Yahoo Finance Fathom Holdings Inc. (NASDAQ:FTHM) Q3 2023 Earnings Call Transcript
Fathom Holdings Inc. (NASDAQ:FTHM) Q3 2023 Earnings Call Transcript November 11, 2023
Operator: Good evening, and welcome to the Fathom Realty Holdings Inc. Third 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 with Gateway Group. Please go ahead.
Alex Kovtun: Great. Thank you, operator, and welcome, everybody, to the Fathom Holdings 2023 third 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 Securities -- 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. With that, I'll turn the call over to Fathom's Founder, Chairman and CEO, Josh Harley. Josh?
Joshua Harley: Thanks, Alex. Good afternoon, and welcome, everyone, to our third quarter 2023 earnings call. We're pleased to share the recent progress we've made advancing our growth strategy despite the volatility in the interest rates in the broader residential real estate market. I want to start by thanking our Fathom family across each of our businesses for their hard work and dedication as we continue to navigate the real estate market. This has been one of the most difficult years in Fathom's history. But through the hard work of our team, we've been able to demonstrate that we can adapt and thrive even in the challenging economic times. 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 the steps we've taken to adjust to the current environment.
During the third quarter, we witnessed continued pressure on transactions throughout the industry. In September, the residential real estate market changed rapidly as mortgage rates exceeded 8%, and we experienced an increase in cancellations, which impacted our transactions during the quarter. Despite this volatility and the highest mortgage rates in 20 years, we were encouraged by performance in agent growth in a very difficult market environment. During the third quarter, Fathom delivered revenue of $93.5 million, which was in line with our guidance range. We also completed approximately 10,303 real estate transactions and while down 15% from the prior year's third quarter transaction number of 12,077, we do feel good about this number when compared to the entire U.S. residential real estate market.
We continue to take market share from legacy brokerage firms and even saw year-over-year transaction growth in several of our markets. We also increased our agent network 13% to over 11,333 agents at the end of the quarter, which compares favorably to all but one of our public peers domestic agent growth. While the residential real estate industry remains challenging, we continue to believe that our future remains bright. And by continuing to grow our agent base, we are positioning Fathom for continued success once the industry rebounds. We are making meaningful progress in advancing our growth strategy, expanding our agent network, optimizing our business for profitable growth and taking market share with an industry-leading commission model that continues to resonate well in this environment, and we believe we'll continue to do so going forward.
Elevated interest rates continue to put pressure on home affordability. So the recent decline in mortgage rates following the Federal Reserve's November rate pause is encouraging. While we don't have a crystal ball to predict if we're -- if we reach the bottom of this current cycle in the industry or if rates will start to normalize in the near-term, what we do know is that the industry will eventually recover, and Fathom is well positioned to continue growing market share regardless of when that happens. Let me provide an update on our Realty business and why we remain well positioned today to grow our agent network and also expand our reach during this difficult market environment. Fathom Realty continues to be among the fastest-growing residential real estate brokerages in the U.S., and we're proud of our growth this year as we expand our presence nationwide to reach more buyers and sellers.
Today, Fathom Realty operates in 37 states and the District of Columbia. We believe our model allows us to succeed irrespective of the market environment, and we're well positioned to attract an ever-increasing number of real estate agents from legacy firms during downturns in the industry when agents struggle to generate leads and close sales. We continue to believe that we are the most attractive home for agents long-term as we help them ultimately earn more money with an industry-leading flat fee commission split to agents. During the third quarter, we grew our agent network by 13%, which included the existing agent referral efforts underway. We also recently announced three walkovers so far in Q4 in Louisiana, Massachusetts and California.
We promised to grow across all 50 states as well as deeper into each state, and we continue to take steps to deliver on that promise. Our agent growth this quarter further validates that we're winning through innovation and a truly disruptive business model that continues to resonate among agents. Our new agents will have full access to Fathom's proprietary cloud-based software, intelliAgent, and will also benefit from having additional Fathom services to offer their clients, including mortgage and insurance services as we continue to help all of our agents grow their business. We see a strong pipeline of walkover opportunities and believe that we'll continue to attract high-quality agent teams and brokerages to our unique low cost and disruptive model.
