Good day, and welcome to the Fathom Holdings First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the call over to Alex Kovtun with the Gateway Group. Please go ahead, sir.

Thank you, operator, and welcome everyone to the Fathom Holdings 2023 first 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 these forward-looking statements, actual results may 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?

Thanks, Alex. Good afternoon, and welcome to our first quarter 2023 earnings call. We're pleased to report a strong first quarter as compared to the overall market, and what we feel is a great start to the year. I want to start by thanking our agents and employees across each of our businesses for their hard work and dedication as we navigate the real estate market. Their commitment to supporting our growth, vision and serving others in the communities we operate is a testament to the Fathom culture and I'm proud of them. The market has been tough for a lot of agents, but you wouldn't know it talking to some of them. Many agents I've talked to see this market as an opportunity to take greater market share by reinvesting their savings they get from being a Fathom agent into their marketing, while many other competitors are pulling back on their spend. I love to hear that because that's exactly why I started Fathom in the first place. Our agents have worked hard to continue to grow and thrive even with all the market uncertainties, and we're proud of our recent awards and recognitions within the industry. We were recently ranked second by RealTrends 500 as industry top mover for 2023 and ranked as the fourth largest public independent brokerage, another notable category up from sixth place last year. We're also proud to be ranked as the 10th largest brokerage in transactions in the recent T3 Sixty MEGA 1000. These achievements are testament to Fathom's commitment to providing top-notch service and support to our agents and our clients and our ability to adapt and thrive in the rapidly evolving residential real estate industry. Before turning the call over to Marco Fregenal, our President and CFO, for a detailed review…

Thank you, Josh. I'll start with a detailed review of our first quarter 2023 results and we'll finish with the discussion on guidance. First quarter revenue declined 14% year-over-year to $77.5 million compared with $90.1 million for last year's first quarter. GAAP net loss for the first quarter was $5.7 million or a loss of $0.36 per share compared with a loss of $6 million or a loss of $0.38 per share for the 2022 first quarter. Adjusted EBITDA loss, a non-GAAP measure, was $1.4 million in the first quarter versus adjusted EBITDA loss of $2.1 million for the first quarter of 2022. The $700,000 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 14% decrease in revenue this quarter compared to Q1 of 2022. G&A expense was $9.6 million in the first quarter or 12.4% of revenue, compared with $10.9 million or 12% 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 the 14% decrease in revenue. In total, our operations and support, technology and development and G&A expenses decreased by almost $2 million from $14.5 million in Q1 of 2022 to $12.5 million in Q1 of 2023. This reduction reflects the benefits of our expense reduction initiatives that commenced last quarter. Expense related to marketing activities were $716,000 for the first quarter compared with $1.2 million for last year's first quarter. The decrease in marketing expenses is related to leveraging internal resources and optimizing advertising expenditures. Now, I'll spend some time reviewing our business segment results in more detail. We closed 8,532 real estate transactions in the quarter, a 15.4%…

Thank you, Marco. We remain focused on execution and are well positioned to achieve breakeven profitability in Q2 with our model and can thrive throughout various real estate cycles. With that, operator, let's open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from John Campbell with Stephens Inc. You may now go ahead.

Hey, this is AJ Hayes stepping in for John Campbell. Congrats on the quarter and appreciate you guys taking our questions. First thing, on [your guidance] (ph), EBITDA inflection, just kind of wanted to see like, is there any additional steps needed to get there? How dependent on the market is this outlook? How dependent is that on kind of your outlook for the market in your brokerage business? How dependent is it on a recovery in mortgage, in better attach rates and maybe mortgage gain on sale? Just trying to get a sense of what assumptions -- underlying assumptions may be built into this outlook here?

Thank you for your question. We -- as we are today on May 10, we have a good feel for the quarter. So that's the first and foremost. We are definitely seeing an improvement in file starts in Q2 compared to Q1. There are two components of that. First is certainly seasonality. And second, I think, Josh mentioned earlier that many of the Fathom agents are using their savings that they get from Fathom and they invest in marketing. So, we are anticipating an increase in revenue and transactions. In terms of cost structure, I believe about 85% to 90% of our $3 million has been already -- it's already built in into Q1 number. So there's a little bit more in Q2. So, I think the overall answer to your questions is that we feel pretty good about the guidance we're giving. And we're not assuming a significant increase in the market. If the market does continue to increase even in a greater way than we are anticipating, I think that our numbers could be better. But we feel fairly confident about the guidance we're giving, given what the market conditions are today.

Got you. And then maybe shifting the focus kind of hitting positive cash flow in 3Q '23. You guys reiterated that target again, which is great to hear. But given the uptick in interest expense as a result of that new convert, can you kind of walk us through the moving pieces there? Did you change your underlying assumptions needed to hit this target, such as the macro, the existing home sales maybe mortgage gain on sale? And this might be much of the same as kind of what you answered in the last question. But maybe trying to get a sense, was there may be already a degree of conservatism or [wig room] (ph) in that inflection? Any color there would be much appreciated.

