Good day, and welcome to the Fathom Holdings Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Alex Kovtun from Gateway Group.

Thank you, operator, and welcome, everyone, to the Fathom Holdings 2023 Second Quarter Conference Call. I'm Alex Kovtun with Gateway Group, Fathom's Investor Relations firm. Before I turn things over to the Fathom management team, I want to remind 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 Factors section of the company's Form 10-K for the year ended December 31, 2022 as well as our latest Form 10-Q 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. Please also note that during this call, we will be discussing adjusted EBITDA, which is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is included in today's press release, which is now posted on Fathom's website. So with that, I'll turn the call over to Fathom's Founder, Chairman and CEO, Josh Harley. Josh?

Thanks, Alex. Good afternoon, and welcome everyone to our second quarter 2023 earnings call. Our entire team really appreciates your support and encouragement throughout the quarter. We're pleased to report another strong quarter as compared to the overall market and share the recent progress we've made in advancing our growth strategy. I want to start by thanking our Fathom family across each of our businesses for their hard work and the dedication as we continue to navigate the real estate market. Their commitment to supporting our growth, our vision in serving others and the communities we operate in is a testament to the Fathom culture. We recently had the honor of ringing the NASDAQ opening bell to celebrate our third anniversary of our public listing and our significant achievements to date. This milestone is a tribute to the collective effort and unwavering commitment that drives us forward and allows Fathom to adapt and thrive in a rapidly evolving residential real estate industry. We extend our heartfelt gratitude to every Fathom employee and agent who have poured their dedication, passion and hard work into the journey and in shaping Fathom's success. I'd also like to briefly mention the addition of Steve Murray to our Board of Directors, which we announced a few weeks ago. Steve has become a great friend that brings invaluable experience in the residential brokerage industry to Fathom and should be a tremendous asset as we continue to disrupt the real estate market and execute our growth strategy. Before turning the call over to our President and CFO, Marco Fregenal, for a detailed review of our financial results, I'd like to touch on a few key highlights during the quarter and what gives us confidence in our business going forward. While the second quarter remains challenging for residential…

Thank you, Josh. I'll start a detailed review of our second quarter 2023 results, and then we'll finish with a discussion on guidance. Second quarter revenue declined by 22% year-over-year to $100.1 million compared with $128.2 million for last year's first quarter. This decrease was primarily attributed to a 16.7% decrease in transaction volume, along with a 6% decrease in the average home prices during the quarter. GAAP net loss for the second quarter was $4.3 million or $0.27 per share compared with a loss of $5.7 million or $0.35 per share for the 2022 second quarter. Adjusted EBITDA, a non-GAAP measure, was $458,000 in the second quarter versus adjusted EBITDA loss of $2 million for the second quarter of 2022. The $2.4 million improvement in adjusted EBITDA this quarter was largely driven by a reduction in expenses and additional agent fees that went into effect in January. Notably, this improvement was achieved despite the 22% decrease in revenues this quarter compared to Q2 of 2022. One of the most important achievements this quarter is that approximately 70% of the increase in gross profit from Q1 flowed to the adjusted EBITDA line. This highlights the operational leverage our company has reached in this quarter. We believe that going forward, we will continue to drive a similar percentage of the increase in gross profit contribution to the bottom line. G&A expense was $10.2 million in the second quarter or 10.7% of revenue compared with $12.4 million or 10.1% of revenue for the same period a year ago. On a sequential basis, G&A improved from 12.4% of revenue to 10.7% of revenue. In total, our operational support, technology and development and G&A expenses decreased by almost $1.3 million from $15 million in Q2 of 2022 to $13.7 million in Q2 of 2023.…

Thank you, Marco. Sometimes you have to delay a short-term victory in order to ultimately deliver long-term success and market domination. We remain dedicated to executing on our growth plans and doubling down where we can to bring the greatest long-term value to our employees, our agents and of course, our shareholders. With that, operator, let's open up the call to questions.

[Operator Instructions]. Our first question comes from Dillon Heslin with ROTH Capital Partners.

This is Dillon on for Darren. First, on the agent acquisition side, I guess could you talk about what you might be seeing from agents given the housing environment? Are they sort of staying put as to not rock the boat and sort of get to a point where there's some more stabilization to sort of the supply and demand for them as agents? And then as sort of an adjacent question to that, like of the agents you did add in the quarter, I guess, how does their productivity compare to your base level variance?

