Good afternoon, and welcome to the Fathom Holdings Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] 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, Allie, and welcome, everyone, to Fathom Holdings 2021 Second Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Fathom's Investor Relations firm. And it is my pleasure shortly 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 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 the company's IPO registration statement, its latest Form 10-K and other company filings made with the SEC, copies of which are available on the SEC website at www.sec.gov. As a result of those forward-looking statements, actual results could differ materially, and 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, a non-GAAP financial measure, as defined by SEC Regulation G. The reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, which is posted on Fathom's website. And with that, it is 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 and your faith in us. We're really proud that you're part of our Fathom family. Now quarter-over-quarter, our results continue to demonstrate the power of our truly disruptive model. And I'm proud to stand here and share our incredible growth in every key metric of our business. And to know that we did it without using gimmicks to get here. We're winning the right way, through hard work, continuing true innovation and providing really long-term value to our agents, our employees, clients and our shareholders. As you saw, year-over-year, our revenue grew by 118%. Our transactions grew by 74% and our agent count grew by 53%. And all of our publicly traded real estate companies out there of -- not all the companies out there, only a couple of the companies performed at this level, and they've been public for a very long time, while we've only been public for a year, and we're killing it, and we're just getting started. Too many people try to compare us to other real estate companies out there, but that's a huge mistake in my opinion. And I get it, though, they don't really understand who we are yet, and I believe the operative work here is yet. A few more quarters like this, and I think that people will truly understand our business and our value and really value us accordingly. If you really dig into our story, you'll realize that not only have we generated impressive performance to date, but still have an incredible path ahead of us. Fathom is unique and that we continue to grow at these incredible rates while also quickly becoming a profitable company. You have…

Thank you, Josh. As we indicated last quarter, our financials will look a bit different this quarter in order to provide additional visibility to the many businesses we have acquired. And I'm going to take some time here to review the numbers in more detail with you. Total second quarter revenues grew 118% year-over-year to $84.4 million -- $84.2 million from $38.7 million. The increase resulted from growth in real estate transactions, average revenue per real estate transaction and revenue contributions from Encompass Lending, which is a mortgage company; IntelliAgent, which is our SaaS technology company; Dagley Insurance, which is an insurance company; and finally Verus Title, which is our title company. GAAP net loss for the quarter was $2.1 million or a loss of $0.15 per share compared with a GAAP profit of $161,000 or $0.02 per diluted share for the same period last year, which was, as you know, again, prior to our IPO. The change from last year's second quarter was due primarily to increases in costs related to operations, marketing, G&A and expenses related to being a public company. Partially offset by a tax benefit of approximately $2.6 million attributable to the release of the company's valuation allowance against deferred tax assets as a result of the company's second quarter acquisitions. Adjusted EBITDA loss, which is a non-GAAP measure, was $2.3 million for the quarter versus an adjusted EBITDA profit of $329,000 for last year's second quarter, again, prior to our IPO. And while we recorded a loss in total adjusted EBITDA, our real estate division was profitable, which I'll discuss in a moment. In Q2, our G&A decreased to 11.2% of our total revenue from 12.3% during first quarter of 2021. Total G&A expense increased to $9.4 million compared with $2 million last year, due…

Thank you, Marco. As you can tell, we're incredibly excited about our incredible long runway for the company and our future prospects. We've been working really hard to deliver on our promise to grow Fathom and accelerate in yet sustainable fashion for the long term. For those of you who are shareholders, thank you for your trust and being part of our Fathom family. All right. Operator, we are now ready to open the call to questions.

[Operator Instructions] Our first question today comes from Darren Aftahi with ROTH Capital Partners.

Congrats on the quarter. So thanks for the detailed segment breakout and the long-term targets. I just wanted to kind of make sure I have the growth assumptions right on your "guidance." So is the right math taking kind of the trailing 12-month transaction since the IPO and then kind of growing over the prior year, I think that kind of come up with 59% growth, is that correct?

Yes.

Yes, that's correct.

Got it. So if that math is right, it kind of implies roughly 2.5 years to get to roughly 100,000 transactions. I guess my question -- go ahead.

