Fathom Holdings Inc. Q2 FY2022 Earnings Call

Good day, and welcome to the Fathom Holdings Inc., Second Quarter 2022 Earnings Conference Call. 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, Sarah, and welcome, everyone, to today's call. I'm Roger Pondel with PondelWilkinson, 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 Fregenal. 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 Factors 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. 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 GAAP 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.

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 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 our model that are enabling growth in a changing climate. Second, our recent growth, some challenges we faced in the second quarter and are likely to face for 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 many investors over the last few months who are new to Fathom and how we operate. 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 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 broker in the country out of over 86,000 brokerages and the sixth largest independent broker. 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 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. The overall value we provide agents who joined 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 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 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 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 7x to 10x 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 laws that we've built around our business. We believe it would be extremely challenging, if not impossible, for most of our competitors to replicate 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 consecutive quarter, 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 faced a 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 outpace most of our competitors, but we're also seeing increased interest from agents on our career site. Now, we actively track 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 operations 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 breakeven on each agent less than the $1,100 we earn 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 much more impactful on our competitors than it has been for 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 adjusted EBITDA 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 but, in fact, the splits they pay their brokerage. With Fathom, an agent has access to all the technology, training, resources, and support they're used to getting at one of the legacy brands and 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 breakeven for the entire company, we are highly committed to getting there as soon as possible and ensuring that 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 receive 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. We've been very careful to educate potential acquisition candidates and help them reevaluate their expectations as virtually all company valuations 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 that vision. With that, I'll turn the call over to Marco. Marco, it's all yours.

