Good day, and welcome to the Fathom Holdings Inc., Second Quarter 2022 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, Sarah, and welcome, everyone, to today's call. I'm Roger Pondel with PondelWilkinson, Fathom's Investor Relations firm. And 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 at www.sec.gov. 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. Josh?

Thank you, Roger. And of course, thank you to everyone on today's call. Our entire team really appreciate 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 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 a lot of investors over the last few months who are new to Fathom and how we operate. It's really gratifying when 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 brokers in the country out of over 86,000 brokerages and the sixth largest independent brokers. What's truly unique about our…

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 and 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 exceeds 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…

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.

[Operator Instructions]. 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. And let me just say [indiscernible]. Q2 had two sort of two quarters within one quarter. The first two months, April and May performed relatively the same as previous years. June or really even the last 3 weeks of June was that we start seeing a reduction in file starts, which then continue into July. And so we did not really see a -- at least for us, we did not really see a significant impact in the sort of file starts until, let's say, the last 3 weeks of June. And 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%. And so we're 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 then we're adding those agents, they're bringing in file starts. But the best way I think to answer the question is that when we were running a file starts growing 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. So there are 3 key factors in the mortgage company, typically how the -- one is how much you -- your margins, right? Second is fees that you charge? And the third is if you hedge and you can -- some companies can make a little bit of from hedging. But what has happened is that because of the significant decrease in the sort of second half of June into July, volumes have decreased significantly. And so what happens is that the volume decreases, the company also has less revenue, but that affects margins or some companies become much more competitive, and they're trying to gain any business at any price. And so margins also compressed. So you see that's fairly typical. Whenever you see a significant change in the mortgage industry for about 2, 3, 4 months, you're going to see compression of margins until the market stabilizes and then those margins come back up again. And so yes, we did see and continue to see some compression in margins for the -- for mortgage, yes.

Got it. And I guess just last one for me and then I'll pass it on. You talked about reducing expenses in the goal of $750,000 per quarter by Q1. I guess, what's kind of the low-hanging fruit? And given how quickly the market changed -- if you're sort of looking back -- more than quarter back, was there some overhiring in ancillary services that will be sort of the first thing to go? I'm just kind of curious where some of these cuts may come from and what's kind of the quickest path we're getting there?

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

Well, I was wanting to say, actually, I'm here at this Infinite Conference today and I had a chance to speak to a lot of broker owners and they asked, what do we do moving forward? Like how do we -- what should we do as broker owners moving forward in this market? One of the things I expect of them, look, as a broker, you should be looking for opportunities in this market to reduce expenses, every business without fail, including Fathom. Like, we are incredibly frugal in our business. But even we have bloat somewhere. There's always some fat that can be clogged somewhere. What we don't want to do is do it -- some of these mortgage companies have done, other companies have this massive layoffs. So I think it's not the right thing to do. It just shows poor hiring in the first place. That's not our intention. We're looking for other opportunities to be more profitable through reducing unnecessary expenses. We all have things we like -- so we want to do a really good job. We're very thoughtful on how we do it. But it's amazing if you really put the microscope to the business where you can find $10,000 here, $8,000 there, $500. And so we've gone to every single business head and said, hey, where can you find fat that doesn't need to be here? That's just -- it's a nice to have, not a need to have. It doesn't affect your ability to grow the business. And so Marco's done a good job whipping the proverbial bullet to get them in shape, but they've all been very receptive. They've all been very positive to do their part to help us make this happen. So real proud of our groups -- go ahead, Marco.

Let me add the following. The best way to look at this, I think, is to say, look, if the company -- we've 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 always had -- you have to hire ahead, right, of that growth. And so we're going to slow down some hiring just to make sure that our cost structure is aligned to our revenue growth curve. That's all. And with that, we'll be able to say that, it's not -- it's a little different than some of the companies. And the other thing is if you look at some of the news and mortgage companies, we know mortgage is a very small component for our business and a lot of mortgage companies who are primarily mortgage companies are going to significant pain right now. For us, it's just adjusting -- continue to get the attach rate. As I indicated, July was a very good month in a sense of the increase in the attach rate and increasing their revenue by 30%. We anticipate that revenue for ELG will continue to grow in August as well. And so I think it's just that this is maybe a 2-quarter adjustment that has to take place. But in terms of reduction expenses really aligning the expense growth curve to the new revenue growth curve, at least for 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. I mean, just given the commentary about such a strong July or you might -- I am 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 will say one thing first, and Marco, I think you can take it. I actually had an opportunity of looking 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 a lot of them decrease was significant. The amount that we decreased our revenue was very small, very nominal. So it wasn't a big number, but we felt it was the right number. Marco, I'll let you kind of go with a little bit more detail about why and why we?

