Fathom Holdings Inc. Q1 FY2021 Earnings Call

Good afternoon and welcome to the Fathom Realty Holdings First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Roger Pondel, Investor Relations for Fathom Holdings. Please go ahead.

Thank you, Chad and welcome, everyone to Fathom Holdings 2021 first quarter conference call. I'm Roger Pondel with PondelWilkinson, Fathom's Investor Relations firm. It's my pleasure to shortly introduce the company's Founder and CEO, Joshua Harley; and Fathom's President and Chief Financial Officer, Marco Fregenal. Before I turn things over to Josh, I must remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to numerous conditions, many of which are beyond the company's control, including adding new capabilities, the ability to reduce costs and drive sustainable growth, the type of new revenue-generating opportunities identified by the company as well as the company's timing of identifying and completing them. 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's my pleasure to turn things over to Josh Harley. Josh?

Thank you, Roger. Of course, thank you to everyone who's on today's call. Our entire team really appreciates your support and your faith in us. We're really proud that you're part of our Fathom family. Our first quarter results once again demonstrate the power of our truly disruptive model. As you know, we recently acquired a mortgage company, an insurance company, a lead generation and lead nurturing call center, a technology company specializing in big data aggregation and content creation, as well as a technology company building home search and CRM tools to help us attract more home buyers and sellers, which also helps us attract more agents. To say that we've been busy building Fathom to be an ultimate finding machine is an understatement. On our very first earnings call just eight months ago, I made statements that we now had jet fuel to pour on the fire. Hopefully, we've proven that we're not just hype; we are delivering on what we say we will. Ahead of all that, on top of our entry into the title insurance sector back in November, we now have all the pieces of the puzzle we need to make real and significant change in the real estate space. We may still be small, but we have an elite team and we're growing at a pace that will make people notice. Our cash position remains strong, and we're committed to adding to that position by focusing on operational cash generation. Since going public, we have substantially increased revenue, continued the expansion of our agent network, improved agent retention, entered new geographic markets, and completed strategic acquisitions that further solidify our market position. With our attractive agent commission structure, we believe that we're in a unique position to grow even faster in a time when many investors worry about possible headwinds in the real estate sector. I want to remind you that most of these possible headwinds can prove to be tailwinds for Fathom's growth. I'll touch on that a little more later, but for now, I'll just say that we're excelling. I know I might sound a little biased, but I believe our numbers support my claims. Before going much further, I notice a lot of names on this call that I've never seen before. A number of people are watching us who don't really know our story. I can't tell you how many times I’ve taken a call from a potential investor who doesn’t want to hear the story, just wants to jump into questions. But then by the end of the call, after I’ve shared the story along the way, they tell me they went from interested to excited about Fathom. I want to ensure everyone here knows our story, so you too can be excited and not just interested. It's important to understand that like many of our competitors, Fathom Realty is a full service, residential real estate brokerage. However, and I think this is key, we leverage an innovative platform-as-a-service model powered by a proprietary cloud-based technology called intelliAgent. This technology platform allows us to operate virtually, while providing our agents with all the major functions that they would receive from a traditional brick-and-mortar brokerage. Our technology aids our agents, allowing Fathom to streamline and automate operations, significantly reduce costs and personnel requirements, and enables us to scale and expand into new markets without excessive spending. With the addition of mortgage, title insurance, and additional SaaS product offerings, we have the potential to significantly increase our revenue and profitability per transaction. We don't just want to grow our agents' transactional revenue, but also our profitability. Fathom is being compared to Shopify by one of the analysts who follows us, showcasing how we attract real estate agents who act as small business owners to our low-cost platform and generate more revenue from multiple ancillary services that allows us to monetize our growing agent base and the transactions they bring. I couldn't agree more with this assessment, and I'm glad he said it so that I didn't have to, as I don’t want to be one of those companies that claims to be the Uber of this industry or the Shopify of another industry; that gets a little silly. We are who we are, and we're poised to dominate in our own way while constantly learning by watching others. As a result of our technology platform and streamlined operations, we charge our agents a fraction of what other brokerages charge, keeping more money in our agents' pockets to help them reinvest and grow their businesses. This also gives us a faster path to profitability than many competitors who charge monthly fees and large commission splits. We're excited about the advantage that intelliAgent creates, including attracting new agents and helping them become more productive while adding even more robust technology to lower costs and improve operational efficiency. I want to reiterate our focus; it’s not just about adding more agents but also helping our agents become more productive and close more sales. We don’t want to be just another brokerage hanging agents' licenses. Our goal is to provide more training and more technology to help our agents connect with more buyers and sellers, thus reducing the time required to