Yahoo Finance Fathom Holdings Inc. (NASDAQ:FTHM) Q1 2024 Earnings Call Transcript
Fathom Holdings Inc. (NASDAQ:FTHM) Q1 2024 Earnings Call Transcript May 12, 2024
Fathom Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Fathom Holdings First Quarter 2024 Earnings Conference Call. Please note that 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 everyone to Fathom Holdings First Quarter 2024 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 would like 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, 2023, 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 President and CEO, Marco Fregenal. Marco?
Marco Fregenal: Thank you, Alex. Good afternoon and warm welcome to everyone joining us for our first quarter of 2024 earnings call. I want to extend my heartfelt gratitude to each one of you for incredible hard work and dedication, especially in the face of such trying circumstances. Despite the challenging market conditions, our teams have remained steadfast in carrying out the essential work needed to propel us towards our goals for 2024. During our previous earnings call, I outlined four key goals for 2024. These included enhancing our balance sheet, achieving positive EBITDA and operational cash flow, reinstating agent growth to an annual rate of 20%, 25%, while prioritizing high-quality agents and launching additional initiatives to further support our agents in growing their businesses.
I am pleased to update you on our progress and announced that the successful completion of our first goal, enhancing our balance sheet. The sale of Dagley Insurance Agency is a significant milestone in bolstering our financial position. This strategic move enhances our financial stability and position us well to advance our agent growth strategy for the remainder of the year. The capital infusion from this transaction equips us with essential resources to confidently tackle any potential challenges. Additionally, I am delighted to share that we will continue collaborating with Nathan Dagley and his team to ensure a seamless service to our real estate client. Fathom Realty’s agents can expect no disruption in their current working relationship with Dagley.
In Q1, we also made progress towards achieving profitability. We saw a meaningful increase in gross profit margin, rising about 160 basis points to 10.3% in Q1 of 2024 from 8.7% in Q1 of 2023. We anticipate this positive trend to continue in the upcoming quarters as we increase revenues from our ancillary businesses, which we have greater gross profit margins. Furthermore, in Q1, we may strive in achieving our goal of positive operational cash flow by reducing our operational cash burn to $974,000 from approximately $40 million in Q4 of 2023. Fathom’s total revenue decreased 9% for the 2024 first quarter to $70.5 million from $77.5 million for the 2023 first quarter. Fathom completed 7,703 real estate transactions for the first quarter of 2024, a decrease of 9.7% compared to 8,532 transactions for the first quarter of 2023.
Real estate transactions decreased primarily due to the continuation of high interest rates, especially in the last few weeks of the quarter. Our dedication to expanding market share from legacy brokerage firms throughout the year remained unwavering. Notably, we achieved a 13% year-over-year growth in our agent network. Traditionally, Q1 poses challenges for agent growth across the real estate brokerage with many low-producing agents exiting the industry. Despite this trend, Fathom persevered and our numbers [ph] reflect positive growth strategy going forward. During our last earnings call, I mentioned implementing programs to refine our agent recruitment to high-performing agents. The reintroduction of Producer Perks, a teller to attract high-performance agents is yielding promising early results in Q1 and continuing to early Q2.
Our sustained efforts in agent referrals, the strategic workovers [ph] and the diligent work of our dedicated local managers and recruiting teams have driven our growth. Ultimately, we aim to restore our annual agent growth to about 20% to 25% and are encouraged by the progress this quarter towards achieving that goal. It is worth emphasizing that we believe the industry will see significant M&A activity in the next few quarters and years, and the brokerage consolidation will be prevalent in 2024 and 2025. We are focused on pursuing opportunities that immediately enhance our business, contribute positively to EBITDA and offer the greatest potential for long-term success and sustainability. We will remain opportunistic with our capital deployment in pursuing this opportunity.
Now let’s move on to the ancillary businesses. Despite the challenges faced in the mortgage business in 2023, Encompass Lending Group’s revenue surged by 55% from $1.5 million in Q1 of 2023 to $2.3 million in the most recent quarter. This growth is a testament to the dedication and strategic initiatives implemented by our team in the past quarters. Recognizing the increase in demand within the Latino segment, we launched a dedicated division within Encompass Lending, aligning it closely with our Latino division at Fathom. The early outcomes of this collaboration have been very positive, reaffirming our commitment to serving diverse community. Building on our commitment to support local heroes, we expanded the Hometown Heroes program with over 700 agents now authorized to promoting its partnership with Encompass Lending team.
