RedChip Companies, Inc. (FTHM) Earnings Call Transcript & Summary

Hello. This is Craig from RedChip Companies. Thank you for joining today's event with Fathom Holdings, which trades on the NASDAQ under the ticker FTHM. With us today, we have Marco Fregenal, Chief Executive Officer of Fathom. We will begin with a brief presentation in a moment, and then we will answer your questions. [Operator Instructions] Before we begin, please allow me to read the safe harbor statement. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements pertaining to future financial and/or operating results, along with other statements about the future expectations, beliefs, goals, plans or prospects expressed by management, constitute forward-looking statements. Any statements that are not historical fact should also be considered forward-looking statements. Of course, forward-looking statements involve risks and uncertainties. I now turn this webinar over to Marco. Please go ahead.

Thank you, Craig, and good afternoon. Thank you for joining a brief presentation on Fathom. What I'd like to do is take you through some slides that talks about our company, our goals and how we'll continue to be successful. And then, of course, I'll take any questions that you may have. Just to go over some of the highlights about Fathom. Fathom is a national, technology-driven, end-to-end real estate services platform. And we integrate not only brokerage but as well as mortgage, title and SaaS offerings for brokerages. Some of the highlights for 2024. We did revenues of $314 million. We closed 37,000 transactions. We have agent growth of 21%. We opened 5 new states. And in November of last year, we made one of the most significant acquisitions of the company, which was acquiring My Home Group, the 27th largest brokerage in the country. In a few slides, I'll talk in more detail about them. Some people ask me about what is the outlook for the real estate market. And this is NAR's outlook, the Chief Economist of NAR, and he currently is forecasting that, even after 2 very difficult years for the industry, that we're going to begin to see some growth in 2025, about 9% growth. Most of this growth will come probably second half. And then 2026, we should see a 13% increase. Now again, keep in mind that '23 and '24 are 2 of the most difficult years in the real estate industry. So we certainly are looking forward to getting back to transaction growth. Let me just highlight some of the key things about our company. So the way we look at real estate, Fathom is a way to reinvent the real estate industry, and we'll talk more in detail about that. We believe that we have an unmatched value to real estate agents. And then we look at -- one of interesting things about Fathom is that we look at the real estate agent as our customer. The other thing that makes Fathom rather unique is that we own 99% of our technology. The entire platform is owned by Fathom. We developed that over many years. The best way to think about our technology is to think of it as an ERP solution that runs the entire transaction, the real estate transaction, end to end. And again, in a few minutes, I'll go over our technology. It's one of the key things that differentiates us, that allows us to have the lowest direct cost per transaction in the industry, which are about $270 per transaction. Also we do -- like I said, I mentioned earlier, we own mortgage, title and a data business as well. So we try to monetize the transaction in many different ways. We do believe we have an interesting and effective growth strategy, which -- it involves not only organic growth but also agent referrals within Fathom and then a roll-up acquisition or an acquisition strategy. We have performed rather well even in difficult years in '23 and '24. And certainly prior to the significant change in interest rates, Fathom grew very quickly. And I do believe we have a great management team that can continue to help us and achieve our goals going forward. So what is unique about Fathom and why do we think it's reinvented? So if you think about the traditional real estate companies out there, they typically charge an agent anywhere from 20% to 40% of their revenue of that transaction, where Fathom, we charge a flat fee. So that's one of the significant differences. Again, we own all the technologies, we're virtual, and so we don't have the office expense that most of the brokerages have. Our ability to monetize transactions through mortgage and title is rather unique in the industry, and certainly, the growth potential of this company going forward. We currently have about 14,300 agents. There are over 1.4 million real estate agents in the country. So we have enormous runway in terms of growing our business. When you talk about the value that we bring to real estate agents, and as I mentioned earlier, real estate agents are our customers. That's who we serve. We do believe we have the best commission splits in terms of what the agent pays to the brokerage. We just launched a revenue share, which is another interesting way for agents to earn additional income. Our technology is rather unique because our technology allows us to have a very efficient way to run the transaction and, therefore, allowing us to close the transaction with about -- in less than $270 per transaction. We do provide real estate leads for our agents, of course, provide training. And certainly, agent support is key in terms of helping the agents grow their business. When I mentioned earlier the commission splits, if you think about a typical transaction of, say, $430,000, where the commission may be 2.7%, at Fathom, we only collect $465 plus a $35 fee. So the agent is able to keep