So a couple of things. It is looking back on that average. But I think if you see -- if you look at the last 3 quarters, when you look at transaction growth, right, you're looking at Q4 was 50%, Q1 60% and Q2 74%. So you can see that the transaction growth is also accelerating, right? So it is taking into consideration the past, but it's also taking some consideration to the acceleration of the transaction growth as well.

Fair enough. So it takes some time to get to that 100,000 transaction and $40 million of EBITDA. My real question is what's the underlying attach rate assumption on your various service portfolio to get to that number?

So the way that we look at this is more of -- if you look at the 100,000 transactions is to look at around 10% across the board, average. Now keep in mind that some businesses are going to do more than 10%, some are going to do less than 10%, but it's -- we are making assumptions using a modest attach rate of 10%.

Got it. That's helpful. Beyond kind of some of your tentpole geographies like Texas and North Carolina, where are you seeing kind of over-indexed traction in some of your newer markets?

That's a great question. Honestly, we're seeing growth everywhere right now. The industry, as you know, is really hot. Now keep in mind that we are not -- we currently don't have a presence in the Northeast, right? We're not in New York, Connecticut and Massachusetts. So we're not in some of the areas that we've seen transitions of people migrating from, right? We are primarily in the states where people migrating to. So for example, if you look at our recent merger with EPIC in Idaho, Boise, Idaho, the state of Idaho is one of the top 10 new markets in the country in terms of growth, right? So we see significant growth in Idaho. We're seeing significant growth in Florida, Tennessee, Texas. So it's -- there are a variety of states in which are increasing significantly. And to a certain extent, we have limited exposure in the states that are losing market share in a sense against the whole country, right? So we are not, again, in the Northeast. But we're seeing really -- they are many -- even North Carolina, I mean the Raleigh area is seeing significant increase in people moving into the area. So there are many markets that are seeing a significant increase. Certainly, the California market, people are -- the population is moving away from California certainly in the Northeast to a certain extent. But we have at least 8 or 9 markets that we're seeing some significant increases.

And we're also seeing significant increases just in the markets we're currently in, just really starting to see some incredible penetration in each of these markets we're in.

Great. And maybe if I could push you on the spot, your sort of 12 months removed from your IPO, what are kind of your 1, 2 or 3 top strategic priorities kind of over the next 12 months if we're talking August 2022?

I think priority number one right now, which by the way, when I talk about priority 1, 2 and 3, it doesn't mean we have to do one at a time. We've got an incredible team that we can do all of these at the exact same time. But there's 2 huge priorities. One is we've got these great companies now, right? Fathom is no longer Fathom Realty. Fathom is now Fathom Realty, Encompass Lending, Verus Title, IntelliAgent, Dagley Insurance, all these companies now. So to go back to be able to get that pattern you talked about, it's about fully integrating these companies into our technology, fully integrating the companies and their employees into our real estate business to where they became a really tight cohesive units. And that's really focus #1 is making sure that we're not -- we're not playing loose with these acquisitions. We want to do it the right way, take our time, do some very strategic investments into making sure that we can accomplish that goal. And so that's a huge focus for us right now. And the other piece is that we want to continue to grow. I mean I'm not going to lie. Obviously, we want to grow like everyone else does. One of the mistake I think a lot of people do is they just grow for the sake of growth, right? They're just trying to add body count. And then what happens is you have a lot of agents who are closing no transactions. And it starts to diminish our transactions per agent, it starts to hurt your reputation. That's not who we are. I'd rather have a 53% increase in agent count -- agent growth, an 80% increase in transaction growth, then a 70 -- and then had the…

No, I think we're good. I think those are it, yes.

In other words, Marco is saying [Technical Difficulty]

[Operator Instructions] Our next question comes from Tom White with D.A. Davidson.

This is [Kevin Robinson] on for Tom. I was just wondering if I could have 2 questions for your time. So I was wondering since you're going -- since going public, you've added your Encompass title -- I mean the Verus Title, Encompass Lending, Dagley Insurance, and I've seen incredible growth through that. I was wondering if you could talk a bit more on the near-term and long-term growth for those plans and what you expect these ancillary services will represent as a percentage of your business? And I have a follow-up question after that.

