CVB Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Favin Holdings Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Alex Kocherm from Gateway Group. Please go ahead.

Speaker 1

Thank you, operator, and welcome, everyone, to the Fathom Holdings 2023 Second Quarter Conference Call. I'm Alex Cuthin with Gateway Group, FADM's Investor Relations firm. Before I turn things over to the FADM management team, I want to remind listeners 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 ks 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.

Speaker 1

Fathom undertakes no obligation to update any forward looking statements after today's all 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?

Speaker 2

Thanks, Alex. Good afternoon and welcome everyone to our Q2 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 their dedication as we continue to navigate the real estate market.

Speaker 2

Their commitment to supporting our growth, Our vision in serving others in 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 3rd anniversary of our public listing and our significant achievements to date. This milestone is a tribute To the collective effort and unwavering commitment, which 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 and 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.

Speaker 2

Before turning the call over to our President and CFO, Marco Fregional, 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 2nd quarter remains Challenging for residential real estate overall, we are encouraged by some recent signs of stabilization across our markets along with the moderation And interest rates during the quarter. Consumers continue to adjust to higher mortgage rates and while transactions across the industry were down, We remain encouraged by the trends we're seeing across our markets and we believe we're well positioned to continue growing market share regardless of what happens to interest rates. I'm sure you've all seen the talking heads state that with so many homeowners Currently enjoying historically low interest rates, they have no plans to move anytime soon. However, what people Plan to do under ideal personal circumstances and what they actually do in the real world are rarely the same thing.

Speaker 2

The fact is not everyone has the luxury of being rate sensitive. Life happens. People get married or they have a blown family and need more God forbid, sometimes we get divorced. People relocate for work or for family. There's always a need and when that need arises, we'll be there.

Speaker 2

Our result this quarter continues to demonstrate the power of our truly disruptive business model and how We're able to succeed in a difficult market environment. During the Q2, Fathom completed approximately 11,000 real estate transactions And while down 16.7% from the prior year's Q2 of approximately 13,200, We feel good about this number when comparing it to the overall market declines. Even then, as I mentioned, our decrease compares favorably to most of our peers and the entire U. S. Residential real estate market.

Speaker 2

According to the National Association of Realtors, the U. S. Residential real estate market saw overall transactions in the quarter 18.6% compared to 2Q of last year. As our transaction volume reflects, we continue to take market share from legacy Firms despite the volatile environment and actually saw year over year transaction growth in several of our markets. We also increased our agent network 14% to approximately 10,930 agents at the end of the quarter, which compares very favorably to all but one of our public peers, especially when many of our peers saw a decline in agent count domestically.

Speaker 2

We feel optimistic as we continue to provide a compelling value proposition through innovation and an industry leading commission model that continues to resonate well in this environment, and we believe that we'll continue to do so going forward. We are excited to achieve our goal of adjusted EBITDA breakeven in Q2. During the Q2, we continue to see the benefits from the cost reduction measures we implemented along with the improved performance across all over divisions. In fact, we made tremendous progress in reducing our cash burn from over $5,000,000 in Q4 of 2022 to less than $1,000,000 this quarter. Importantly, we believe that these cost reductions were made without sacrificing our ability to grow and in fact, We have allocated some of these savings to further strengthen our recruitment efforts and our technology platform.

Speaker 2

We're continuing to optimize our Cost structure for current environment and better position Fathom for improved operating leverage as the residential real estate market returns. We continue to be committed to maintaining adjusted EBITDA profitability going forward and ultimately achieving cash flow Positive as well. Although the latter may not be reached until Q3, we anticipate continued cash investments to fuel The growth of our mortgage division, our agent recruiting and potential acquisitions. Let me now spend some time discussing our progress across the businesses. Fathom Realty has been one of the fastest growing residential real estate brokerages in the U.

Speaker 2

S. For over a decade and that growth does not happen by accident. We have an incredibly talented and dedicated team who truly live our guiding principles and support our unique culture every day. As Sam, we'll continue to innovate and disrupt the residential real estate industry and believe that our best years are still ahead of us as we continue to grow our agent network and capture market share from legacy firms. Today, Saddlemen Realty operates in 37 states in the District of Columbia.