about -- roughly around $11,000. If that agent is working for a traditional brokerage, that agent is keeping around $8,000. So you clearly can see that it's a much more favorable program for agents. And this is one of the many reasons that we have grown quickly over the years. As I mentioned, we do have revenue share, and our revenue share is a -- it's something that we just launched in Q4 of last year -- late Q3, early Q4 of last year. So it's rather new yet for us. There are some other companies out there who have had revenue share models for many years, and we're just starting on this now. But we do have an entire platform that's able to not only keep track of this, but give the agents the ability to see what's going on and how much they're earning. And we do have 2 plans, Fathom Max and Fathom Share. And you can see that in the Fathom Share, an agent has the ability to earn a lot more of the revenue share. Now let's just make one more interesting about revenue share. So the way revenue share works is that we basically allocate 50% of our gross profit to revenue share. And then if the revenue share then is allocated through the agent, then the agent can earn more all the way down to 5 levels. Again, this is just to get a view for how revenue share is calculated and how basically it works. I'm not going to spend a lot of time here. If any of you later have questions about revenue share, I can address those either individually or collectively as a group. As I mentioned, technology is one of the key differentiators about our product. And when I think about an ERP system for the industry, think of it a technology suite that allows us to manage the entire process, right? And so we have agent websites, we have a CRM that allows the agents to manage all their leads, transaction management. We allow -- we have the ability to create neighborhood reports for agents. As you can imagine, real estate is a local business. And once someone is looking for a house, they typically are looking in specific neighborhoods. So we have the ability to create reports on about 140,000 neighborhoods across the country, which is a great tool for agents in order to market themselves and then work with their potential customers. Of course, I mentioned lead generation, marketing campaigns, print marketing. So we're able to deliver a great deal of value to our agents in helping them run their business. And as I mentioned earlier, 99% of this is our technology. We talk about leads. We're able to generate leads for our agents as well. There's a variety of different programs for leads, all the way from Hometown Heroes, GoSocial -- creating GoSocial leads. We have first-time buyer programs. We're beginning to implement AI in our lead generation program. So again, 87% of agents have indicated that they're always looking for a way to grow their business. And at Fathom, we have that ability, and we'll continue to increase that in the future. Support is another key component of our value. 80% of our agents said that they continue to need support from their brokerages. And one of the things that makes us unique, because we are a virtual company, we actually have a great deal of focus on on-demand training as well as local training. But on-demand training is a key factor of helping agents grow their business. Agents want the ability to train themselves whenever they feel like it's the right time to do it as opposed to having local classes in which they have to go to a specific time. So they want the flexibility to have access to training anytime during the day. And we have built an entire suite that allows the agents to get trained at any time. Our technology is called intelliAgent. And again, as I mentioned earlier, it automates the entire process of a transaction. So again, one of the key differentiators of our company is that we believe we are the lowest-cost provider. We can close the transaction for about $270. What this means is that once we pass breakeven, adjusted EBITDA breakeven, which we believe will be Q2 of this year, we believe that about 60% to 65% of any additional gross profit will actually flow down to the bottom line. And that's important because I think once we pass the breakeven point, our technology allows us to be incredibly profitable. And again, this allows us then to create all kinds of other products and services for our agents. Ancillary services is a key component of our strategy, both in mortgage and title and data. As you can see from this chart, you can see that the gross profit potential in lending and title is significant. Both of our title and mortgage businesses have grown significantly over the years. I believe in the last quarter -- we just announced earnings yesterday, and for Q4 -- for the full year last year, I believe our title company grew 50% and our mortgage company grew 49%. So we are seeing rapid growth of both our mortgage and title businesses, and these companies are going to add significant value to our profitability going forward. As I mentioned earlier, our growth in Verus, our title company, last year was 50%. And Encompass Lending, which is our mortgage company, is 49%. Let me just highlight one key component of Encompass Lending. Some people always ask me, as a mortgage company, do you take paper risk? Do you hold the mortgages? We do not take paper risk. We do not hold mortgages. By the time we close a mortgage, that mortgage is sold to another bank. And as a matter of fact, if you look at our balance sheet, you're going to see a line in our balance sheet that is mortgage held for sale, and then a liability which is our warehouse line. And so they go hand in hand in terms of that. So if you look at our -- the asset part