Sure. Thank you, Kevin. Look, we are going to see significant growth. I mean one of the things that we did, as you saw, we made a significant investment in Encompass Lending in Q2. We felt that for us to be able to see that kind of growth that we want to see, we wanted to make that investment. So I think that revenues going forward for all of our -- as Josh indicated, that is going to be key priority for us. I think we're going to see significant revenue growth going forward for the next 12 to 18 months. For us, these acquisitions are very key in terms of making Fathom a very profitable company. So if you look at the statement that we made earlier, that we believe that between 100,000 to 110,000 transactions, we believe that our adjusted EBITDA will be about $40 million. More than half of that adjusted EBITDA is coming from the mortgage, title, insurance and technology companies. So you can see that in the next 24 to 30 months, a lion's share of the profitability is going to come from those businesses. So I think that should be in a statement in a sense that shows how profitable we expect these business units would be for our business.

Great. Awesome. And congrats on the agent growth. I was wondering has your value proposition changed at all since -- especially given the competition of they tweaking their offerings by having other benefits like a dividend or anything else, is there anything else you see for adding to your value prop for agents over time?

That's a fantastic question. So the answer is no. We haven't had to. When you think about it, we don't have to. If you look at what we're doing compared to any of the competition out there that's publicly traded, once you can actually look at what they're doing. We can provide -- everything we're providing, it's so far greater value to agents that they have to provide all those things to be able to compete with us, not us having to add more to compete with them, if that makes any sense. So ultimately, long term, are there things we can do? Absolutely. But right now, we've got, I believe, I truly believe, I'm not biased, I'm trying not to be, one of the greatest value propositions of any company out there. And so they're trying to play catch-up, I believe, because we really do have a strong value proposition. So right now, I think our focus is how do we provide more tools and resources to agents, more than anyone else provides. And we can do that through technology. We can do that through lead gen. There's a lot of way we can do active training. There's a lot of things that we can do that a lot of our competition talks about doing but don't actually do. And so that's been really our focus. How do we take the technology we have because we're one of the only companies that actually have a full technology suite for their agents. We're not licensing other technology platforms. So we're able to take that technology and start providing more ways to help the agents spend less time in front of the computer, more time in front of clients and be able to generate more business through their sphere and through their marketing. That's what agents want. More than even better splits, more than a small dividend, they want more leads because one more closing could be $9,000 to them, right, not a couple of hundred dollars per year and something else. So that's our focus is, really will provide more value. We've already got one of the greatest value propositions, but provide more value by helping them close more business. That's key, that's what they want. They're not looking for gimmicks.

Kevin, let me also add that how we look at value is also by looking at turnover, right? So turnover is an indicator of value in a sense that are agents leaving you, right? To attract agents is one thing, but at the end of the day is about keeping them, right? And so when we look at the value exchange, we're looking at who are the agents that are leaving Fathom, what is our turnover? And I think Josh indicated our turnover for Q2 is 1.37%, which we would argue as one of the lowest in the industries, although we don't know what other companies are because they don't post theirs. But if you look at that and given that the -- a significant majority of the 1.37% agents that leave Fathom close very little business. So clearly, the agents that were within Fathom perceive that the value exchange that they're receiving is a positive one. And then the other thing that we're very proud of is the agent referral. So the Fathom agents are referring other agents, and that number continues to increase as a percentage. In the future quarters, we're going to share those numbers. And I think people will see, again, that's the issue about value exchange. How are agents representing? How it is staying with the company? And then how agents are referring other agents? Other companies talk about Net Promoter Score. And to me, at the end of the day, Net Promoter Score is about are agents referring other agents, and we're going to start showing that number going forward. And I think that shows the kind of benefit that agents are seeing from the value that they're getting from Fathom, which as we continue to grow, that will continue to benefit everyone.

Great. Congrats on an awesome quarter.

Our next question comes from Kris Tuttle with IPO Candy.