Thank you, Josh. I'll start with a detailed review of our second-quarter results. You will find our year-to-date results in today's press release. Second-quarter revenues grew more than 52% year-over-year to $128.2 million compared with $84.2 million for last year's second quarter. The increase resulted from growth in real estate transactions, higher average revenue per real estate transaction, and revenue contributions from our newly acquired businesses. GAAP net loss for the quarter was $5.6 million or a loss of $0.35 per share compared with a loss of $2.1 million or $0.15 per share for the 2021 second quarter. Our loss narrowed slightly in absolute terms from $6 million for the first quarter this year and decreased more as a percentage of revenue given our top-line growth. Year-over-year change in GAAP net loss resulted principally from investments in future growth, operational and overhead costs related to acquired companies, increases in noncash stock compensation, and noncash amortization of acquired intangible assets. Our adjusted EBITDA loss, a non-GAAP measure, was $1.9 million versus an adjusted EBITDA loss of $2.3 million for the second quarter of 2021 and $2.1 million for the first quarter of 2022. While these results came in below the guidance we gave last quarter, profits in our core real estate business exceeded our estimates. Approximately 80% of our adjusted EBITDA mix was attributed to our mortgage business, which is not surprising given rising interest rates in the current real estate market. I'll provide more color during my review of our business lines. In the 2022 second quarter, G&A was $2.4 million or approximately $9.6 million in total revenues compared with $8.7 million or approximately $10.4 million of total revenues for the 2021 second quarter. On a sequential basis, G&A as a percentage of total revenues declined from about 12%. The increase in G&A dollars is primarily attributed to recently completed acquisitions and increases in noncash stock compensation expense. Expenses related to marketing activities were $1.3 million for the current second quarter versus $378,000 for last year's second quarter. The change was mostly driven by an increase in marketing activities related to new market openings and recruiting expenses. Now, I'll report our business unit results. Our real estate division continues to perform very well. We grew our agent count by 38%, finishing the quarter with nearly 9,600 agents. As Josh mentioned earlier, agents can make more money with Fathom in a down market than they might with a traditional brokerage firm, which we believe is why we are seeing a nice uptick in our recruiting. Additionally, we closed more than 13,200 real estate transactions for the quarter, a 32% increase from last year's second quarter. These results are gratifying considering the state of today's market. Adjusted EBITDA for the Real Estate Division was $1.8 million, marking our fifth consecutive quarter of adjusted EBITDA profitability. One of the things we're most excited about is that our gross profit in the business grew by about $1.2 million from the first quarter of this year, and about $820,000 or 70% of this increase in gross profit fell to the adjusted EBITDA line, demonstrating the operational leverage we have created in our real estate business. Our mortgage business generated revenues of $2.6 million for the second quarter, down slightly from our 2022 first quarter results, which is not surprising given the reduction in mortgage originations across the country. The adjusted EBITDA loss in the business was approximately $860,000 compared with $890,000 in the first quarter of this year. As I mentioned earlier, our mortgage results for Q2 were the primary reason for adjusted EBITDA missed driven by market slowdown in interest rates that rose faster than at any other time in over 50 years. That said, we have a lot of faith in our mortgage business and believe it will perform well over the long term. On a positive note, due to many of the enhancements we have been making to our mortgage business, we grew the business by 30% in July versus June of this year. Moving to our Technology segment, second quarter '22 revenues were $656,000, slightly higher than the $644,000 for the first quarter of 2022. Adjusted EBITDA loss in our Technology segment was approximately $325,000 versus a loss of $400,000 for the 2022 first quarter. Our Insurance and Title business had combined revenues of approximately $2.8 million, about $300,000 more than the first quarter of this year. Adjusted EBITDA for the businesses totaled $130,000 compared with $154,000 for the first quarter of 2022. Breaking down further, Verus Title generated adjusted EBITDA of $23,000 versus $54,000 for the prior sequential quarter. Meanwhile, adjusted EBITDA for Dagley Insurance was $107,000 compared to $100,000 for the prior sequential quarter. We ended the quarter with a solid cash position of $19.5 million, which gives us plenty of runway to execute our strategy. Now I'll spend some time on the attach rates. Given the difficult market conditions for Q2, we chose not to roll out any new markets for Encompass Lending. We did, however, open Colorado as a new market for Verus Title. For Verus Title, we did not see a significant decrease in attach rate for Q2, but we did see a decrease in attach rate for Encompass in the second quarter. However, as I mentioned previously, we saw a 30% increase in closed transactions for Encompass in July, which was driven mostly by the relationship between Encompass and Fathom Realty. We believe that we can reach attach rates of 10% or better over the long term. Related to our share repurchase plan, year-to-date as of June 30, we purchased a total of just over 686,000 shares for about $6 million. Approximately $4 million remains under the plan at the end of the second quarter. I'll finish with our guidance for the third quarter of 2022 as well as updated guidance for the full year. This guidance does assume that the residential real estate market will continue to soften and that interest rates remain at current levels or increase. The company believes that if market conditions improve, it may generate results that are better than currently anticipated. For the third quarter of 2022, Fathom expects total revenue in the range of $105 million to $110 million and adjusted EBITDA in the range of a loss of $1.6 million to a loss of $1.5 million. For the full 2022 year, Fathom is now expecting revenue guidance in the range of $425 million to $435 million, and adjusted EBITDA is now expected to range from a loss of $6.8 million to a loss of $6.6 million. The company reiterated that it believes it can generate adjusted EBITDA exceeding $40 million per year at 100,000 to 110,000 annual transactions. While Fathom has not provided a timeline for reaching this target, the company believes it can maintain transaction growth rates similar to those since the IPO. As a reminder, the guidance is a forward-looking statement, which is subject to certain risks and uncertainties. Before I hand the call back to Josh, I would like to add my thanks to the entire Fathom family. Even in this uncertain market, our team is working hard to generate transactions and provide the best possible service to our agents, home buyers, and home sellers. Like most real estate cycles, this one will improve over time and with our unique business model and leadership, Fathom is poised to excel. Now, I'd like to turn the call back to Josh so we can take your questions.

Thank you, Marco. We believe Fathom has a clear, visible, and long runway with solid growth prospects. No matter what the market holds, we believe our model is positioned to win over the long term. Thank you again for your trust and being part of our Fathom family. With that, operator, we are ready to open the call to questions.

Our first question comes from Darren Aftahi with ROTH Capital Partners.

First, maybe, Marco, could you speak to kind of the cadence of file starts by month in the second quarter? And then how that kind of compares to, I guess, the month of July since that's all the other day we probably have right now?

