then sort of the confidence you may have with referrals to sort of offset that lower spend and still grow agents?

Great question, Dylan. Great question. So the reduction in marketing is not so much focused on recruiting. It's really more focused on a variety of really optimizing our marketing machine. So we've optimized a lot of our internal resources. We've optimized on how we spend dollars in terms of our advertising campaigns. And so a combination of that, plus some shifting of dollars resulted in that decrease in marketing. However, we actually have increased our recruiting team. And so where the dollars look like have been decreased, which they are, we actually have increased our recruiting team. The second part of your question was the referral rate. As Josh indicated, the month of March, we had the highest internal referral rate ever in our history. And we feel confident that's going to continue as agents continue to see the benefit of our Free for Life program. And we've always said that that's going to take some time for agents to fully benefit there, right? But certainly in Q2, sorry, Q1 in March, we've seen a significant increase in that. And we anticipate that continue to maintain itself as we continue to increase the number of agents that we recruit.

Yeah, just sort of touching that. The sequential net ads and agents, sort of, how many were from referrals versus, I guess, what you could call more organic?

For March, it was 60%. For the whole quarter, Marco, do you have that number off the top of your head?

So, yeah, so we don't give the net number, Dylan, in terms of that. We can give you that on a gross number, the internal referral was 60%. on the gross number. And then when you look at the net number, keep in mind that Q1 has the highest turnover, right? Number of agents leaving the industry. Our turn rate in Q1 was 2.2%, which is significantly higher than our average around 1.5, 1.6%, right? And so the two things to keep in mind, one, about 60% of our agents came from internal referrals, which is the highest we've ever seen. And second, that in Q1, we not only Fathom, but the whole industry sees a significant higher churn percentage as agents leave the industry because they don't want to pay all their annual fees that they have to pay in Q1.

By the way, if you go back in time and you listen to some of our earlier, especially Q1 of last year or even earlier than that, you'll see we actually spoke that about 35% of our growth was agents referring other agents. And now to see that number hit 60% is pretty exciting.

No, I appreciate the call. That's helpful. And then just to follow up for me, on the productivity side, I mean, obviously, the demand is down from lower home sales in the market. But could you sort of talk about, I guess, the type of agents you're recruiting and or your existing base, like how are you seeing their productivity evolve over time as in improving the potential number of transactions they can handle?

So for Q1, it was fairly consistent across the board for 15%. I mean, we've seen that pretty much fairly consistent. Some states are a little higher than others, and some states are less. But that decrease in the number of transactions and the productivity was fairly consistent across. So when you compare that against the other public companies, I think you see that our decrease in percentage was about half of what everyone's seeing. What we see in the market is fairly consistent, around 25%. I guess some states in the West Coast are seeing a higher percentage. In some states in the East Coast are seeing a lower percentage, but across the board is 25%. Across our agents, it's fairly consistent on the 15%. Great.

I'll pass it on. Thank you.

Thank you, Dylan.

Again, if you have a question, please press star then 1. Our next question will come from Tom White with DA Davidson. You may now go ahead.

Hey, this is Wyatt Swanson on for Tom. Thanks for taking our questions. I've just got a quick one here more on the longer term regarding the agent value proposition. You know, if you look two to three years out, what do you think are the most likely areas that are likely to see some meaningful evolution or improvement in terms of the ways for you guys to add value to agents?

I think it really comes down to probably better training. You think about how, number one, obviously, how do we add more agents? And then once we add those agents, how do we help them improve their productivity per agent? One of the things we've said in the past is the average agent who joins Fathom increases the business by 49% over a four year period. So that happens naturally, just simply the fact that you've got more money to be able to reinvest back in the business. A lot of agents will pocket the money and pay bills with it or feed the family or take vacations. But a lot of agents are They run businesses, right, and they reinvest that money back into their business. So that just happens naturally. But one area that I think we can see great improvement, and we've been exploring this more, is increased training, increased coaching for individual agents to say, okay, you have this savings, now what? Not everyone knows where to spend that money. Can we help coach them and show them how and where? Can we help train them to be better at their job, be better at their craft? And so I think that's an area that we can dramatically improve inside our own house. And I think that will dramatically improve the productivity per agent. So obviously we want to increase transactions by increasing agents, but we also want to increase transactions by making our agents better. And then the third way, of course, is by offering even more solutions, more training, more resources to our agents, we should also be able to attract higher producing agents. So I think there's three really strong ways to Three really strong ways that we can do to be able to increase the number of transactions per agent.

Great. Thank you very much.

Again, if you have a question, please press star then 1. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Josh Harley for any closing remarks.

Thank you. Of course, thank you for joining our call today and your interest in Fathom. For those of you who are Fathom shareholders, thank you for your trust. We will continue to work hard and look forward to sharing future updates with you. Have a wonderful week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.