Those are great questions. So I think first thing to understand is the market saw a decline of 1.5%. So the overall industry, whether U.S. based, we saw an increase of 14%. So we definitely outproduced the market, and we feel really good about our numbers. But even then, you kind of touched on something I think is really important. There's a lot of agents right now that have seen a substantial 20% to 30% reduction in their personal business. And when that happens, a lot of times when you make a change to -- and this is something we're learning along the way as well. When an agent wants to make a change in their business, there's always that concern that I don't know what I don't know. What if I make a change, and it takes a while to get set up in the new brokerage. And I might miss out on business or whatever -- or I've got a couple of deals working right now. I've got one that's under contract. What if my broker doesn't pay me because they're struggling too? And so we're seeing that. So as we're talking to agents, we're talking to a lot of agents I want to come over, I love the story. It makes a lot of sense. But I've got a deal on the sidelines here that maybe come into fruition. It's under contract. I want to get it closed, and I'm worried about not getting paid. So we've heard that time and time again. That's not every deal, of course, but we hear that a lot. As I mentioned, there's a lot of agents too who are just worried about what happens if I make a move, my business declines, right? I hear people say don't go to Fathom. Yes, you have to save money. So there's always that ridiculous argument that people make because they're scared of us. But the fact is, we still beat the market significantly in just -- rides the market in regards to our growth compared to everyone else. So I think there's only one other company that beat us in regards to agent growth. So we feel really good about that number even in this market, we feel good. And I think it's going to take some time, obviously, but there's going to be more -- we're seeing more and more agents finally getting off the fence, finally saying, okay. They're either getting out of the industry altogether, which we're seeing more and more of. Or they're saying, okay, I'm ready to make a move. So we feel really good, positive about our progress moving forward. We're starting to see an accelerated number of agents coming over. So we saw a dip a little bit there in Q2. But again, we still feel really good about that. I have a little bit ADD, what was the second part of the question?

Just on the productivity side of the new agents added in the quarter versus your existing base.

No, we're not. We're not seeing a difference. Obviously, we are seeing agents that are coming in, closing less transactions than we're used to, but not any different than the agents -- the reduction of the agents that we currently have with us, if that makes any sense, right? So if our agents are down 20% or 30% individually, then we're seeing a lot of agents come in closing a lot less than we're used to. But again, that's just reflective of the overall market. So unfortunately, that's just -- it's the industry we're in right now or the market we're in right now.

Got it. If I could ask one more, maybe for Marco. I appreciate the color on sort of the flow-through of gross profit on the real estate side of things that goes to the bottom line. I guess how much wiggle room is there in the OpEx side? Or are you sort of managing it to the point where the pretty tight guidance on EBITDA is sort of based upon your goals of staying adjusted EBITDA positive, but sort of managing it sort of right to the line as to stay positive, but I mean, still near breakeven? So I guess like how much actual?

Yes, great question. So the 70% is company-wide. It's not just [indiscernible]. That's 70% -- we increased gross profit Q1 to Q2 by about $2.5 million and about 70% of that. And that's -- so that number's for all companies and all companies -- and I think that's one of the key points we should be driving is that all companies have reached that inflection point. Even our mortgage company. If you look at the reduction in the loss of EBITDA from Q1 to Q2 from the mortgage, right? And so that 70% is across all companies. We -- I think you used the word wiggle room. Yes, we have some. Yes, it is not -- we now have crossed the EBITDA line that we do have some room on that. It is not something that we have to manage it carefully. We certainly continue to grow our business, and we're still making investments to continue to grow our business. But it's not something that we have to watch very carefully. We do -- we continue to hire people. We continue to hire loan officers. I think we're up to about 45 loan officers now. We probably hired 15 loan officers this past quarter, and we'll continue to hire more. So it is not something that we have to manage with extra care. We continue to run our business the same way. And -- because, again, I think we passed that inflection point, Dillon. And I think that's why we believe that going forward, we'll continue to drive 70% of the gross profit increase to the bottom line.

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

This is Wyatt Swanson on for Tom. Congrats on achieving positive adjusted EBITDA. We're seeing some signs that the momentum you and some of the other cloud-based brokerages are enjoying us triggering a bit of a competitive response at some other larger brokerages with similar models to yours. So I mean, in terms of them having to sweeten the value prop to their agents, Josh, curious to hear about how you think about needing to stay on par or ahead of some of the larger brokerages you're competing with when it comes to the overall appeal of your value prop or financial package.