manage transactions, allowing them more time to network and sell. As evidenced by our acquisitions of Naberly, our home search technology platform, and Real Results, the lead generation and nurturing company we acquired, we aim to generate leads for agents, which in turn will enhance our agents' closing rates, further increasing our revenue and profitability per transaction. We attract agents to our small flat-fee commission structure rather than a large percentage split that competitors charge. For Q1, we saw a 42% increase in agent count, with over 6,000 agents. Remarkably, our cost to acquire each agent during that period was only $920, meaning our breakeven on each agent is less than what we make on just the first sale. The lifetime value of an agent exceeds $18,000 for us, giving a ratio of over 20x when compared to our cost of acquisition. This figure does not account for revenues from our mortgage, title, and insurance companies or leads generated for our agents. Our cost of agent acquisition may increase as we dedicate additional resources to drive growth, but with a 20x LTV to CAC, we feel we have ample room to maneuver. Agents often say they joined Fathom to earn more commission but stay for the culture. While I don’t want to overemphasize our Glassdoor rating, it does validate this feedback. Our Glassdoor rating of 4.8 positions us among the top of large residential real estate brokerages. Though it's just one example of our culture of service, I take pride in having one of the lowest agent attrition rates in the industry. The true gauge of agent happiness is our annual attrition rate. Moreover, we are growing our agent base at an unprecedented pace, and I'm proud to report that our retention of high-performing agents has improved significantly between 2019 and 2020. The agents who close fewer than one sale per year comprise over 75% of agent attrition, with only 1% of those leaving coming from agents closing 20 sales per year. During our IPO, we discussed acquiring a mortgage company, title company, and insurance companies — and we achieved that and more in just nine and a half months. These aren't basic joint ventures that some real estate companies pursue; these are full companies where we control the quality and revenue and innovate within them. As you can probably tell from my voice, I'm excited and more enthusiastic today than ever before, and I hope you are too. The real estate market is hectic right now, and some have mentioned a possible housing bubble. However, experts indicate that this market is different, and we do not expect to see a bubble. We genuinely believe that this chaotic market presents advantages for us. While others might see strong headwinds due to rising home prices, mortgage rates, and low housing supply, I firmly believe Fathom could benefit significantly. Agents can increase their income by either selling more homes or decreasing costs; and the biggest cost for an agent is typically their brokerage fees and splits. In a tough market for buying or selling homes, agents should be drawn to Fathom to compensate for declined income by lowering the fees they pay. For instance, if an agent closes 20% fewer homes due to market dynamics but switches to Fathom from a brokerage with a 30% split, they could earn around 9% more income — a clear win, which I believe most agents will acknowledge. I envision this fact being an exciting draw for agents to join Fathom, and if the market shifts in that direction, we will be marketing this extensively. We will be vocal about it and ramp up efforts to grow our agent base. We anticipate continuing to outpace traditional real estate companies with outdated commission models. As our agent base expands, those agents bring more transactions, leading to further opportunities to capture mortgage, title, and insurance revenue that turns potential headwinds into tailwinds for Fathom. The necessity to attract more real estate agents, providing them with more income potential, technology, training, and support to grow their businesses is evident, even during these unprecedented times. The fact continues to drive our growth. For Q1, our agent growth year-over-year saw a 42% increase, while transactions grew by 60% and revenue surged 72%. Fathom is clearly moving in a positive direction, attracting high-performing agents and selling more properties in higher-priced markets. This shift will not only benefit our real estate brokerage operations but also enhance our mortgage, title, insurance businesses, and lead generation services. Fathom Realty is now operational in 29 states, and we plan to open several more soon. Our mortgage company, Encompass Lending, is active in 10 states, Dagley Insurance in 34 states, and Verus Title in 18 states. Our title business has now expanded into Texas, one of the largest real estate markets. Our virtual model and technology platform enable us to launch new markets quickly, efficiently, and at low costs. I love our technology platform because it reduces reliance on third-party tech providers, lowering our costs significantly while offering robust tech to our agents. IntelliAgent empowers us to control the full lifecycle of the home buyer and seller and enhances our understanding of data, allowing us to utilize it for further improvement and lead generation. We can now pre-emptively identify potential clients for our mortgage, insurance, and title companies long before they enter contracts, even before the agent makes an introduction—that’s the holy grail for these types of companies. We've made numerous acquisitions in a short timeframe, and now we have all the pieces needed. Now, we just need time to effectively align these components for strong capture rates. While acquisitions will be integral to Fathom's growth, we aim to grow strategically and avoid overpaying for growth. Our own team owns over 50% of Fathom's stock, making dilution a serious consideration for us. Some of you might ask about guidance, but as newly public companies typically don’t offer guidance this early post-IPO—especially after multiple integrations—we will not share guidance at this juncture. However, we possess immense confidence in our leadership team, vision, and execution capabilities, feeling optimistic about the future.