I just have 2. But before I say that, you guys -- congratulations again on everything you've done over the last year. Our clients are very happy. And I'd say if there was a ratio of sort of management execution to market cap, you guys would rank very highly on that from an IPO standpoint.

Thank you.

I had 2 questions for you. One, pretty basic and then one a little more long term. The basic one is when you guys talk to agents who you would like to have come over to the platform, in cases where they decide not to, I'm curious to know what you generally hear as sort of the top 1 or 2 reasons why someone might stay at a traditional brokerage firm like a Weichert or something like that?

Sure. It's a fantastic question. It really comes down to kind of psychology, doesn't it? First of all, when we get in front of an agent, we rarely lose them. If an agent is actually thinking about actively moving somewhere else, if they're talking to us versus talking to someone else, it's very rare they choose someone else over us. It happens, but it's pretty rare. But the question becomes, what about those agents who aren't thinking about moving that we're talking to, that either another agent is trying to reach out to or that we're actively trying to recruit, it usually comes down to fear, right? Fear of the unknown, fear of loss. Right now, they're being told because the -- some of these traditional brokers are scared, right? And I'm not saying that loosely. I hear it because they're scared of us coming into the market. They're scared of us taking all their agents. They see us cannibalizing a lot of their agents. And so they're telling their agents that if you come to Fathom, you'd not be able to close any business, clients care about the brand. They care about the logo. And that's just so far from the truth. And so in fact, NAR has proven that time and time again that clients care about the agent, right? That's who's actually attracting the client, not the brand they're with. In fact, only 1% of all homebuyers chose an agent based on what brand they're with, but the other 99% chose the agent. But that's not what the brokers are telling the agents. The brokers are telling you have been part of the brand. So it's scaring them. They think, okay, I'm closing 15 homes this year, if I leave will I lose business? Is that a…

Yes. I appreciate that. And I'll just share one thing. The only thing I've heard that's a wrinkle -- not a wrinkle even, but just a niche thing, is some of these more established brokerages, and I'll turn this into a question, they have some established relocation business with large companies. And a few of the agents I've talked to have said, it's not that big, but they throw me a few of these relocation clients every quarter. And it's enough of a -- it provides a little bit of an inducement, I guess, for them to stay with an established agent. I'll turn it into a question and just ask you, are you guys looking at relocation or have you thought about that as something you might be able to add into your mix?

The answer is absolutely yes. It's something we've explored and looked into more just as an internal talk. We've actually gone further exploring opportunities. However, I will tell you that there's a bit of a caveat to that, I guess. I'm not sure the best way to put it, but there's very few companies. There's one big brand, but there's very few companies that actually do any real amount of relocation. And then in those companies, there's only a small number of agents inside the company who actually received those relocation spreads. And then the number of leads they typically get are actually very small. We've had a lot of agents come over, they got 1 per year or 2 per year. Very few got a lot. Now some do, I'm sure. I've got no doubt some got lot, but it's not every single agent in that company. And so if you think about if an agent gets 2 relocation deals. Relocation deal is typically, you're getting up 50% to the relocation company, then your broker is taking 30% of your 50%, right? So how much are you left with? You're left with very little, right? You'd have to do 3 deals from them to equate to 1 deal at Fathom. So if you're only giving up $6,000 because you're getting up those 2 relocation deals, total of $6,000. But you move over to Fathom and the average agent saves $12,000 to $15,000, you might do 2 less deals, but you're still making a significantly more amount of money. So sometimes it takes time to just sit down with them, show them the math, help them understand the truth, not the emotion, not what they feel, but the actual facts, right? Facts don't care about your feelings kind of idea. So we've walked them through that. And once we show them the numbers, like, "Oh, it makes sense. I got it." But unfortunately, sometimes it takes time to actually -- you have to actually sit down with the person and help them understand the numbers.

All right. Yes, that makes sense. I appreciate that. And my final question, and you can -- don't have to go into too much detail on this, but there's certainly an interest, it's not a fixation in some of the markets in real estate around this more transactional model, the Opendoor and Zillow and some of these guys have been -- in the Cathie Woods and the ARKs are out there around fungible real estate. And I understand it as a segment of the market, but I just wanted to take the opportunity to ask you guys if you have some thoughts about how you kind of see this more liquid, more efficient sort of transactional real estate market and if that plays a role in how you see your long-term growth?

