Fathom Holdings Inc. Q1 FY2024 earnings call

• Balance sheet enhancement: Sale of Dagley Insurance Agency was a significant milestone, bolstering financial position and equipping with resources to tackle challenges.
• Profitability progress: Gross profit margin rose about 160 basis points to 10.3% in 2024 Q1 from 8.7% in 2023 Q1. Anticipate positive trend to continue with ancillary businesses having greater gross profit margins.
• Transaction volume: Real estate transactions decreased 9.7% in 2024 Q1 due to high interest rates, but Asian network saw 13% year-over-year growth.
• Agent growth: Implemented programs to recruit high-performing agents, with Producer Perks yielding promising results. Aim to restore annual agent growth to 20%-25%.
• Ancillary businesses: Encompass Lending Group's revenue surged 55% to $2.3 million in 2024 Q1, launched Latino division, expanded Hometown Heroes program. Verus Title's revenue surged 9.5% to $652,000, established joint venture Verus Title Elite with positive initial results.

Real Estate division

• 2024 Q1 revenue was approximately $65.4 million, a 10.7% decline from the same period in 2023, primarily due to a 9.7% decrease in transaction volume (7,703 transactions in 2024 Q1 vs. 8,532 in 2023 Q1).
• Gross profit margin increased to 6.5% in 2024 Q1 from 5.5% in 2023 Q1.
• Adjusted EBITDA in the Real Estate division was approximately $0.8 million in Q1 2024, a decrease from $1.3 million in Q1 2023.

Mortgage business

• Revenue grew to $2.3 million in 2024 Q1 from $1.5 million in 2023 Q1, driven by an increase in the loan officer base. File start loan volume was up 114% compared to 2023 Q1.
• Adjusted EBITDA for Q1 2024 improved to a loss of $0.5 million from a loss of $0.6 million in the same period last year.

DIA business

• Generated revenues of $1.4 million in 2024 Q1 compared to $1.6 million in 2023 Q1.
• Had positive adjusted EBITDA of $0.1 million in 2024 Q1, down from $0.4 million in 2023 Q1, primarily due to a decline in bonuses from insurance carriers. The DIA business was sold on May 3.

Verus Title

• Revenues were $0.7 million for Q1 2024, an increase of 9.3% from Q1 2023.
• Adjusted EBITDA for the 2024 first quarter was a negative $0.2 million compared to a negative $0.3 million in Q1 2023. New open orders tilted more to higher-margin states.

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.

• 2024 Q2 total revenue expected in the range of $86 million to $89 million and adjusted EBITDA in the range of $0.2 million to $0.5 million.
• For the remaining of the year, P&L impact from Dagley sale is about a $1.3 million to $1.4 million reduction in EBITDA compared to last year, and about a $3 million to $4 million impact on top line revenue. Q2 EBITDA guidance includes an extra ~$400,000 in EBITDA if including DIA.
• Anticipate Encompass Lending to achieve positive EBITDA in Q2 2024 and Verus Title to achieve positive EBITDA in Q2 based on Q1 performance.

• Industry lawsuit: Currently engaged in active discussions but unable to disclose specifics, eager to resolve to alleviate investor concerns.
• Market conditions: Challenging market conditions with high interest rates impacting real estate transactions. Seasonal challenges in agent growth in Q1.

Q: On the first one, maybe if we could touch on Dagley, the full year impact on the P&L, what you're expecting? And then maybe if you could parse out the impact on the 2Q guidance?

A: For the P&L for the remaining of the year, it will be compared to last year, we have reduction of about $1.3 million, $1.4 million EBITDA compared to last year because we do have the Q1 into our numbers, right? And then -- and in terms of revenue, it would be about a $3 million to $4 million impact in terms of our top line revenue. In terms of our guidance for -- our guidance does include -- not included DIA, right, because we say it's a longer part of their business. So if we did have DIA, it would have an extra about $400,000 in EBITDA, something like that. And so that will be the impact on EBITDA in Q2. So as we're guiding between $200,000 and $500,000, we feel that even with not including DIA, as we had previously discussed, we feel very positive about achieving positive EBITDA for Q2.