Speaker 2

We continue to expand our reach with a unique business model to the residential real estate market as we offer agents all the tools, the technology, training and resources and support our larger traditional peers do, but at an industry leading flat decommission split to agents. Our business model allows us to succeed irrespective of the market environment and we believe we're well positioned to attract An ever increasing number of real estate agents during these unprecedented times when agents struggle to generate leads and close sales. We often hear agents say that they join to earn more commission, but they stay for the culture. Our unique low cost and disruptive business model has allowed FASM to attract high quality agents and enjoy agent retention rates approximately twice the national average. Even though we charge a small fraction of what other brokerages charge their agents, we believe that all Realty business can be profitable with smaller number of transactions and our peers.

Speaker 2

Our technology also remains a key point of differentiation and we can generate long term savings and ultimately charge our agents far less than others by owning it outright. We also license our proprietary technology to over 750 brokerages through a Recurring revenue subscription model that drives incremental high margin revenue, while enhancing awareness of and Differentiation of our brand within the industry. Let me now provide an update on our agent trends and steps we're taking to grow Fathom Network. Our cost to acquire 1 agent during Q2 remained low at approximately $9.80 making our breakeven on each agent still less than the $11.50 that we'll earn on their first sale. We also maintain strong retention rates, which are approximately twice the national average and remain exceptionally strong given the backdrop of agents leaving the industry.

Speaker 2

During the Q2 of 2023, Our attrition rate averaged approximately 1.85% per month, which again compares favorably to the industry average of over 3%. More importantly, 80% of the agents who left Fathom still 0 or 1 sale per year. Based on historic trends, we anticipate an additional attrition coming year We'll continue to be primarily from low producing agents. Our enhanced agent referral program called Free for Life And revised agent commission structure continue to show traction among our agents. And we're pleased to announce that we've continued to see a stronger Agent referral rate.

Speaker 2

The Free for Life program is a testament to our commitment to fostering a supportive and rewarding environment for our agents and this program is a true win win. At Fountain Realty, we believe in empowering our agents to reach new heights of success by providing them with unrivaled opportunities and benefits. Once an agent achieves free for life status, they experience a dramatic transformation in their business potential at Fathom Realty and will never have to worry about Paying transaction fees again while substantially enhancing their earning potential. Now remember, there's only 2 ways for a real estate agent to net more income, Increase their revenue by closing more sales, which is hard to do in a downturn or decrease their expenses. We can help agents do both in this environment And this is why our agent referral program continues to have a positive impact on our recruiting efforts.

Speaker 2

We're also excited to announce our inaugural Fathom Serves event in August, which illustrates how Fathom can unite and make a tangible difference in our local areas beyond real estate. The week long event will allow agents and staff to give back to the local community of our favorite charitable organizations by choosing a service project that aligns with 3 of the company's guiding principles of service, support and charity. We're committed to positively impacting the areas we serve and are excited to see what meaningful change we can make through our annual event. Lastly, let me briefly touch on our path to profitable growth. A lot of companies sacrifice profitability for growth, But I'm proud to say that we don't have to operate that way.

Speaker 2

We can do both. This quarter, we achieved adjusted EBITDA breakeven even in today's difficult market environment. We believe that 2023 will be a pivotal year for Fathom as we strive to turn the corner on profitability and really start to show the operating leverage in our business, which Marco will cover in his remarks. Our ancillary businesses have the potential to dramatically increase our revenue and profitability per transaction over time. And even in this tough market, we're continuing to see progress across those businesses, giving us Increased confidence in our growth strategy.

Speaker 2

During the Q2, we saw improved tax rates within our title and mortgage businesses as we continue to go deeper in the markets in which we operate. To close, we believe that we're well positioned to grow revenue, agents and transactions through the remainder of 2023. With that, I'd like to pass over to Marco for a financial update.