of our balance sheet, it's always going to be greater than the liability in the balance sheet, and that is because we're selling mortgage for more than we are borrowing. Our growth strategy for the last few years and going forward is going to be based, again, leveraging our platform, okay? And we're also going to focus on increasing our gross profit. So our gross profit currently is derived mostly from real estate, but as we continue to have mortgage and title, we'll be able to increase our gross profit overall. And that is a key component of this. So not only growing the number of transactions, but then also growing the gross profit per transaction. And as you can see, $264 roughly is the cost for a -- to operate -- the direct cost to operate a transaction in our platform. Throughout the last few years, we have grown this company in 3 different ways. Organic growth, which is -- we do this by having a broad marketing campaign across the 1.4 million agents. About 50% of our growth come from agent referrals. And that means that we try to incentivize our agents to refer other agents. And we made a few acquisitions over the years. Clearly, the most important one has been My Home Group, which is a company we acquired in November of last year. 2,200 agents, the 27th largest real estate company in the country. Our goal over the next few years is to reach 100,000 agents. Let me just briefly discuss My Home Group because it's an interesting case study on how we acquire companies and how -- and what is the potential EBITDA for this company. So we acquired My Home Group last year. It had about 2,200 agents and close to about 12,000 transactions. The 2025 projections is to increase revenue by between $100 million and $110 million for Fathom because of this acquisition. And we should do EBITDA between $1 million and $1.2 million. In 2026, we are forecasting revenues of $130 million with EBITDA of $2 million. So basically, our breakeven in this acquisition is 2 years. So we typically -- when we make an acquisition, we try to acquire companies that we can break even within 2 years in terms of using our technology to reduce expenses, optimize the operation, increase the EBITDA. And therefore, after all this is implemented, we can have a breakeven of about 2 years. Briefly just talk about our financials. Again, we announced earnings yesterday. We closed the year with 14,300 agents. It was roughly a 24% increase in agent year-over-year. Our revenues for the year last year were $311 million. We grew Q4 revenue by 24%. And then transactions, we did 9,903 transactions, and we grew transactions by 22%. So Q4 returned the company to not only revenue growth but transaction growth, and we do believe that we'll continue this trend into 2025 and beyond. This is a coverage map that gives you a feel for the coverage throughout the country. Fathom itself, the real estate company, is in 43 states, and the majority of the higher-transaction states we already cover. We look forward in being all 50 states by the end of the year. Our mortgage business continues to expand as well, as well as our title business. And we'll cover most of the states by the end of this year, not only for real estate, but mortgage and title. One of the things that also makes us unique is our lower cost of acquisition. We can acquire an agent for about $1,100 or so. And therefore, within the first transaction, which is $500 plus $700, we're able to break even. And we believe that we can continue to maintain a low cost of acquisition for single agents as we continue to build our business. Now turnover is a key component of this. It doesn't matter how many agents you recruit, it's also how many agents you keep. And Fathom is unique in the sense that our turnover is probably the lowest in the industry. If not the lowest, it's one of the lowest at roughly around 1.7% a month. Now the other thing that's interesting about our data, and this is Q3 data, we're in the process of updating Q4, again, we closed our -- reported our earnings yesterday, is that the majority of the agents that leave Fathom, so roughly 86%, closed very few transactions, right? And so that's one of the key things that's -- so like any other company, we lose agents. We certainly lose a lot less than our competitors. But the significant majority of those agents leaving Fathom are agents that close very little business. And I think that has been a pattern for many, many years, and we believe that pattern will continue. We have a great management team. Josh Harley was our Founder. He stepped out about 1.5 years ago when I became the CEO. Samantha Giuggio, our Chief Operating Officer, has been with the company 15 years. And Jon Gwin is Chief Revenue Officer. Jon joined the company about 9 months ago. And so we do think we have a qualified team that's been involved in real estate, mortgage, title for many years as well as growth companies. And so we believe we're well-poised to continue growing the business. I'll quickly highlight our Board. It's a Board that is represented by individuals who have a great deal of experience in different areas. I will highlight 2 very quickly. Scott Flanders, who ran multiple public companies, high-growth businesses and has been instrumental in helping us grow. And then Steve Murray, who's been in the real estate industry for over 40 years. He ran -- he's one of the most well-known industry analyst experts for the real estate industry, has been -- participated in over 400 different M&A deals. And certainly, Steve had the opportunity to choose any company to sit on any Board, and we're certainly blessed that he decided to join Fathom. So with that, I'll stop and I will take any questions that you may have.