Q: On gross margin, I might -- I guess I'm doing the math wrong here, but I'm showing a 13.2% gross margin. I think you guys -- I think you mentioned 10.3%. And I think in the press release, it was also 10.3%. Do I have that wrong?

A: So yes, when you look at gross margin, you have to reduce -- remove two costs. I know we have to remove the commission and other agent related costs and then the operation and support. Operational support or direct costs. When you add those two costs and then you subtract from total revenue, then you get the gross margin.

Q: My first question, Marco, is on Dagley, I know you just addressed the EBITDA impact. Just a bigger sort of question, why sell it? I understand that it's for liquidity, but would that -- does that imply that other divisions or would be up for this position as well?

A: Raj, thank you for your question. [Technical Difficulty]...So Raj, we just felt that the resources that were available to us with the sale of DIA or Dagley, they could be utilized in a way that will give a much higher return to our stockholders. And so we just felt that the capital could be much better implemented in that way. Second, our partnership with Dagley continues and our agents and clients are not going to have any deterioration in terms of services. So we just felt it was the best combination of putting our assets in a way to give the best return possible to our stockholders at the same time, continue the level of service that we wanted to provide our clients. So we just felt that was the best way to do that.

Q: I just wanted to ask about Asian productivity. Have the agents you've added so far this year based on what you might know about them, are they tending to skew higher than sort of your more legacy based, meaning like are they more productive on a like-for-like agent basis?

A: Yes. Great question, Dillon. So what happened is sometime mid last year, we stopped our Producer Perks program, which is really focused on higher producing agents. We just felt like we had good momentum. And clearly, that hurt us a little bit at the second half of last year. The kind of Asian we started recruiting. So we reinstituted the Producer Perks program and a variety of other different programs in terms of really being focused on higher [Indiscernible]. And the early signs of Q1 show us that we are absolutely recruiting a higher percentage of producing agents, which, by the way, is what we did in the beginning of last year, right? So it is clear that a number of transactions has the lack of focus on higher producing agents hurt us a little in Q1. But the reality is that the early results of the agents that are bringing on board are higher-producing agents. And I think that by late Q2 and certainly by Q3, we're going to see higher productivity per agent based on the programs that we implemented.

Q: This is Wyatt on for Tom. I had one on whether you could give some color into what you're seeing so far in 2Q related to agent productivity and, just the overall market?

A: Sure. Thank you for your question. So a couple of things. So we gave guidance for Q2 and a significant change from our Q1 in terms of EBITDA, right, from the loss of about $1.5 million to a guidance of positive between $200,000 and $500,000. So we are seeing seasonality. We're certainly seeing seasonality coming back to the market. And so we anticipate a higher number of transaction closing, which would lead us to a positive EBITDA. Moreover, we're also seeing the seasonality in our mortgage business and in our title business. So this is all the real estate side. So all three parts of our business, we anticipate all three them to be positive EBITDA for Q2, which is an exciting time for us, given the Q1 results. We certainly look forward to being positive adjusted EBITDA in terms of that. In terms of agent productivity, yes, we are seeing agent productivity picking up, two reasons. One is just seasonality, right? Q2 and Q3 are higher transaction quarters. We're also seeing people, clients and buyers really adjusting to what their interest rates are. Actually, interest rates have come down this morning, I believe, to 7.09. And so I think buyers are getting their heads around that. These are the interest rates and I have to buy a house. And so there is a level of a greater acceptance from buyers. It is still a tough market, but we are seeing a great acceptance from buyers in terms of that. And that's why we're seeing all three of our businesses are going to have significant improvements in Q2. So productivity is going to increase in part because of seasonality, in part because we are recruiting higher productive agents in Q1 and going into Q2 as well.