Speaker 3

Thank you, Josh. I'll start a detailed review of our Q2 of 2023 results and then we'll finish with a discussion on guidance. 2nd quarter revenue declined by 22% year over year to $100,100,000 compared with $128,200,000 for last year's 1st quarter. This decrease was primarily attributed to a 16.7% decrease in transaction volume along with a 6% decrease in the average home GAAP net loss for the 2nd quarter was $4,300,000 or $0.27 per share, compared with a loss of $5,700,000 or $0.35 per share for the 2022 Q2. Adjusted EBITDA and non GAAP measure was $458,000 in the 2nd quarter versus adjusted EBITDA loss of $2,000,000 for the Q2 of 2022.

Speaker 3

The $2,400,000 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 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.

Speaker 3

G and A expense was $10,200,000,000 in the 2nd quarter or 10.7 percent of revenue compared with 12,400,000 or 10.1% of revenue for the same period a year ago. On a sequential basis, G and A improved from 12.4% of revenue to 10.7 percent of revenue. In total, our operational support, technology and development and G and A expenses Decreased by almost $1,300,000 from $15,000,000 in Q2 of 2022 to $13,700,000 in Q2 of 2023. This reduction reflects the benefits of our expense reduction initiatives that commenced earlier this year. Expenses related to marketing activities were $927,000 for the quarter compared with $1,300,000 for last year's 2nd quarter.

Speaker 3

The decrease in marketing expenses related to leveraging internal resources and optimizing advertising expenditures. Now let me spend some time reviewing our business segment results in more detail. We closed approximately 11,000 restate transactions in the quarter, a 16.7% decrease from last year's Q2, but below the 18.6% reduction in the overall market. We ended Q2 with approximately 10,930 agents, which represents a 14.3% growth rate over Q2 of 2022. While the National Association of Realtors saw a membership decline of approximately 1.5%.

Speaker 3

Revenue for the real estate division was 94 point $6,000,000 compared to $122,000,000 for the same period last year. This is a decrease of 22%, of which About 6% is related to a decrease in the price of homes and 16% is attributed to a decrease in transactions. Adjusted EBITDA in the Real Estate division is approximately $2,500,000 an increase of $800,000 compared to adjusted EBITDA of 1,700,000 in Q2 of 2022. The increase was achieved despite the 16.7% decrease in transactions this quarter compared to the same quarter last year, and reflects our increasing fees and favorable impact of cost cutting measures. Now that we reached breakeven adjusted EBITDA, We can begin to show the operating leverage of our business.

Speaker 3

Going forward, we estimate that 70% of the increases in gross profit will flow to the bottom line. Our mortgage business generated revenues of $2,000,000 in the 2nd quarter compared to $2,600,000 in the prior year period. Mortgage adjusted EBITDA for Q2 was a loss of $240,000 compared to an adjusted EBITDA loss of $860,000 for the same period last year. Our team continues to identify opportunities to reduce expenses to right size our mortgage business going forward as well as increase revenues by recruiting additional loan officers. DIA, our insurance business, generated revenues of 1,700,000 For the quarter compared to revenues of $1,600,000 for the same period a year ago.

Speaker 3

This represents an increase of 6% of revenue. Adjusted EBITDA increased 348 percent from $107,000 in Q2 of 2022 to $480,000 in Q2 of 2023. This reflects the great work our DIA team has done under Nathan's leadership to significantly increase adjusted EBITDA this quarter. Verisk Title had revenues of $960,000 for the quarter compared to about $1,000,000 in revenue for Q2 of 2022. Adjusted EBITDA was negative $25,000 compared to $22,000 positive adjusted EBITDA in Q2 of 2022.

Speaker 3

The decrease in revenue and adjusted EBITDA is primarily due to the significant decrease in the purchase and refi business due to higher interest rates. However, we continue to see an increase in the number of files starting from FADA Majors in North Carolina, Dallas, Utah and Indiana, markets which we believe will improve adjusted EBITDA going forward. Moving to our Technology segment, revenues increased 20 percent to $792,000 compared to $656,000 for last year's Q2. Adjusted EBITDA loss for the quarter increased by 28% from a loss of $325,000 in the Q2 of last year to a loss of $418,000 in the current quarter. Our LiveBi team continues to increase its footprint across the country to reach over 240 MLSs and 425 agents at the end of the quarter.