Thank you, Josh. I'll start by discussing some of our key financial results for the quarter. Our Q2 revenues grew 72% year-over-year to $49.6 million from $28.8 million last year, the same quarter. The increase resulted from growth in real estate transactions, average revenue per transaction, and the contribution from their acquisitions, which is part of the Fathom family for the full quarter. Supported by our ongoing strong residential real estate market and continued rising home prices that we've seen. As a reminder, home sales in Q4 and Q1 are seasonally lower than the rest of the year. Our GAAP net loss for the quarter was $3.4 million, translating to a loss of $0.25 per share, compared with a GAAP net loss of $43,000 or breakeven per share for the same period last year. The weighted average outstanding share count increased by 35% between the periods, mainly due to our IPO and acquisitions. The adjusted EBITDA loss, a non-GAAP measure, was $2.5 million for the first quarter versus an adjusted EBITDA profit of $135,000 last year. G&A expenses increased to $6.2 million compared with $1.8 million last year, attributed mostly to full acquisitions, costs linked to being a public company, and ongoing marketing efforts to support our growth. G&A expenses are expected to rise going forward for similar reasons as we continue to scale and integrate all the businesses we've just acquired. Marketing costs increased to $402,000 from $230,000 in last year's first quarter, mainly driven by growth in our talent acquisition team and higher investment levels in advertising and PR. We believe these efforts have proven fruitful. We closed approximately 6,900 real estate transactions this quarter, a 60% increase from the same quarter last year. This increase exemplifies the power of our truly disruptive model. The fact that our transaction growth exceeds the agent growth reinforces that agents will flock to Fathom and will close transactions after joining, reinvesting their savings into their business. In Q1, average home prices rose to approximately $284,000 from $241,000 Q1 of last year. As we discussed earlier, our agent network increased to just over 6,000 agents, representing a 42% boost from 4,250 agents a year ago. Our balance sheet remains robust, reiterating our commitment to be good stewards of your investment in Fathom, echoing what Josh has mentioned—we do not believe in growth purely for growth's sake. Q1 turned out to be a fantastic quarter; indeed, it was the best combined showing of our KPIs in the company’s history. For the second quarter, we expect significant year-over-year revenue growth, primarily propelled by contributions from the acquired companies. Our financial statements will look drastically different next quarter as we work to enhance transparency in all our businesses. Importantly, however, the previously mentioned G&A costs will continue to escalate due to other acquisitions, public company expenses, and additional investments in our growth. We firmly believe the future remains exceptionally bright as we continue integrating acquired businesses and identifying new growth opportunities.

Thank you, Marco. As you can tell, we're incredibly excited about our prospects. We've been working hard to deliver on our promises and grow Fathom in an accelerated yet sustainable way for the long-run. This is not a short game; it's a long-term operation, and we’re thrilled about it. Thank you to our shareholders for your trust and being part of our Fathom family. Now, operator, we are ready to open up the call to questions.

Thank you, sir. We will now begin the question-and-answer session. And the first question will come from Darren Aftahi with ROTH Capital Partners. Please go ahead.

Hi, this is Dylan on for Darren. Thanks for taking my questions. First one, with all the acquisitions that you've been working on and completed, could you talk a little about the timeline for when you expect all these to be integrated into the markets you currently cover? I think you said you're up to 29?