Sure. No, actually. So look, iBuyers, kind of the term we've given those companies, iBuyers are here to stay. I don't think they'd go anywhere. They've been around for, I don't know, 40, 50 years. I mean that [We Buy Ugly Homes] has kind of beat them to the punch. That model has been on forever. Now it's got a prettier spin to it, and there's a lot more money backing it up, but they've been on forever. And I don't think they're going anywhere. I know they're struggling to -- a lot of struggles relating to that model, but I don't think they're going anywhere. So the question is you can freak out and try to compete against them or you can use them to your advantage. And so we actually have a lot of agents, and we encourage agents to use them to our advantage. So what we do is, for example, we've got agents who will promote the iBuyer, the instant offer. We can offer you a home, just like they can, immediately. Now it's not Fathom that's buying the property, but we can utilize investors and Zillow and Opendoor and the rest would be able to do that. So we market it. That allows us to get in front of 10 homes, for example, as an agent markets that property or that offering. They go into those 10 different listing appointments with the instant offers. They might walk in with free 3 instant offers, but they also walk in with here's what actual listing would look like as well. So offer #1, offer #2, offer #3 or list with me, and it might take 30 days, but here's what you met at the end of the day. And what we find is that typically, the ones who actually opt for that instant offer, it's like 1 out of 10 or 1 out of 20 people. The rest of them become great opportunities for listings -- for new listings for our agents. So our agents are using them to actually generate more business. And then the ones who do opt for that instant offer, that's okay, because our agents got 9 other listings potentially, but also they typically still get their full commission from that iBuyer. So whether they choose the instant offer or they go the listing route, our agents still gets paid and Fathom still makes a profit. So why fight against them, let's work together, let's use them to make more money, become more profitable. And that's what we do.

All right. Very good. Well, listen, I'll step down. Just congrats again, and I'll circle back with you guys and Marco on some more detailed questions about the model.

Well, those are great questions.

Our next question comes from Gregg Kitt with Pinnacle Fund.

One comment and one question. First, I was very excited to see your long-term guidance of $40 million in adjusted EBITDA and building on Darren's question from earlier, it sounds like that could be possible maybe as early as 2024-ish. And so that's exciting to me because I love businesses that have good incremental margins. And as you grow revenues, you grow EBITDA as well. And further, one of your virtual brokerage peers is trading for 75x plus current year EBITDA, if these multiples hold up, I would love to see you earn 75x $40 million of EBITDA and be a $3 billion company in a couple of years and especially compared to your $400 million enterprise value today. So if I heard Marco correctly, I think I heard a lot of the growth could be coming from your services businesses and that those could be nicely profitable over the next couple of years. I also heard that you were making some investments to get licensed and prepare those businesses, especially the mortgage business to grow -- to handle a lot of growth. What work is left to do for you to prepare the services businesses that you've acquired for that future growth that you're expecting to see?

Well, let me first step back 1 second. On the 100,000 transactions, just -- one thing I think is really key for people to understand that 100,000 transactions, just the real estate business alone could see $10 million to $15 million in operating profit. So that just by itself is incredibly strong. So I think that's key for people to understand. So [indiscernible] being about 20%, 25% of that $40 million. So that -- I think in real estate it's key for people to understand because there's a lot of companies out there that -- that aren't making any profit whatsoever or -- I'm sorry, EBITDA right off of just the real estate transactions. They're depending on everything else to be able to carry the load. And yet, each one of our businesses can be very strong by itself. I know Marco needs to correct me on how I phrase that. I know for fact, as soon as he said like oops, I said it wrong. But the other piece is that -- no, Marco, I can just see, Marco. The other piece to that is the focus is really in how do we -- now that we've got the operations in place, how do we fully integrate them? How do we get the relationships built between the agents, the loan officers, the escrow officers, insurance agents and so on? Because relationships matter. Even though we own the business, we can't just force these solutions down our agents' throats, right? We still have to earn the business. And the way we do that is making sure we hire the best people. So we made investments in strong leadership. We made investments in strong loan officers, title and so on. So those investments are really important because if you want agents to actually give you that business, you have to have the best. And so when you think about -- when you hear about a lot of these other companies, and they tend to hide that attach rate or don't talk with attach rate, it's because the attach rate is weak. The attach rate is weak because they're trying to force it down people's throats versus earning that business. And so our focus is really making sure we've got a strong operation, strong business with strong people. So that way, our agents want to send the business over, not that we're forcing or begging them to send the business over. And I think that's going to be really key when it comes to attach rate. And so that's really the -- the focus right now is strong investments in both time and money in those operations to make sure we got the best of the best to help the real estate agents really want to attach and really want to work with those people. Marco, what do you want to add to that, I know I'm.