Speaker 3

LiveBy Power's more than 4,000,000 community pages with 125,000 neighborhood reports created. We continue to focus on our balance sheet given the dynamic real estate market condition, and we have made tremendous progress on reducing our cash from over $5,000,000 in Q4 of 2022 to less than $1,000,000 this quarter. We ended the quarter with a cash position of $9,100,000 We believe that our cash position and overall liquidity provide us with adequate runway to grow the business and execute our strategy through operating cash flow breakeven. We did not purchase any shares in the 2nd quarter under the stock repurchase plan and approximately $4,000,000 remain under the authorization. Before turning the call back to Josh, let me briefly touch on guidance.

Speaker 3

Given the continued uncertainty in the macro environment, we're only providing guidance for the Q3 ending September 30, 2023. For the Q3, we expect revenues in the range of $93,000,000 to 90 $5,000,000 and adjusted EBITDA in the range of $200,000 to $350,000 As a reminder, guidance is Forward looking, which as we noted in the beginning of the call, is subject to risks and uncertainties. I want to thank and congratulate the entire team in achieving positive adjusted Our entire team has worked very hard to achieve such an important milestone in a very challenging economic period. With that, I'll turn the call back to Josh for closing remarks.

Speaker 2

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 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

Thank you. We will now begin the question and answer session. Our first question comes from Darren Ashtahi with ROTH Capital Partners. Please go ahead.

Speaker 4

Hey, Darren. Hey, this is Dylan on for Darren. Thanks for taking my questions. Hey, Dylan. Sure.

Speaker 4

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 of agents?

Speaker 2

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.

Speaker 2

So even then though, you kind of touched on I think it's really important. There's a lot of agents right now have seen a substantial 20% to 30% reduction in their personal business. And And when that happens, a lot of times when you make a change to brokers and this is something we're learning along the way as well. When an agent wants to make change in their business. There's always that concern that I don't know what I don't know.

Speaker 2

What if I make a change and it takes me a while to get set up in the new brokerage and I might miss out on business or whatever it is 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 may be coming to fruition.

Speaker 2

It's under contract, 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 Worried about what happens if I make a move, my business declines, right? I hear people say don't go to Fathom.

Speaker 2

Yes, you save money, but 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 and just pulverized 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.

Speaker 2

And I think it's going to take some time, Obviously, but there's been 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 the progress moving forward. We're starting to see an accelerated number of agents coming over. So we saw it dipped a little bit there in Q2. But again, we still feel really good about that.

Speaker 2

I'm a little bit ADD. What was the second part of the question?

Speaker 4

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

Speaker 2

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 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.

Speaker 2

So unfortunately, that's just it's the industry we're in right now or the market we're in right now.

Speaker 4

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 So 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.

Speaker 4

So I guess like How much actual? Yes.

Speaker 3

Yes, great question. So the 70% is company wide. It's not just listing. That 70% we increased gross profit Q1 to Q2 by about $2,500,000 and about 70 Percent of that. And so there are numbers for all companies.

Speaker 3

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 I think you used the word wiggle room. Yes, we have some.

Speaker 3

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.

Speaker 3

We continue to hire loan officers. I think we're up to about 45 loan officers now. We probably hired 15 loan This past quarter and we'll continue to hire more. So it is not something that we have to manage with Thanks for care. We continue to run our business the same way.

Speaker 3

And because again, I think we've passed that inflection point, Dylan. And I think that's what we believe that going forward, we'll continue to drive 70% of the gross profit increase to the bottom line.

Speaker 4

Great. I appreciate the help. Thank you.

Speaker 3

Thank you, Zoe.

Operator

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

Speaker 5

Hey, this is Wyatt Swanson on For Tom, thanks for taking our questions and 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 is 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 for 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?

Speaker 2

Can you give me a specific I mean, you're referring to other companies with the exact same commission model we have?

Speaker 5

I'm referring to Similar like cloud based brokerages?

Speaker 2

Yes. When you think about cloud based brokerages who are public peers, there's only 2 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 the same model as a Keller Williams or when you think about public peers as really any of their Realogy brands, I guess now anywhere brands, aside from the fact that they've got caps. So they still charge eightytwenty split or eightyfivefifteen split or seventythirty split.