Sure. Yes. We're certainly not anticipating higher turnover. Actually, our turnover continues to stay consistent to the past. As we indicated, John, we had the second best quarter -- second best month in recruiting in July. But even as we add those agents, those agents take time to -- by the time they join start doing transactions, right? Really, our decrease in revenue -- adjustment to revenue guidance is really more related to some of the uncertainty in the market related to -- as you know, the revenue per transaction is really related to price of houses. We're beginning to see some significant changes in prices of houses in the West Coast, Idaho, parts of California. And so we just don't know how far that is going to continue across the country. What we learned over time is that changes typically happen in the West Coast and they sort of navigate to the rest of the country. And so there are cities in the West Coast where we're seeing a significant reduction. As you know, that's how revenue is calculated. It doesn't really change our gross profit per se, but we wanted to be conservative in our guidance because there's so much uncertainty in the market still. But it's really more related to average per transaction, per se, as opposed to a number of transactions or as opposed to losing agents or all of that. And that is one of the components that we just don't know how much that acceleration and reduction in price is going to take place. And so we wanted to be conservative in our estimates.

Yes. Once you get to know us better, you'll realize that we try to be as conservative as possible. Everyone says that, but not everyone actually does it. We do try to be very conservative in our approach. The problem is we try to look at the crystal ball, but the more the government, the more the Fed tried this "help", the more murky that crystal ball becomes and it becomes very difficult to start forecasting and really understanding what's going to change. I wish that wasn't the case, but it is. It's the world we live in right now. So we're doing the very best we can, but we want to make sure that we're putting numbers out there that we feel good about that no matter what happens, we feel strong.

Okay. That makes sense. And then I'm trying to get a little bit of a better grip on gross margin in the back half. And I know a lot of that is going to be influenced about what you guys actually see from the top line and the mix and whatnot. But I mean, I guess, just conceptionally, if transaction volumes are -- gross commissions per agent drop as much as you guys maybe are expecting in the guidance, would you expect to see relief in gross margin, I guess, at least in the brokerage business?

Well, I think because gross margin in a sense is a percentage, right, and because we charge a flat fee. So if revenues do decrease top line, our $500, say $500 in a sense, our gross margins should increase, right, as a percentage, right? And so we think that the worst case scenario will stay the same, but actually, they could increase, right? If in fact this happens that the average revenue per transaction decreases, which may not, right? And if it doesn't, then our top line it will be higher than we're anticipating. But I don't think our gross profit -- our gross profit dollars per transaction are not going to change. In terms of percentage, it will depend in terms of what the top line is, right, because it's basically a percentage -- so that's kind of how we feel about that. So I don't know if I answered your question, but it would depend on the top.

Yes. I think we all tend to focus on our side a little 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 have adjusted EBITDA and gross profit been this quarter had you -- had that -- not had to step back in the mortgage business?

So that's a great question. So 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 be around about $300,000 or $400,000 positive. So that swing was about $1.3 million to $1.4 million. So you can see that the majority of the miss was really related to markets. Our real estate business continues to do well. It's really -- most of the story on the miss, it was related to the mortgage business.

[Operator Instructions]. 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. And 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 you guys -- for you guys from a recruiting perspective. We heard from another brokerage last night. It sounds like they're seeing a kind of a pretty steep slowdown in agent adds. Just kind of curious on one hand, it would seem like a platform like yours would arguably maybe accelerate agent attraction in a market like this. But just curious if you feel maybe incrementally confident that, that could happen or are agents, I don't know, maybe susceptible to kind of sitting on their hands when the market slows down for a little bit. And then I had a quick follow-up on expenses.

Sure. I think first of all, you raised a good point. So I try to think about the last quarter, the year-over-year growth. So we had about 38% growth for agent growth. If you think about if we removed that acquisition we made last year, this quarter, we'd be pretty high. So we've been averaging high 30%s, 40%, 30%, 38% for probably the last several years. And so when you remove acquisitions out of it -- so we feel really good that if you remove the acquisition out of the last one, we'd still be maintaining pretty strong equal growth quarter-over-quarter, year-over-year for us. And so we feel really confident moving forward that, that will continue. But as I mentioned, when you think about all the leading indicators, when you look at the traffic to our website, when you look at brokerages reaching out to us, thinking about joining our company, all of those numbers are increasing and increasing more and more. And so it actually gets -- I'm trying to come on this call and not be overly excited because there's good, there's positive, there's also negatives. But at the same time, I'm excited for the future because of all of this that we're seeing coming in. And so there's no saying never let a disaster go to waste. I don't come across harsh, but there are some huge opportunities that could come out of this. So we feel really good that one, just maintaining a really strong recruiting. We just added, I believe, 10 recruiters to the team. So we're adding more recruiters to help get the word out to help talk to more people. We are putting more out there in regards to dealers talking to companies about possible walkovers and acquisitions. As I mentioned on a…

Tom, let me just add something. The best 2 recruiting months in the year is Q4 and Q1 and I think that given the economic factors that are affecting every real estate agent, we certainly believe that Q4 and Q1 will be stellar months, stellar quarters for us to continue to increase recruiting because that's -- in our history, we know that those are the 2 best quarters to recruit agents.

Okay. Maybe just a quick follow-up. Any sense on the recruiting in July, whether like agent kind of tenure or agent quality was comparable with kind of prior quarters? I guess I'm just wondering if you guys might see a big influx of agents over the coming quarters, guys who are 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 will be a better value prop? I know that in the past, you guys have -- you don't want just agents, you want quality agents, but just curious whether -- what July looks like maybe on that front?