Sure. So second quarter for us, we did not really see a significant decrease. Q2 had two sort of quarters within one quarter. The first two months, April and May performed relatively the same as previous years. June, or really even the last three weeks of June, was when we started seeing a reduction in file starts, which then continued into July. And so we did not really see a significant impact in file starts until the last three weeks of June. What we're seeing right now is we are increasing our business relatively around 45%. What we see in terms of file starts right now is probably an increase of around 30%. We are seeing a decrease in file starts between that delta. One of the things that makes Fathom interesting compared to other companies is that because we continue to add agents and as we're adding those agents, they're bringing in file starts. But the best way I think to answer the question is when we were running a file start growth around 45%, we're now increasing file starts at around 30% to 35%.

That's helpful. And then your comments about mortgage originations. So I appreciate that with how interest rates kind of have moved, but are you seeing compression within the mortgage business itself on gross margin as well?

Absolutely. There are three key factors in the mortgage company: typically how much your margins are, second is the fees that you charge, and third is if you hedge. What has happened is that because of the significant decrease in volume in the sort of second half of June into July, volumes have decreased significantly. And so what happens is that when the volume decreases, the company also has less revenue, but that affects margins as some companies become much more competitive, and they're trying to gain any business at any price. So you see that fairly typical. Whenever you see a significant change in the mortgage industry for about 2, 3, or 4 months, you're going to see compression of margins until the market stabilizes, and then those margins come back up again. So yes, we did see and continue to see some compression in margins for mortgage.

Got it. I have one last question before I hand it off. You mentioned aiming to reduce expenses to $750,000 per quarter by the first quarter. What are some of the easier areas to address? Considering how rapidly the market has shifted, do you think there was some overhiring in ancillary services that could be among the first cuts? I'm interested in where some of these reductions might originate and what the quickest way to achieve this goal might be.

Sure. It's a great question. Go ahead, Josh.

What I expect of them is that as brokers, they should be looking for opportunities in this market to reduce expenses. Every business, without fail, including Fathom, we are incredibly frugal in our business. But even we have excess somewhere. There's always some fat that can be trimmed somewhere. What we don't want to do is do what some of these mortgage companies have done with massive layoffs. I think that's not the right thing to do. It just shows poor hiring in the first place. We're looking for other opportunities to be more profitable through reducing unnecessary expenses. We all have things we want to do, and we want to do a really good job. It's amazing if you put the microscope to the business how you can find $10,000 here, $8,000 there, $500. We've gone to every business head and said, 'Hey, where can you find fat that doesn't need to be here?' We've made a thorough inquiry, and they've all been very receptive and positive to do their part to help us make this happen. So I’m proud of our team.

Let me add the following. The best way to look at this is to say, look, if the company has been growing at 45% a year for many years, and if now we're going to grow at 30% or 35%, it's just the ability to reduce the expenses to match the revenue growth. And so by doing that, it's part of it. Now, when you're running a growth business, you have to hire ahead of that growth. So we're going to slow down some hiring just to make sure that our cost structure is aligned with our revenue growth curve. That's all. With that, we can say that it's not like some of the companies. If you look at the news about mortgage companies, we know mortgage is a very small component to our business, and a lot of mortgage companies that are primarily mortgage companies are going through significant pain right now. For us, it's just adjusting—continuing to get the attach rate. As I indicated, July was a very good month in terms of increased attach rates and increasing revenue by 30%. We anticipate that revenue will continue to grow in August as well. This is maybe a 2-quarter adjustment that has to take place. Reducing expenses really means aligning the expense growth curve to the new revenue growth curve for at least the next few quarters until things get back to normal.

Our next question comes from John Campbell with Stephens.

After peeling back the onion here, I mean, it seems like everything is healthy outside of the mortgage business. The guidance— I mean, it does seem like you've got an expectation for pressure continuing there, at least in the EBITDA side. I totally get that. I'm a little perplexed by the revenue guidance. I'm thinking to get down to your second half revenue kind of frame, I think you've either got to lose the agents, which doesn't seem like that's the case, given the commentary about such a strong July, or you might—I'm guessing maybe you're assuming a pretty steep drop in transactions per agent and maybe price as well. So just as a starting point, maybe if you could walk through kind of those key factors for the annual revenue guidance.