So while most of our peers are experiencing flat or declining agent numbers domestically, our agent value proposition remains compelling and allows us to take share now to better position Fathom for a higher overall growth rate once the market recovers. Our cost to acquire one agent during Q3 remained low at approximately $1,000 and making our breakeven on each agent less than the $1,150 that we'll earn back on the first sale. We also maintained strong retention rates, which we believe exceptionally positive news given the backdrop of agents leading the industry. As most of you have no doubt seen the National Association of REALTORS, along with several of our country's largest brokerages were found liable in a recent legal battle over agent commissions.
I have no doubt that we will see this go to the appeals court and even higher should it be necessary. It might be years before we see any changes in the real estate industry as a result of these lawsuits. But what I can say is that we might be one of the only real estate brokerages to be a beneficiary of any changes that compress agent commissions. Unlike our peers who are -- who are accused of conspiring and colluding to keep commissions high, we do not put pressure on our agents to maintain higher commission percentages. The fact is our flat fee commission model does not change regardless of whether an agent charges 3% or 2% or even 1%. Lastly, let me briefly touch on our path to profitability, profitable growth as we -- and the steps that we're taking to optimize our business in the current environment.
In Q2, we achieved our goal of adjusted EBITDA breakeven and we've continued to make tremendous progress in reducing our cash burn. In Q3, we fell short of maintaining adjusted EBITDA due to the slower home sales in September as a result of further Fed rate increases. But we have since identified additional opportunities to further rightsize our cost structure for the current environment and better position Fathom for improved operating leverage when the residential real estate market rebounds. With current market conditions in mind, we're working with each of our business heads to reduce company-wide expenses by a total of $1.2 million per quarter going forward, which we expect to see the full benefit of in Q1 of next year. By further rightsizing the company's expenses, we've set a target to achieve cash flow breakeven as early as Q2 of next year, while remaining committed to getting back to positive adjusted EBITDA in Q1 of next year and going forward.
It's important to note that even though we are finding ways to cut costs, we will not sacrifice our ability to continue growing and attracting agents. As a matter of fact, we've increased the size of our recruiting team and plan to continue doing so by growing that recruiting team in 2024. In summary, we remain encouraged by the trends we're seeing across our business despite a challenging quarter for Fathom and the real estate industry. With that, I'd like to pass it over to Marco for a financial update.
Marco Fregenal: Thank you, Josh. I'll start a detailed review of our third quarter 2023 results, and then we'll finish with a discussion on guidance. Third quarter revenue declined 16% year-over-year to $93.5 million compared with $111.3 million for last year's third quarter. This decrease was primarily attributed to a 15% decrease in transaction volume, along with a 3% decrease in the average home prices during the quarter. GAAP net loss for the third quarter was $5.5 million for a loss of $0.34 per share compared with a loss of $6 million or a loss of $0.38 per share for the 2022 third quarter. Adjusted EBITDA loss, a non-GAAP measure, was $253,000 in the third quarter versus adjusted EBITDA loss of $2.3 million for the third quarter of 2022.
The $2 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 16% decrease in revenue this quarter compared to Q3 of 2022. While we experienced an adjusted EBITDA loss this quarter, our goal is to reach adjusted EBITDA breakeven by Q1 of 2024. We believe that going forward after Q1, we'll continue to deliver approximately 70% of the increase in gross profit to the adjusted EBITDA line. G&A expense was $9.8 million in the third quarter or 10.5% of revenue compared with $11.5 million or 10.4% of revenue for the same period a year ago. Again, to be noted that G&A did not meaningfully increase as a percentage of revenue despite a 16% decrease in revenue.
In total, our operations and support, technology and development and G&A expenses decreased by almost $2 million from $15.4 million in Q3 of 2022 to $13.4 million in Q3 of 2023. This reduction reflects the benefits of our expense reduction initiatives implemented earlier this year, and we'll continue to see a decrease next quarter into Q1 of 2024. As Josh mentioned earlier, we plan to reduce company-wide expenses by a total of $1.2 million per quarter going forward to further rightsize the company's expenses in the current market environment. Expenses related to marketing activities were $796,000 for the third quarter compared to $1.5 million for last year's third quarter. The decrease in marketing expenses related to leverage internal resources and optimizing advertising expenditures.