Sure. Great question.

I mean...

I don't want to step on any toes, Marco. Go ahead.

Well, I think, look, we continue to apply the same model, right, in terms of Q3. The components that lead us to -- if you continue the curve of adjusted EBITDA in Q2 to then profitability in terms of our cash flow positive in terms of Q3, one aspect of that is the seasonality of the industry. Second, when we look at the ancillary businesses, all our ancillary businesses continue to grow. Even in a tough market, they continue to gain market share. DIA, for example, has done a really great job and continue to increase its revenue and EBITDA. 265% percent in EBITDA increases is a phenomenal result. So, we continue -- it's a combination of our ancillary business continue to gain market share and continue to grow. The combination of the full execution of our $3 million per quarter in cost reduction and certainly the aspect of the seasonality. We are not anticipating, in our numbers, a significant increase in the market in terms of upside. Some have argued that the Fed may start lowering interest rates in Q3 and Q4. We are not putting that into our model. And so, we are really somewhat conservative in terms of the upside in terms of getting to the cash flow breakeven in Q3. But it's really a combination of all those factors.

I want to add some color if I may though. I want to make sure you understand that we didn't do that because we were worried about not being able to reach the breakeven or reach cash flow profitability, it's really just out of just being wise. You don't know what you don't know. We don't want to be foolish. We want to make sure that we had some additional buffer there for the just in case that sometimes happens in this world, especially in this market. So, we're just trying to be prudent, trying to be thoughtful about the business. But we -- at the same time, we have to ask ourselves, do we really want to do this, because we feel very confident that we're going to be able to continue to achieve what we've said we'll be able to achieve. So far that hasn't changed. But again, so raising -- bringing that extra capital was really just, I guess, add a little extra touch of wisdom in the business.

That makes sense. Thank you for the color there. One more question if I may, and then I'll pass the mic along. But I wanted just to narrow in on the mortgage business here for a second. Josh, you had said attach rates improved in mortgage as well as title. But can you maybe provide an exact number for mortgage and maybe title, or maybe just like a general kind of estimate there? And then Marco, you may have briefly touched on this, but what was this improvement attributable to? Was there anything specific? And then also, is gain on sale, is that something that's starting to normalize in which maybe your updated outlook in terms of gain on sale?

I think the first part of the question is directed...

I'll start...

First part of the question is directed at me. As far as attach rate goes, we haven't shared the attach rate with exact numbers or attach rate, other than the fact that we're seeing improvements. I feel strongly that we probably need to keep it that way for right now. I know none of our peers actually share those specific numbers either. I think there's -- I start to realize there's a reason for that. Things kind of ebb and flow, but we are seeing improvements. We still -- we do feel a lot better about attach rates. We're starting to see a lot more agents really buying and understand the fact that these are part of our Fathom family. And the more we support our ancillary services, the more we support that Fathom family, the more benefits everybody. So while we're not prepared to give the exact attach numbers, we are definitely seeing improvements.

Our improvement in the mortgage business is a combination of several factors. One, the leadership in our mortgage company continues to recruit more loan officers and continue to grow the revenue base. And I think we look forward to demonstrating that when we announce our Q2 numbers and subsequently Q3 numbers. So, it's a combination of adding more loan officers to the team. Second, we focused the attach rate -- to a certain extent, we took a more focused approach and focus our mortgage business to try and expand in the North Carolina and in the Texas area, and so, therefore, giving us the ability to grow our market share into those states much deeper. So that certainly has helped the attach rate. We've also implemented a variety of pilot programs in Q1 in terms of marketing programs, and we'll be able to give an update of those in Q2 once they're fully executed and we'll be able to do that. And then the last part is the gain on mortgage. So, certainly, the market has become a little more consistent and stable. If we go back to Q3 and Q4 last year, it was a highly unstable market in terms of the gain on mortgage. There's plenty of data out there that shows how mortgage companies -- profitability of mortgage companies have decreased significantly in terms of what happened in Q3 and Q4. So, yes, we're definitely seeing a more stable market. Not a great market yet, certainly not compared to Q1 of last year and Q2, but is definitely more stable. We're not seeing the ups and downs in profitability of the loan. And I think that's a good start. We're hoping that by Q2 and Q3, things continue to get a more stabilized and easier to sort of anticipate what the market would do. But we certainly feel better today about our mortgage business than we did in Q4. And we are very hopeful that as we continue to work hard, we'll see better results in Q2 and Q3.

Great. Thank you so much, and good luck for the rest of the year.

Thank you.

Thank you.

Our next question will come from Darren Aftahi with Roth Capital Partners. You may now go ahead.