The program’s early success underscores its value, and we’re eager to further its reach. The first quarter of 2024 [indiscernible] 114% increase in file starts compared to the same period last year, signaling strong momentum for ELG. These promising results feel our optimism for sustained success and growth in the mortgage business going forward. I am pleased to share that April marked a historic milestone for ELG, with the highest number of monthly calls in our company’s history. Given this momentum, we anticipate Encompass Lending will achieve positive EBITDA in the second quarter of this year. While Q4 post challenge for Verus Title, Q1 usher a much-needed growth. Verus Title’s revenue surged by 9.5% to $652,000, an increase from $595,000 in Q1 of 2023.
On March 12, we announced the establishment of our first Verus Title joint venture, Verus Title Elite, and its initial results have exceeded expectations. This strategic collaboration is poised to elevate agent productivity and bolster all stockholders’ profitability. It represents the first of many such planned joint ventures nationwide, reflecting our commitment to forge an impactful partnership with the local agents to enhance attach rates and overall performance. We’re also optimistic about Verus Title’s prospects for achieving positive EBITDA in Q2 based on the performance of the first quarter. Our title business positive trajectory underscores our focus on strategic growth initiatives and continue to optimize our ancillary businesses for profitability in the current environment.
Now looking ahead, our primary emphasis will be attracting top-tier agents, teams and brokerages leveraging our compelling agent value proposition, telling to the current market condition. With a robust pipeline of opportunities, we look forward to returning to the 20% to 25% annual agent growth in the second half of 2024. At Fathom Realty, we pride ourselves on being a premier destination for agents. We offer an unmatched value proposition that empowers them to maximize their earnings. Our industry-leading flat fee commission split underscores our commitment to agents’ success in the long term. Our overreaching objective remains clear, establishing Fathom Realty as one of the top five brands in every market to serve while continuing to expand our footprint nationwide with the goal of reaching all 50 states by the end of this year.
In the coming months, we’ll roll out various marketing initiatives and technology enhancements delivered added value to our agents. These efforts should enhance productivity and contribute to our agents’ overall success. Now before I pass the call to Joanne, I’d like to touch on the industry lawsuit. While numerous companies have reached settlements since the start of the year, we are currently engaged in active discussions and therefore, unable to disclose any specifics at this time. Nevertheless, we're eager to resolve this matter swiftly to alleviate investor concerns regarding the potential impact on our business. Our priority is to continue focusing on the future, which are generally enthusiastic about. With that, I'd like to pass the call to Joanne Zach, our Senior Vice President of Finance, so she can discuss our financial results in more detail.
Joanne?
Joanne Zach: Thanks, Marco. I will start with a general overview of our first quarter 2024 results and will then provide a more detailed review by segment. First quarter total revenue was $71 million, a 9% decline year-over-year compared to $78 million for last year's first quarter. This net decline included a 10.6% decrease in brokerage revenue, partially offset by a 17.1% increase in Fathom's ancillary services revenue, which was particularly attributable to Fathom's mortgage business. Despite the decrease in total revenue, gross profit for the 2024 first quarter increased approximately 7% to $7.2 million from $6.8 million for the 2023 first quarter. Gross margin increased approximately 160 basis points for the 2024 first quarter to 10.3% compared to 8.7% for the 2023 first quarter.
This increase in margin was largely due to our reset of agent fee caps and to an increase in certain agent fees implemented on January 1 of this year. Technology and development expenses were approximately $2 million for the 2024 first quarter compared with $1.6 million for the first quarter of 2023. The approximate $0.4 million increase was primarily due to expansion of our technological operations, higher data and outside service costs into an approximate $0.1 million, increase in non-cash amortization of costs incurred related to the development of our technology platform. General and administrative expense totaled $9.6 million for the 2024 first quarter or 13.6% of revenue compared with $9.3 million or 12% of revenue for the first quarter of 2023.
The dollar increase was primarily due to costs incurred to enhance our offshore services team and regional leadership, partially offset by a reduction in insurance costs. Marketing expenses were $0.6 million for the first quarter of 2024 compared to $0.7 million in the first quarter of 2023. The 16% decrease in marketing expenses was primarily related to leveraging internal resources and to optimizing our advertising expenditure. GAAP net loss for the first quarter of 2024 was $5.9 million or a loss of $0.31 per share compared with a net loss of $5.7 million or a loss of $0.36 per share for the 2023 first quarter. Our net loss was slightly higher due to strategic activities noted above and to a net increase in interest expense, primarily related to our note payable financing which occurred in Q2 of 2023, partially offset by our increase in gross margin.