Can you give me a specific? Are you referring to other companies with the exact same commission model we have?

I'm referring to similar like cloud-based brokerages.

Yes, when you think about cloud-based brokerage to our public peers, there's only two of them, and they're both -- it's kind of hard, you're not comparing apples-to-apples. It's hard because while they are cloud-based, they have a traditional model. They have basically the same model as a [indiscernible] when you think about public peers as really any of the [indiscernible] brands, I guess, now anywhere brands, aside from the fact that they've got caps. So they still charge a 80-20 split or 85-15 split or 70-30 split. So it's not really apples-to-apples. Now as far as what ends up bottom line to the brokerage is a little different. But for us, when you think about the agent, the agent's the one that we're trying to attract. That agent with a company that has an 80-20 split, even if they're cloud-based, they're still an 80-20 split. They're still paying 20% of the commission, let's say, $2,000 or $2,500 on one transaction versus paying us $550 in one transaction. So it's going to be hard for them to compete in regards to the monetary value. And then the rest of it, what can they provide that we can't? We have all the -- basically the same tools, technology, training resources. So while I'm not going to say that ours is better, what I can say is they don't provide more than we do. So if all things are equal, the only thing left is the commission side, and that's where I think we win hands down. And they can't compete, not without fundamentally changing their whole business model. And all of a sudden, you're going to see a massive decline in what they've been promoting as far as profitability and so on. So I feel really good about that today. I feel really good about that moving forward. And I don't think that they can make a pivot to match us. I just -- I don't think they can do that, not without, again, from massive chaos that would ensue after that.

Let me also add a couple -- let me add a couple of more things to that as well. We -- of all the public companies, we are very unique. Our model is very different, right? But there are thousands of small companies like us across the country. And I think when you look at this flat model, 100% commission flat model, unfortunately, that you have to kind of look at the data to kind of realize that. But it's actually the fastest-growing model in terms of the net agents growth across all companies like us. It's just that we are the only public one. But I think there is a great desire from agents to join companies like us and many others like us who are private. And our model, the 100% commission model, is going to continue to grow significantly across the country and eventually will be a model that will have a significant percentage of the agents. And there are -- there will be different models, and a lot of models will be successful. There isn't such a thing as one model for everyone. But the 100% model or flat model is going to continue to grow. There's no question about that. We've seen that across the countries that we see more and more regional or local companies like us who are growing very quickly. And so it's just that they're not public and therefore, they don't get a lot of attention.

I think what -- I think you're seeing the other cloud-based growing exponentially, not necessarily because they're cloud-based or because they're similar to us, they're growing because they have a pitch that no one else has that MLM-type aspect of the business where you're profit sharing or revenue sharing. And so right now, it's exciting. But at some point, it becomes less and less exciting, especially as that business grows to a point where it kind of hits its plateau, there's really no more room for people on the bottom to benefit from that model. And so you're seeing one start to plateau and you're seeing the other one still hit its stride and doing fantastic, and we're cheering them on. It's fun to see. I think they've got a great CEO and a great team. But at the end of the day, that only lasts for so long. I think this model that we have at Fathom, long term, will be the future of this industry, and I truly believe that. That's not lip service.

The next question comes from John Campbell with Stephens.

It's Jonathan Bass on for John Campbell. Could you speak to the gain on sale margins in the mortgage business? What you're seeing there? And if you have any outlook on that?

Sure. Great question. It's [indiscernible] all over the place. It started -- you go back to Q2 of last year, it's probably the worst quarter -- sorry, Q3 of last year, and the big banks who basically buy all the mortgages really squeeze the market out. And then -- and over the last few quarters, it has significantly changed. I think one of the things that's happening is that a lot of banks, for a variety of reasons -- and that will be a much longer call are having some cash challenges, right? And so one of the things to pay attention to is to look at the gap between the 10-year note and mortgage rates. And historically, that gap has been about 150 to 200 basis points. And now we're probably over, in some cases, 300, 350 basis points. So banks are in a sense -- we do -- increasing the interest rate on mortgages to slow down the intake of mortgages, and so that's already happening. And in some cases, they're also reducing the payout. So yes, there's absolutely some compression on the commissions from the big banks paying for mortgages. And companies like us and others are adjusting to compensation and other costs within the company, right? And so there's definitely some forces pushing that compression. And it varies from month-to-month and quarter-to-quarter. And companies like us are learning how to do that. I would say that our leadership in our mortgage under have done a really great job. If you look, for example, at the comparison of the EBITDA loss in Q2 compared to Q1. And we've done significant work in reducing that, and we look forward to adjusted our breakeven in our mortgage business, hopefully within a few quarters. But yes, there's definitely some compression on commissions in the mortgage business.