Speaker 2

So it's not really apples to apples. Now as far as what ends up bottom line for the brokerage is a little different. But For us, when you think about the agent, the agent is the one that we're trying to attract. That agent with a company that has an eightytwenty split, even if they're Cloud based, they're still an eightytwenty 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.

Speaker 2

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 this 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.

Speaker 2

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, Massive chaos that will ensue after that.

Speaker 3

Let me also add a couple more things to Let me add a couple more things to that as well. We of all the public companies, we are very unique. Our model is very different, right? Well, 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.

Speaker 3

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% Commercial model is going to continue to grow significantly across the country and eventually will be a model that will have a significant And there are there will be different models and a lot of models will be successful. There isn't such thing one model for everyone.

Speaker 3

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

Speaker 5

companies like us who are growing very quickly. And so

Speaker 3

it's just that they're not 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.

Speaker 2

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.

Speaker 2

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.

Speaker 5

That's great to hear. Thank you very much. I appreciate the color and congrats again. Thank you.

Operator

The next question comes from John Campbell with Stephens. Please go ahead.

Speaker 5

Hey, guys. 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?

Speaker 3

Sure. Great question. It's honestly 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 over the last few quarters, it has significantly changed.

Speaker 3

I think one of the things That's happening is that a lot of banks, for a variety of reasons, and that would 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 no And mortgage rates. And historically, that gap has been about 150 basis points to 200 basis points. And now we're probably over, in some cases, 300 basis points, 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.

Speaker 3

And in some cases, they're also reducing the payout. So there 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 back 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 Sean Barron and Paul Marsh have done a really great job. If you look, for example, at The comparison of the EBITDA loss in Q2 compared to Q1.

Speaker 3

And we've done significant work in reducing that and we look forward to Just about breakeven in our mortgage business, hopefully within a few quarters. But yes, there's definitely some compression on commissions in the mortgage business.

Speaker 5

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

Speaker 3

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 these prices increasing more rapidly.

Speaker 3

We are now therefore seeing them decrease more rapidly. And so in those markets, we're seeing a greater decrease in prices They're not the market. 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 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've seen some decreases, but there 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.

Speaker 5

Okay, great. Thank you.

Speaker 3

Thank you.

Operator

Our next question comes from Raj Sharma with B. Riley. Please go ahead.

Speaker 6

Yes. Hello, good afternoon. Thank you for taking my questions and congratulations on hitting breakeven here.

Speaker 2

Thank you.

Speaker 6

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 M and L MLM type of a marketing. Why does that The referral tiers not get impacted when you gained a lot of share in the market, assuming there's a lot of share in the market?

Speaker 2

First of all, I wouldn't say even better. The fact is we've had a lot of investors over the years saying why don't you do ABC and XYZ company do? Why Why don't you do that roughly on the 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.

Speaker 2

Yes. So we had to come up with something that was different. So it's not necessarily 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 You said I referred 8 people and never made any money or barely made any money because they just were not producing agents, right?

Speaker 2

So they have to produce for you to make anything. 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 I'm willing 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 around the transactions they close, right? So I think number 1, there's a benefit.

Speaker 2

You're not dependent on someone else Closing business for you to be financially awarded. Now you have to close business to be financially awarded 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 break in from what we give you from day 1. Right. So you have to gather for a lot of agents in that model just to get what we get from day 1.

Speaker 2

So that I think that's important to start with. So now with us, An agent refers 4 people to Fathom. Now, of course, we have a minimum requirement of how many transactions they can close before they get that benefit, But they were for 4 people who, let's say, on average close what they do, on average close 5 transactions each. That's 20 transactions that came into the company and they're now capped for life, which means they're not free. They still have to pay their annual fee.

Speaker 2

They still have to pay their $150 transaction fee, the capped fee. So at the end of the day though, it's a huge win win because they're saving money and we're getting a lot of transactions, right? On the Free for Life, They've got to refer 8 agents, right, to become free. Now once they've gone free, there's no transaction fees of any kind. There's no annual fee either.