Now I'll spend some time reviewing our business segment results in more detail. We closed 10,303 real estate transactions in the quarter, a 15% decrease from last year's third quarter but below the 20% reduction in the overall market experience. We ended Q3 with 11,333 agents, which represents a 13% growth rate over Q3 of 2022, while the National Association of REALTORS saw membership decline of approximately 1.6%. We have seen an increase of 25% in onboarding starts in Q3 over Q2, which should result in an increase in number of agents joining Fathom going forward. Revenue for the Real Estate division was $88.2 million compared to $105 million for the same period last year, which represents a 16% decrease, of which about 3% is related to a decrease in prices of homes and 13% is attributed to a decrease in transaction.
Adjusted EBITDA in Real Estate division was approximately $1.6 million, an increase of $1 million compared to adjusted EBITDA of $566,000 in Q3 of 2022. This increase was achieved despite a 15% decrease in transactions this quarter compared to the same quarter last year and reflects our increase in fees and favorable impact of cost-cutting measures. Our mortgage business generated revenues of $1.9 million in the third quarter compared to $2.8 million in the prior year period. Mortgage adjusted EBITDA for Q3 was a loss of $293,000 compared to an adjusted EBITDA loss of $406,000 for the same period last year. Our team continues to identify opportunities to reduce expenses to rightsize our mortgage business going forward as well as increase revenues by recruiting additional loan officers.
Going forward, we do expect our mortgage business to increase given the addition of the Elite Financial Group and its 21 mortgage professionals. Moreover, recently, we've seen some positive movement in interest rates. This improvement allows borrowers to see rate options at par. This, combined with the additions we made to the team are resulted in an increase of 64% in mortgage applications in Q3 of 2023 versus Q3 of last year. DIA in our insurance business generated revenues of $1.7 million for the quarter compared to revenues of $1.8 million for the same period a year ago. This represents a decrease of approximately $100,000. Adjusted EBITDA increased 50% from $370,000 in Q3 of 2022 to over $558,000 in Q3 of 2023. This reflects the great work our DIA team has done in Q3 to adjust expenses while still growing revenue.
Verus Title -- Verus Title had revenue of $883,000 for the quarter compared to about $958,000 in revenues for Q3 of 2022. Adjusted EBITDA was a negative $22,000 compared to a negative $24,000 adjusted EBITDA in Q3 of 2022. Now moving to our Technology segment. Revenues increased 19% to $836,000 compared to $702,000 for the last year's third quarter. Adjusted EBITDA loss for the quarter increased by 38% from a loss of $372,000 in the third quarter of last year to a loss of $514,000 in the current quarter. This represents an increased investment in agent technologies. Our LiveBy team continues to increase its footprint across the country to reach over 245 MLSs and 420,000 agents at the end of the quarter. LiveBy powers more than 4 million community pages with over 125,000 neighborhood reports being created.
We continue to focus on our balance sheet given the dynamic real estate market condition. Our cash burn for the quarter was $2.5 million and was largely due to a $1.3 million decrease in accounts payable, $500,000 in additional investments in our SaaS platforms for our agents, plus increases in prepaid and certain financing of payments. We ended the quarter with a cash position of $6.6 million. And given the aforementioned cost reductions of $1.2 million per quarter, combined with the increase in revenue from additional agent growth, we believe our cash position and overall liquidity provide us with the adequate runway to grow the business and execute our strategy through operating cash flow breakeven by Q2 of 2024. We did not purchase any shares in the third quarter under the stock repurchase plan and approximately $4 million remains under the authorization.
Before turning the call back to Josh, let me briefly touch on guidance. Given the continued uncertainty in the macro environment, we will not be providing guidance for the fourth quarter ending December 31, 2023. We will review the guidance expectations next year. With that, I'll turn the call back to Josh for closing remarks.
Joshua Harley: Thank you, Marco. We remain focused on execution and are taking necessary steps to better position Fathom in the current environment and once the market recovers. I want to thank the entire Fathom team on their hard work as we navigate this market and continue to serve our clients. With that, operator, let's open the call up for questions.
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