That's very helpful. And then are you guys seeing any noteworthy regional differences in terms of home sales and price change dynamics?

Yes. So historically, in this industry, every trend starts on the West Coast and moves from the West Coast to the East Coast. And we've seen this for the last 10 years, and there are so many trends. Certainly, the increase in prices 2 years ago, we've seen a much greater increase in prices of houses in the West Coast, markets like California, Utah, Idaho, Oregon, Nevada. And so we saw those prices increasing more rapidly. We are now therefore seeing them decrease more rapidly. And so in those markets, we're seeing a greater decrease in prices than other markets. And the question, I guess, will be, will these reductions follow the normal trend that we've seen in the past that things start in the West Coast and then move across the country? Or this is really more related to the West Coast because the prices increase so much there, and they're going to just adjust. So the jury is still out on that. But we absolutely have seen greater decreases in the West Coast. Having said that, there are some pockets across the country that we're seeing some decreases, but they tend to be more smaller pockets as opposed to a trend. The trend really is primarily in the West Coast, and that's where we're seeing the largest decrease in home prices.

Our next question comes from Raj Sharma with B. Riley.

Yes. Congratulations on getting breakeven here. Yes, I just have a few questions, just trying to understand your uniqueness here. First of all, can you touch upon your referral tiers? And how are they better than an MLM type of a marketing? Why does that the referral peers not get impacted when you gained a lot of share in the market, assuming there's a lot of share in the market?

First of all, I wouldn't say it's better. The fact is we've had a lot of investors over the year saying, why don't you do ABC and XYZ company do? Why don't you do that MLM business? The fact is we don't take enough money. We're not taking 20% or 30% of the commission to be able to do that. So we had to come up with something that was different. So it's not better, it's just different. I will say though, in the one side, you're being rewarded for what other people are doing, and therefore, you're dependent on other people to perform. I know plenty of people who've come over to our company from companies like that who said I referred 8 people and never made any money or barely made any money because they just were not producing agents, right? So they have to produce for you to make anything. And in our scenario, you're rewarded for your efforts, not someone else's efforts. So that's why I think from that standpoint, it's superior, right? So the more harder I'm willing to work, the more benefit I get from it, not necessarily related to how much money they can make on the transactions they close, right? So I think, number one, there is a benefit. You're not dependent on someone else closing business for you to be financially rewarded. Now you have to close business to be financial rewarded because it comes down to savings. The other issue is that you've got -- in some of those cases, you've got to refer 8 to 10, 8 to 12 agents just to breakeven with what we give you from day 1, right? So you have like for a lot of agents in that model just to get what we…

Got it. Got it. That's very helpful. So -- and then on the referral tiers, I mean, they're very unique referral tiers. How do you internally measure whether these are working? And also, what is the -- what was the referral as a percentage of the new agent [indiscernible].

I'm sorry, go ahead, Marco.

Yes. So we typically average between 35% and 40% of our agents coming in to Fathom are referring by other agents, okay? Second, historically, agents who -- the agent referred by other agents, okay, historically close a higher number of transactions than the average agent out there. And so when a Fathom agent refers a non-Fathom agent who joined the company, historically, that agent has a higher producing number of transactions. The reason for that will make sense, right? Typically, agents know other agents because they're closing business, right? They're working on the other side of the transaction. So that agent typically is more productive for us. And we have increased the number after we introduced a new program in October, November last year. Now we're up to about 40%. We used to be about 28% to 30%, and now we're increasing to 40%. And we think we can even get as high as 50% as we continue to market the program internally.

Look, we actually -- 1 quarter we hit as high as 60% -- I think 65% one quarter. So it's clearly, if there's a benefit, agents get excited about it. We need to do a better job at keeping them excited about it. And so we've been working with our directors, finding activities and programs. Every time someone does become Free For Life or capped for life, we make sure to promote that, saying, hey, you can do this, too. Just keep them engaged and keep them excited. So it's -- we've seen a lot of great benefit coming from it. So we're pleased.