Well, Gregg, great question, by the way. So if you look at -- one of the things we try to do is by looking at segmentation and looking at each business to try to give everyone visibility, right? So for example, you look at the real estate and the adjusted EBITDA was almost $0.5 million, right, for the quarter. You look at -- when you look at -- and we talked about title and mortgage, and the adjusted EBITDA was about breakeven, right? And then on the mortgage side, yes, we had a loss of almost $890,000. But most of that was related to the investments necessary to really scale the business, which we feel that going forward, those investments are going to pay off. So I think in very short order, most of our businesses are going to contribute in terms of positive adjusted EBITDA to the business, right? So we feel very confident that in that number of 100,000 to 110,000, that we'll see adjusted EBITDA over $40 million. So yes, we feel very good about that. And as Josh indicated, we think about $15 million will come from real estate and the other $25 million will come from the business units. And then we're looking at around about a 10% attach rate. And so I think in some businesses, we'll be able to see more and perhaps some a little less. But the attach rate, we're using a very modest rate. And so we feel very confident. In terms of the timing, if you look at the last 3 quarters, we grew transaction by an average around 61%, 62%. If you -- someone applies the same growth rate in transactions for the last couple of years, I think they'll be able to see when we're going to perhaps hit the 100,000 to 110,000 transactions. So we feel very confident that within that time frame, we'll see EBITDA -- adjusted EBITDA of $40 million, which I think, hopefully, by that time, and sooner, investors would value this company in a different way than we currently are being valued.

And I think just to touch on one thing, my follow-up question was how do you incentivize agents to use these services, and I think, Josh, you touched on it very well, is that you're not forcing this down any of your agents' throats, you're trying to build a really high-quality service offering now that you've taken the time to acquire -- to vertically integrate title, insurance, mortgage that you're going to build a -- your goal is to try and build a really high-quality service that your agents are looking forward to using because your agents are getting -- are seeing a good experience every time that they refer a client to use any of the Fathom-owned service businesses. Is that the right way to think about it?

It is. You said it better than I did. If you ever needed a job, you let me know. There is one added benefit. I wish we could legally incentivize the agents directly for sending business over, that can't happen, I wish we could, but there's rules on that. However, there is an indirect way that we can incentivize agents. And it's something we're doing that right now, no other company is doing, and that is the fact that not some of our agents, but every single one of our agents from the time they close the first transaction own stock in Fathom. We all become shareholders in the company. And there's no other company that I know right now that can say that, every single one, not some, but everyone. And so that means that the more they send business to mortgage, title, insurance, leads and so on, the more revenue we generate, the more profit we're able to create, which brings more value to their stock potentially, right, has never ever again, could be, but potentially, right? So that means that there is a benefit in some way for them as they utilize the services, they are shareholders as well. If they want to see their shares go up in value, then we all have to do our part to bring more value to our shareholders as a whole.

This concludes our question-and-answer session. I'd like to turn the call back over to Josh Harley for any closing remarks.

Thank you so much. And of course, thank you all for joining our call today and for your continued support. We are extremely proud of all that we’ve accomplished. And we look forward to taking additional actions that will add even greater value to our company and benefit all of our stakeholders. So with that, have a wonderful evening, and thank you again.

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