Hey, Dylan. That's a great question. Thank you for asking. It's going to take some time, right. So if you recall, we're now in 29 states. Just in real estate, Fathom operates in 29 states. Verus Title is already operational in about four or five states where Fathom is also operating. We are rolling out Verus and have a quarter of Verus already integrated, and we're quickly implementing Encompass and our DIA into the other markets. The rollout will take time across all states, but we should quickly see results. In Q2, we will see revenue increases from these existing businesses and additional revenue from their integration with Fathom. It will happen in layers: initially, we’ll aggregate the revenue from all businesses, and later, we’ll see additional revenue from the integration and tax rates going forward. It will take time to fully roll out across all the states, and we need to continue adding to our coverage. However, we are seeing early signs of great results, and I think that when we show our Q2 numbers, we’ll feel good about the integration progress.

One thing I'll add to that, Marco, is that once we roll out our technology and fully integrate those companies into our operations, we’ll see growth accelerate even faster. It takes time to get the markets open, secure the licenses, and introduce our agents, then integrate the technology to start capturing leads adequately.

Great, thank you. What is the current cash balance as of today, post-all acquisitions? And how much did the title contribute to the $49.6 million in Q1?

I apologize. Our cash position as we stated on March 31st is approximately $25 million, which is almost $26 million with about $1 million in restricted cash. The title's contribution to Q1 revenue was about $400,000 or so. Q1, again, is the lowest revenue quarter, equating to about $400,000 in Q1.

Are you willing to share current cash levels?

Not at this point.

Got you. One more from me, and then I’ll turn it over. How should we think about the add-on businesses going forward in terms of profitability versus investing for more growth?

That's a great question. Each business is a bit different. Keep in mind, we are entering our busiest quarters, Q2 and Q3. We must make some investments in the mortgage business. However, we will start seeing an impact from mortgage and title profit to the bottom line probably by Q3. For IntelliAgent, we’re still evaluating growth timing, while the insurance business can also grow significantly for us, but we will likely run it at breakeven for now. The cash flow impact from mortgage and title should be evident by Q3.

Dylan, I apologize for not fully addressing your question. Our cash position is strong, and we’re focused on enhancing it through cash generation. The real estate industry is cyclical; as we move from Q1, the lowest quarter, into Q2 and Q3, we’ll generate more revenue, aiming to increase our cash position. We feel optimistic about that.

Great, appreciate it, guys. Thank you.

Thank you, sir. We do have a question from Will Hamilton with Manatuck Hill. Please go ahead.

Just a question on SG&A. Apologies if I missed this, but can you break down the $6.2 million a little more in terms of acquisition-related versus other growth investments? That didn’t seem clear in the EBITDA breakdown.

Hey, Will. Good to hear from you. To break it down, the $6.2 million G&A includes about $1 million to $1.2 million in acquisition-related costs, encompassing legal fees. When looking at total G&A tied to acquisitions—it totals about $1.2 million. The remaining increase in G&A relates to stock compensation, further amounting to about $500,000 due to acquisitions. These costs combined lead to a G&A increase, but we also invested in staff in preparation for the busiest months of the year, and to accommodate the expanded operational structure. Though G&A costs have risen, they correlate with increasing revenues we expect moving forward.

So on a go-forward basis, would $4.5 million to $5 million be reasonable as a run rate? I know you don't like to guide.

That's a great question. Keep in mind, though, once we add the other businesses, they carry their own G&A costs too. Overall, the number will be larger due to adding those companies. However, significant associated revenue will be generated. G&A as a percentage will decrease as revenue increases in Q2 and Q3. We’re enthusiastic about having the companies we wanted as part of Fathom, and how they will positively affect our business. Our Q2 and Q3 results will showcase our growth and impact on our bottom line.

Okay. Thank you.

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, Chad. I appreciate that. Also, my gratitude goes to all of you for joining our call today and for your continued support. 2020 was a watershed year for us, and Q1 proved that we're just getting started. We're extremely proud of what we've accomplished and look forward to actions adding more value to our company and benefit all stakeholders. We are excited about the long-term prospects for our company and anticipate continued growth ahead. With our culture of service, we will always focus on enhancing value for our agents and shareholders. Have a wonderful evening, and thank you again.

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