Speaker 2

They're truly free. But they've brought in 8 agents who closed, let's say, 5 transactions each, right? So you can imagine, start doing the math, we're giving up Five transactions in exchange for 40 transactions plus everyone's annual fees and so on. So it's a massive win for us and it's a win for them as well.

Speaker 6

Got it. Got it. That's very helpful. And then on the referral tiers, I mean, they're very unique referral tiers. How do you internally measure whether these are working?

Speaker 6

And also, What is the what was the referral as a percentage of the new agent?

Speaker 2

I didn't look at this last yes, I'm sorry, go ahead Marco.

Speaker 3

Yes. So we typically average between 35% 40% of our agents coming in to Fathom are referring by other agents, okay? 2nd, historically, agents who the agents referred by other agents, okay, Historically closed a higher number of transactions than the average agent out there. And so When a Fathom agent refers a non Fathom agent to join the company, historically, that agent has a higher producing Seeing number of transactions. The reason for that will make sense, right?

Speaker 3

Typically agents know other agents because they're closing business, right? They're working on the other side of transaction. So That agent typically is more productive for us. And we have increased the number after we produced the new program in October, November last year. Now we're up to about 40%.

Speaker 3

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.

Speaker 2

We actually 1 quarter we hit as high as 60%, I think 65% 1 quarter. So it's clearly, if there's a benefit, agents get excited about it. We need to do a better job of keeping them excited about it. And so we've been working with our district directors, Finding activities and programs, every time someone does become free for life or capped for life, we make sure to promote that, say, hey, you can do this too. Just keep them engaged and keep them excited.

Speaker 2

So it's we've seen a lot of great benefit coming from it. So we're pleased.

Speaker 6

Got it. Got it. Thank you. 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're still it's 1.8% a month, So about a yearly, 20% of the agent is turning away. So how much what kind of a growth rate do you think it's What kind of growth rates are out there?

Speaker 6

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?

Speaker 3

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, I'd 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?

Speaker 3

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 process can take 2 months, right? Our onboarding starts in the last 45 days have increased significantly, right? And so but what happens is the agents are still waiting To close an additional transaction because they're doing less transactions.

Speaker 3

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. We're working a variety of different ways to improve that. But that is a good sign. On boarding starts are significantly increasing.

Speaker 3

So that's number 1. 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 we're looking at sometime next year, right, interest rates settle, come down a little, That will be 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?

Speaker 3

I don't think we're we're never going to I don't think I will see that in my lifetime, 3% interest rates again, right? But certainly in the low 6s, high fives, low 6s, we believe and by the way, others in the industry believe that if interest rates come down to high fives and low 6s, We're going to see that segment of the market that's kind of frozen 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.

Speaker 6

And these are net of churn, right?

Speaker 3

That is correct. That upturn. That's correct.

Speaker 6

Right. Got it. And then lastly, Per agent ticked up, are these just indicative of the market or the percentage of more productive Agents in your mix is going up.

Speaker 2

Part of it. How should we Part of it we're seeing, As I mentioned, 80% of the agents who left us closed 0 or 1 sale per year. So the While at 1.5 percent by the way is 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.

Speaker 2

So the more of them get out of the business, our transaction per agent, as you calculate it, actually It looks like it improves. Part of that's just the fact that they're getting out of business.

Speaker 6

Got it. That's right. So thank you so much for answering my questions. I'll take

Speaker 3

it offline. Thank you. I do

Speaker 2

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.

Speaker 2

And so we're finding ourselves in a position where 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?

Speaker 2

Whatever. They tend to call it, but ends up being acquisition. The opportunities out there, we're seeing more and more. We're seeing an accelerated rate of people reaching out to us. So the potential It's fantastic.

Speaker 2

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 unfortunate, a lot of brokerages go out of They shutter and also the agents are scrambling to find a new home. So we could be the beneficiary either through an acquisition

Operator

through session. I would like to turn the conference back over to Josh Harley for any closing remarks.

Speaker 2

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.

Operator

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

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Earnings Conference Call
CVB Financial Q2 2023
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