Hey, this is Dylan on for Darren. Thanks for taking the questions. If I start firstly with marketing, could you sort of talk about both the reduction in marketing spend, but then sort of the confidence you may have with referrals to sort of offset that lower spend and still grow agents?

Great question -- hey, Dylan. Great question. So, the reduction in marketing is not so much focused on so much on recruiting, it's really more focused on a variety of -- really optimizing our marketing machine, if you will. So, we have -- we've optimized a lot of our internal resources. We optimized on how we spend dollars in terms of our advertising campaigns. And so, a combination of that plus some shipping of dollars resulted in that decrease in market. However, we actually have increased our recruiting team. And so, where the dollars look like have been decreased, which they are, we have actually have increased our recruiting team. The second part of your question was the referral rate. As Josh indicated, the month of March, we had the highest internal referral rate ever in our history. And we feel confident that's going to continue as agents continue to see the benefit of our free for life program. And I've always said that that's going to take some time for agents to fully benefit that, right? But certainly in Q2 -- sorry, Q1, in March, we've seen significant increase in that. And we anticipate that continue to maintain itself as we continue to increase the number of agents that we recruit.

Yes. Just sort of touching that, the sequential net adds and agents sort of how many were from referrals versus, I guess, what you could call them more organic?

For March, it was 60%. For the whole quarter, Marco, do you have that number off top of your head?

So -- yes, so we don't give the net number, Dylan, in terms of that. We can give you that on a gross number, the net was -- the internal refer was 60% on the gross number. And then when you look at the net number, keep in mind that Q1 has the highest turnover, right, number of agents leaving the industry. Our churn rate in Q1 was 2.2%, which is significantly higher than our average around 1.5%, 1.6%, right? And so, the two things to keep in mind: one, about 60% of our agents came from internal referrals, which is the highest we've ever seen; and second, in Q1, we -- not only Fathom, but the whole industry sees a significant higher churn percentage as agents leave the industry because they don't want to pay all their annual fees that they have to pay in Q1.

By the way, if you go back in time and you listen to some of our earlier, especially Q1 of last year or even earlier than that, you'll see we actually spoke that about 35% of our growth was agents referring other agents. And now to see that number hit 60% is pretty exciting.

Yeah. No, I appreciate the color. That's helpful. And then, just a follow-up for me. On the productivity side, I mean, obviously, the demand is down from lower home sales in the market. But could you sort of talk about, I guess, the type of agents you're recruiting or your existing base, like how are you seeing their productivity evolve over time, as like -- as in improving in the potential number of transactions they can handle?

So, for Q1, it was fairly consistent across the board for 15%. I mean, that -- we've seen that pretty much fairly consistent. Some stay, so it's a little higher than others and some states were less. But that decrease in the number of transactions and the productivity, it was fairly consistent across. So, when you compare that against the other public companies, I think you see that our decrease in percentage was about half of what everyone's seen. What we see in the market is fairly consistent around 25%. I guess, some states in the West Coast are seeing a higher percentage and some states in the East Coast are seeing a lower percentage, but across the board is 25%. Across our agents, it's fairly consistent on the 15%.

Great. I'll pass it on. Thank you.

Thank you, Dylan.

[Operator Instructions] Our next question will come from Tom White with D.A. Davidson. You may now go ahead.

Hey, this is Wyatt Swanson on for Tom. Thanks for taking our question. I've just got a quick one here more on the longer-term regarding the agent value proposition. If you look two to three years out, what do you think are the most likely areas that are likely to see some meaningful evolution or improvement in terms of the ways for you guys to add value to agents?

I think it really comes down to probably better training. When you think about how -- number one, obviously, how do we add more agents? And then, once we add those agents, how do we help them improve their productivity per agent? One of the things we've said in the past is the average agents who joins Fathom increase their business by 49% over a four-year period. So that happens naturally. Just simply the fact they've got more money to be able to reinvest back in the business. A lot of agents will pocket the money and pay bills with it or feed the family or take vacations, but a lot of agents are -- they run businesses, right? And they will reinvest that money back into their business. So that just happens naturally. But one area that I think we can see great improvement, we've been exploring this more, is increased training, increased coaching for individual agents to say, "Okay, you have the savings. Now what?" Not everyone knows where to spend that money; can we help coach them and show them how and where, can we help train them to be better at their job, be better at their craft. And so, I think that's an area that we can dramatically improve inside our own house. And I think that will dramatically improve the productivity per agent. So, obviously, we want to increase transactions by increasing agents, but we also increase transactions by making our agents better. And then, thirdly, of course, is by offering even more solutions, more training, more resources to our agents, we should also be able to track higher producing agents. So I think there's three really strong ways to -- three really strong ways that we can do to be able to increase the number of transactions per agent.

Great. Thank you very much.

[Operator Instructions] Ladies and gentlemen, 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. Of course, thank you for joining our call today and 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. Have a wonderful week.

The conference has not concluded. Thank you for attending today's presentation. You may now disconnect.