Yes. I'll add something. I'd love Marco to add some color as well. First, you're right, we don't want just any agent. We don't want to be that broker. There's a lot of them out there that have 3,000, 4,000, 5,000 agents, which sounds like a great number, but their average agent closes 1 or 2 homes per year. And that just -- it's not good because from a reputation standpoint, people start to think of that brokerage as a broker who just don't know what they're doing. A bunch of agents who are non-productive, that don't do enough transactions per year to really stay on top of market changes, contract changes and so on. And so we want to avoid that. But at the same time, we're not fool, right? An agent who closes 3 transactions is still profitable for us. So we want to -- we just want to take it with each agent, one at a time. If an agent closes one home a year, we probably won't take them. That's always been the way it is. 2, they've got to show us that they've got a desire to grow their business. 3, we'll probably take them but try to coach them to get to 5, 6, 7, 8. We really want our average transaction per agent to be in the high, getting closer to 10 than being closer to 1 or 2, which some companies don't care about. So that's part of it. But as we do bring in agents that are lower producing, we want to make a very strong focus on training them and helping them get their productivity up. If they just don't want to grow, and we're going to say no all day long. It's not worth -- their time, it's not worth our time. I've actually talked to a lot of broker owners while I was here and a lot of them are telling me, most of their agents that they're losing or agents who are low producing. So as we see a downturn in the number of transactions closed, we're seeing a lot of the agents to close zero homes or 1 home or 2 homes just say, you know what, I'm out, I'm out of the business. And so a lot of the companies you're seeing an increase in their agent attrition is coming from these low producing, not producing. It's not that they're coming over to companies like ours have better value. They're just getting out for the business also because at the end of the day, 2 closings, whether you're making 100% commission or you're making 80% of the commission is still not up to pay the bills.

So Tom, keep in mind that, again, July, August are the highest months in the industry, right? So producing agents typically close most of their transactions through July, August, September. But to answer your question, July has been an average month in terms of similar numbers for us in terms of average per transaction and all of that. So it hasn't changed. Those higher-producing agents are going to -- and in fact, July -- typically, July, August are not the best months for recruiting even though we had our second best month ever. Those higher-producing agents are going to start changing in Q2 and Q3 and Q4. That's when we're going to start seeing the higher-producing agents make a change, given that their business has decreased. And so for July, August and September, we're primarily going to see just a higher quantity of agents joining us, but they're going to be sort of the same agents that we've had in the past. The higher-producing agents should come in Q4 as their business decrease, and then they are looking for a better compensation and commission. And that's when we're going to start seeing those higher-producing agents joining Fathom than we typically have. That's when that's going to happen, and that's what we anticipate.

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 sort of lagging relative to your kind of long-term ambitions due in part to kind of the focus on getting to profitability. Just curious if profitability was kind of not an issue, like how and where would you be spending to improve attach rates? Is it just kind of like launching in more markets and getting these brands out there? Are there -- is there kind of technology spend that you would deploy to improve the attach rates? Just any color there?

Marco, I'll take the first part and add some color. But you nailed it when you asked the question. When we go into a brand new market with mortgage or title, there's a sizable upfront cost to be able to bring people into that market. So you hire a branch manager, hire loan officers, all the people that are behind the scenes that make a mortgage work. So there's a large cost. And so we've been a little bit slower to open new markets, which we indicated. We haven't done as much of. So that was part of it. Like, if more markets we open up, the greater the attach rate overall becomes. And the markets we currently have, there are some financial spend as well to get in front of agents, getting a budget to some of their loan officers so they can go meet one-on-one for coffee, take people to lunch, build their relationships because relationships are how mortgages are referred. So all that -- these are all costs that -- additional costs that we've been trying to be very, very thoughtful on. But Marco, do you want to add any more color to that?

Yes. I mean there's initial cost to open in new market. So we have -- given what happened in the second half of the second quarter, we did not open in new markets for mortgage. We focus on the current markets. And as I mentioned earlier, Tom, July, we saw an increase of 30% in terms of revenue over June, and that increase primarily came from [indiscernible] agents. So we definitely are seeing an increase in the attach rate in July, and I think we'll continue to do that in August and September. So that has been positive. I think the best way to look at this is to look at this most of a delay of one quarter in terms of attach rates as we adjust our mortgage business. For Title, we continue to see an increase. So I think we're -- we haven't seen an effect on that. But I think for mortgage, it's probably a one quarter to 2 quarter slowdown, but we quickly are picking up the attach rate as well. The mortgage team has done a really good job of dealing with this. Again, this is unprecedented times, and every mortgage company is going through a lot of challenges. And so our mortgage team has worked really hard with our real estate agents in specific markets. So we feel confident over -- in a couple of quarters, we'll get back to the normal attach rate, and we'll continue to deliver on that 10%, which is our long-term goal.

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 and for your continued support. And we're extremely proud of all we've accomplished and we'll continue to work deals toward achieving our objective of adding greater value to our company for the benefit of all our stakeholders. So 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.