Adjusted EBITDA loss, a non-GAAP measure was $1.5 million in the 2024 first quarter, which was relatively constant versus adjusted EBITDA loss of $1.4 million for the first quarter in 2023. We, the Fathom team are very focused on continuing our improved margins and strategic discretionary spend in order to achieve and maintain positive adjusted EBITDA. Now I'll spend some time reviewing our business segment results in more detail. Revenue for the Real Estate division was approximately $65.4 million in the first quarter compared to $73.2 million for the same period last year, which represents a 10.7% decline, primarily attributable to a 9.7% decrease in transaction volume. We saw 7,703 real estate transactions during the three months ended March 31, 2024, compared to 8,532 transactions during the three months ended March 31, 2023.
Our transaction volume decreased primarily due to higher interest rates. However, the negative impact of rising interest rates on transaction volume was lessened due to the 13% expansion in our agent base. During the three months ended March 31, 2024, average revenue per transaction was $8,488, a 1% decrease compared to $8,576 during the three months ended March 31, 2023, primarily attributable to a small decrease in commission percentages. Gross profit margin for our Real Estate division increased to 6.5% in the 2024 first quarter compared to 5.5% in the 2023 first quarter. This increase in margin was largely due to our brokerage transaction fee cap resetting at the beginning of the year to $150 on each of the first 15 of an agent's brokerage transactions, in addition to our increasing our agent's annual fee from $600 to $700 and implementing our new High-Value Property Fee commencing January 1, 2024.
Adjusted EBITDA in the Real Estate division was approximately $0.8 million in Q1 of 2024, a decrease of $0.5 million compared to adjusted EBITDA of $1.3 million in Q1 of 2023. This was largely due to the commencement of internal charges from our Technology division to Fathom Realty for transaction management and CRM services provided. We are very excited about the significant improvement made in our mortgage business. Mortgage revenue grew to $2.3 million in Q1 2024 compared to $1.5 million in Q1 of 2023. This revenue growth was essentially driven by our strategic increase in our loan officer base. Our base of principal loan officers has increased to 55%, up from 34% in the previous year. Q1 2024 file start loan volume was up 114% compared to Q1 2023.
Mortgage adjusted EBITDA for Q1 2024 improved to a loss of $0.5 million compared to an adjusted EBITDA loss of $0.6 million for the same period last year. DIA, our insurance business generated revenues of $1.4 million for the 2024 first quarter compared to $1.6 million for the same quarter in 2023. DIA had positive adjusted EBITDA of $0.1 million for the 2024 first quarter, down from $0.4 million for the 2023 first quarter, primarily due to a decline in bonuses received from insurance carriers. As we have previously shared, we sold our DIA business on May 3rd for approximately $8 million in upfront cash and an additional $7 million over the next 24 months. Our Q2 P&L will reflect an approximate $2.2 million gain from this disposition. This transaction provides us with the cash to fuel our growth strategy.
We are very appreciative of the DIA team and all they have done for Fathom, and we look forward to our continued collaboration to further elevate the insurance offerings and services available to our Fathom Realty agents and clients. Verus Title had revenues of $0.7 million for Q1 2024 compared to $0.6 million for Q1 2023, an increase of 9.3%. Verus Title's adjusted EBITDA for the 2024 first quarter was a negative $0.2 million compared to a negative $0.3 million for Q1 2023. New open orders in Q1 tilted more to higher-margin states, which bodes well for revenue potential in the near future. We anticipate that our new Texas joint venture, which commenced business in early Q2 2024 and similar future joint ventures with our top producing real estate agents, will also add meaningful revenues and adjusted EBITDA for our title business.
Moving to our Technology segment, revenues increased to $1.1 million in Q1 2024, inclusive of approximately $300,000 in internal charges to Fathom Realty for transaction management and CRM services. We are continuously building enhancements to our technology platform to better serve our agents and drive revenues. In regards to our balance sheet, we continue to keenly focus on our balance sheet given the dynamic real estate market conditions. We ended the quarter with approximately $6 million of cash on hand, which combined with the cash from our sale of DIA, as noted, that was $8 million in cash received upfront and $7 million in cash to be received over the next 24 months. We are strongly positioned to implement our growth strategy and to achieve and maintain positive adjusted EBITDA.
Now for our guidance for the second quarter of 2024. For the second quarter of 2024, Fathom expects total revenue in the range of $86 million to $89 million and adjusted EBITDA in the range of $0.2 million to $0.5 million. With that, I will turn the call back over to Marco for closing remarks.
Marco Fregenal: Thank you, Joanne. We remain focused on execution, and we're taking the necessary steps to better position Fathom in the current environment and in preparation for the second half of this year. I want to thank the entire team at Fathom on its hard work as we navigate this market and continue to serve our clients. With that, operator, let's open the call for questions.
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