I'll say one thing first, and then Marco, I think you can take it. I actually had an opportunity to look at every one of our competitors' press releases and listening to every call I can listen to so far. The amount that I've seen significantly decrease was notable. The amount we decreased our revenue was a very small number, but we felt it was the right number. Marco, I'll let you provide a little more detail.

Sure. We're certainly not anticipating higher turnover. Actually, our turnover continues to stay consistent with the past. As we indicated, John, we had the second-best month in recruiting in July. But even as we add those agents, those agents take time to start doing transactions, right? Really, our decrease in revenue adjustment to revenue guidance is more related to some of the uncertainty in the market. As you know, the revenue per transaction is related to the price of houses. We're beginning to see some significant changes in prices of houses in the West Coast, Idaho, and parts of California. We just don't know how far that's going to continue across the country. What we learned over time is that changes typically happen in the West Coast and then move to the rest of the country. In some cities on the West Coast, we're seeing a significant reduction. That is how revenue is calculated. It doesn't change our gross profit per se, but we wanted to be conservative in our guidance due to the uncertainty remaining in the market. It's really more related to average per transaction than it is to the number of transactions or losing agents.

Once you get to know us better, you'll realize that we try to be as conservative as possible. Everyone claims to do that, but not everyone actually follows through. We genuinely attempt to maintain a conservative approach. The problem is when we try to look at the crystal ball, the more the government and the Fed try to help, the murkier it becomes, making it very difficult to forecast and understand guaranteed changes. I wish it weren’t the case, but it is the reality we live in. So we're doing our best, putting out numbers we feel confident about, ensuring they are strong no matter what happens.

Okay. That makes sense. And then I'm trying to better grasp gross margin in the back half. I know a lot of that is going to be influenced by what you see from the top line and the mix. But maybe, just conceptionally, if transaction volumes or gross commissions per agent drop as much as you guys might expect in the guidance, would you expect to see relief in gross margin, at least in the brokerage business?

Well, I think because gross margin is a percentage, and we charge a flat fee. If revenues do decrease, our $500—in a sense—our gross margins should increase as a result. So we think that worst case scenario will stay the same but actually could increase, right? If the average revenue per transaction decreases. But if it doesn't, then our top line will be higher than we anticipate. I don't think our gross profit per transaction will change, but it does depend on the top line.

Yes. I think we all tend to focus on our side a bit too much on the percent and not the dollar amount, but last question for me. Just getting a better grip on the mortgage impact. You mentioned it certainly impacted the gross margin. Could you maybe shortcut that for us and just—I mean, what would adjusted EBITDA and gross profit have been this quarter had that—if that had not been affected by the mortgage business?

So that's a great question. We anticipated that for the mortgage business, if we did not have what happened, especially in the second half of June, our adjusted EBITDA for mortgage would have probably been around $300,000 or $400,000 positive. So you can see that the majority of the miss was really related to the mortgage business. Our real estate business continues to do well and is primarily why the miss was related to the mortgage business.

Our next question comes from Tom White with D.A. Davidson.

Two for me, if I could, Josh, you just mentioned crystal ball. So maybe I'll ask you to dust it off again. I'm curious to hear your thoughts about agent count and agent additions over the next few quarters. It sounds like July was great from your perspective regarding recruiting. We heard from another brokerage last night. It sounds like they're seeing a steep slowdown in agent adds. Just curious, on one hand, it would seem like a platform like yours would arguably maybe accelerate agent attraction in a market like this. But I'm curious if you feel incrementally confident that'll happen or are agents maybe susceptible to sitting on their hands when the market slows down?

Sure. I think first of all, you raised a good point. So, if you think about the last quarter, the year-over-year growth, we had about 38% growth in agent growth. If you think about, if we removed the acquisition we made last year, this quarter, we'd still be pretty high. We've been averaging high 30s, 40%, and 30% growth, so we feel confident that if you remove that acquisition out of the last one, we'd still maintain strong growth quarter-over-quarter or year-over-year. Therefore, we feel confident moving forward. But when you look at all the leading indicators, our traffic to the website is increasing, and brokerages are reaching out to us, considering joining our company. All those numbers are increasing. I’m excited for the future because of these trends. There are some huge opportunities that could arise from this state. So, we feel really good about maintaining strong recruiting. We've added around 10 recruiters to help get the word out and talk to more people. We're very proactive when reaching out to people; other companies about joining us. Our focus has been understanding that there are only 1.6 million realtors out there. We have been very proactive about reaching out and showing them what Fathom can offer.