Got it. Got it. And then if I could ask you on agent growth, clearly, your model is -- seems very attractive to an agent in terms of the 100% commission and also the infrastructure you provide. There's also a churn, even though it's lower than the industry, you still -- it's 1.8% a month or so about a yearly you're -- 20% of the agent is churning away. So how much -- what kind of growth rate do you think it's -- or what kind of growth rates are out there? What -- for you to grab at and what kind of net growth do you think we should kind of see from you going forward if it's possible to comment on that?

Yes. So we still -- Josh mentioned earlier, one of the things that's happening is agents are still -- and if you sit down and think about it, you can understand why. Some agents are still worried about moving over, right? As a matter of fact, one of the things that we've seen in the last, say, 45 days is that our onboarding starts, right, onboarding starts when an agent actually starts filling out the paperwork that they want to move over, right? So they're just basically starting the process. Yes, I would like to join Fathom. Let me start the process, right? The process can take a day and the parts can take 2 months, right? Our onboarding stars in the last 45 days have increased significantly, right? And so -- but what happens is the agents are still waiting to close an additional transactions because they're doing less transactions. So that extra transaction they're about to close is really important to them. And so we're seeing a delay -- a greater delay than historical in terms of the gap between an agent onboarding starts with the agent complete, and we're working in a variety of different ways to improve that. But that is a good sign. Onboarding starts are significantly increasing. So that's number one. Look, historically, the company has grown -- prior to this significant change in interest rates, the company has grown 35% a year, right? We think that once the market settles again, which probably were looking at sometime next year, right? The interest rate settle, come down a little, then we'll begin to see the 35% growth again. But that's not going to happen until we see interest rates coming down some, okay? Now we're not talking about interest coming down to 3%, right? I don't think we're -- whatever going to -- I don't think I will see that in my lifetime, 3% interest rate again, right? But certainly, in the low 6s, high 5s, low 6s, we believe -- and by the way, others in the industry believe that if interest rates come down to high 5s to low 6s, we're going to see that segment of the market that's try to close in and don't want to sell their houses because they have a 3.5% interest rate, that's going to open up, right? And so to answer your question, we believe that once the market comes back to some normal equilibrium, we should see 30% to 35% growth rate for Fathom as we have seen in the past.

And these are net of churn, right?

That is correct. Net of churn. That's correct.

Right. Got it. And then lastly, the transactions per agent ticked up. Are these just indicative of the market? Or the percentage of more productive agents in your mix is going up? How should we...

Part of what we're seeing, as I mentioned, 80% of the agents who left us closed 0 or 1 sale per year. So the -- we're -- while that 1.5% -- by the way, it's higher for us. It's not normally what we see in Q2. That's usually something that's reserved for Q1 when people have to pay their dues. So we did see an increase in loss of agents from typically 1.5%, 1.6% to 1.8%. But again, those agents are closing very few transactions. So the more of them get out of the business, our transaction per agent, as you calculate, it actually looks like it improves. Part of that is just the fact that they're getting out of the business. I do want to address one more thing. The potential for growth, 30% could we do 40% or 50% growth One of the things we're seeing right now because the market is tough. We're in a position where we're growing in spite of the market. That's not true for a lot of companies. In fact, it's not true for most companies out there. And so we're finding ourselves in a position, we're having more and more people reach out to us saying, look, I've been watching you guys for a long time. I love your story. Our business is struggling, would you consider an acquisition? Would you consider a merger or whatever, they tend to call it entering acquisition. The opportunity's out there. We're seeing more and more -- we're seeing an accelerated rate of people reaching out to us. So the potential is fantastic. So we could see greater growth, right? There's a lot more -- and by the way, even if we don't acquire them, at some point, some of them either are going to be acquired by someone else or they may just shutter and go out of business, which case those agents have to suddenly -- and we see that actually happen a lot. We see a lot of -- unfortunately a lot of brokerages go out of business, they shutter and also agents are scrambling to find a new home. So we could be the beneficiary either through an acquisition or it could be the beneficiary through agents just looking for a new home.

[Operator Instructions]. There are no further questions. 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 for joining our call today and for your interest in Fathom. For those of you who are Fathom shareholders, thank you for your trust. We will continue to work hard and look forward to sharing future updates with you. So with that, have a wonderful week. Thank you.

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