Tom, let me just add something. The best two recruiting months in the year are Q4 and Q1, and I think that given the economic factors affecting every real estate agent, we certainly believe Q4 and Q1 will be stellar for increasing recruiting because we know from history that these are the two best quarters.

Okay. Maybe just a quick follow-up. Any sense on the recruiting in July, whether average agent tenure or agent quality was comparable to prior quarters? I guess I'm just wondering if you guys might see a big influx of agents over the coming quarters, as agents sitting at other desks at other firms realize they're going to have a really low production year and are looking to hang their license somewhere that offers a better value prop? I know in the past you’ve stated you don't just want any agents, you want quality agents, but I'm curious what July looks like on that front.

Yes. I'll add something. We don't want just any agent; we don't want to be that broker. There are many out there with 3,000, 4,000, or 5,000 agents, but their average agent closes only one or two homes per year. It's not good because from a reputation standpoint, people start to think of that brokerage as one that just doesn't know what it's doing. A bunch of agents who are non-productive, who don’t do enough transactions yearly to handle market changes or contract changes, is something we want to avoid. But we aren't foolish; an agent who closes three transactions is still profitable for us. Therefore, while we want to bring in agents that are lower producers, our focus is on training them to help their productivity improve. If they’re not willing to grow, we will say no all day long. They’ll find it challenging to survive in this business. I’ve spoken with a lot of broker owners, and many of them are saying the agents leaving are primarily low producers. As we see decreased transactions, we see many of those low-producing agents leaving the industry entirely.

So, Tom, keep in mind that, again, July and August are the highest months in the industry. Producing agents typically close most of their transactions through July, August, and September. To answer your question, July has been an average month for us concerning similar numbers for average transactions. So higher-producing agents are typically going to change in Q2, Q3, and Q4. Hence, we're primarily going to see just a higher quantity of agents joining us, albeit from those in the same category that we have previously had. The higher-producing agents should start coming in Q4 since their business is decreasing. That’s when they begin searching for better compensation and commission; that’s when we’ll begin seeing them come to Fathom.

Great. Maybe I'll slip in one more, if I can. And thanks for all the time. You made a comment that attach rates for ancillaries were maybe lagging relative to your long-term ambitions due in part to focusing on profitability. I'm curious if profitability was not an issue—how and where would you be spending to improve attach rates? Is it just about launching in more markets and getting these brands out there? Or is there a technology spend that you would deploy to enhance attach rates? Any color there?

Marco, I’ll take the first part and expand a bit. You nailed it. When we enter a brand new market, there are sizable upfront costs associated with staffing appropriately. So we hire a branch manager, loan officers, and all the personnel required to make a mortgage work seamlessly. It's a significant cost upfront, which is why we've been a bit slower to open new markets, as previously indicated. The more markets we open, the greater the overall attach rate becomes. There are also necessary additional financial investments to increase visibility and introduce our lenders to agents; building relationships is key to getting referrals. Still, we've tried to be judicious. Marco, do you want to add any more insights?

Absolutely. There's an initial cost to open a new market. Given what happened in the second half of the second quarter, we chose not to open new markets for mortgage. We're focused on the ones we currently have. As I mentioned earlier, July saw a 30% revenue increase over June, and that uptick primarily came from our agents. Therefore, we are observing an increase in the attach rate, and that trend should continue in August and September. I think it's best to see this as a one-to-two-quarter delay in achieving our attach rates as we readjust our mortgage business. For Title, we continue to experience growth. So, we haven't seen a decline in that respect. Regarding mortgage, we expect a one-to-two-quarter slowdown, but we are quickly ramping up the attach rate. The mortgage team has worked diligently with our agents in specific markets. In a few quarters, we believe we will get back to the normal attach rate, continuing to aim for our long-term goal of 10%.

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, operator, and thanks, of course, to all of you joining our call today for your continued support. We are extremely proud of all we've accomplished, and we will continue working hard to achieve our objective of adding greater value to our company for the benefit of all our stakeholders. With that, have a wonderful evening, and thank you again.

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