Thank you, Marco. [Operator Instructions] Marco, we've already got a couple of questions here in the chat box. Do you think in time, with your low transaction cost, you can pass those savings along to the home sellers to reduce fees when selling a home?

That's a great question. I don't know if that's going to happen. By the way -- well, actually, that already happens. And what I mean by that is many of our agents already reduce their fees to their customers. And so what makes us unique is that we allow agents to make those local decisions in their own markets, right? And so -- but many of our agents already do this. They may only charge 2% as opposed to 3%. And so that already happens. The difference is that we allow agents at their local market to make those decisions as opposed to implementing any kind of saves in a very broad way.

Marco, how many agents do you have in Florida?

I believe in Florida we have 600, 700 agents, something like that.

What was your gross profit for the trailing 12 months? What are the typical multiples your competitors are trading at?

So the gross profit for the last 12 months was around $20 million or so. And our -- so the valuation of business is typically based on different factors, right? One factor is the size of the business. Another factor is the growth of the business. In a sense, that's how quickly the business is growing. And so we are trading right now at less than 1x gross profit. Competitors who are bigger than we are and who are growing faster than we are, although, again, our growth rate is going to significantly change this year, and -- they're trading anywhere from 6 to 10x gross profit. So there is an enormous upside in terms of the multiple of our business based on that. And we look forward to being recognized and being rewarded with a higher multiple as we continue to grow the business.

How does the licensing of your intelliAgent work? Are you making a lot of revenue from licensing?

So the licensing right now -- we do not license intelliAgent to other companies yet. That is something that will come in the future. Our technology revenue primarily comes from our LiveBy product where we license the data to many companies across the country. And that's where the revenue comes in for our data business. We will, at some point, make a decision to license our technology to other brokerages. But currently, that technology really is a significant competitive advantage. And so we want to make sure that we leverage that across our company first before we start licensing it to other companies.

Can you compare yourself to some of your publicly-listed peers like REAX and RDFN? Also, can you give more color around getting to breakeven?

Sure. So there are some similarities and there are some things that are very different about Fathom, right? Real, which is a great business, and Tamir is a great CEO and they've built a very nice business, they focus primarily initially on their 100% -- I'm sorry, on their revenue share, right? So they are a traditional company charging 15%, and they built a revenue share program similar to eXp. So eXp started with a revenue share program, and then Real came after that. Clearly, there's some difference between Real and eXp, and not going to get into all of those. We are a virtual company like they are. The difference about us and Real is that -- where they are more traditionally [ 515 ], with revenue share coming pretty close to the beginning of their business, we just implemented revenue share, so we believe that revenue share has a significant upside for us. But the other thing is that we are 100% commission in a sense that we charge a much lower fee. Clearly, Real has grown a great deal in the last few years, and we think that -- given the growth that we've had in Q4 and what we believe is going to happen going forward, we think that we can get back to our traditional pre change in interest rates growth of 30%, 35%, 40%. We think that going forward, we'll get back to that growth. In terms of adjusted EBITDA positive, we believe that Q2 of this year we'll be able to break through and have a quarter in which we'll be adjusted EBITDA positive. And then we look forward to continue maintaining that, and then, of course, then growing beyond that. And as I mentioned earlier, one of the things that makes us unique, because of that low direct cost per transaction, once we pass breakeven, adjusted EBITDA breakeven, we believe we can drive 60% to 65% of any additional dollar -- gross profit dollars to the bottom line. And that's one of the things that makes us incredibly unique and our model incredibly powerful, again, once we pass our adjusted EBITDA breakeven.

Can you talk more about the partnership with Locafy?

Sure. So Locafy is a company out of Australia that has a technology that aids businesses, agents and others to optimize their SEO -- their social presence, online presence, through SEO. We're just beginning to work with them, and I think potentially it could be a great partnership. But that's what they're focused on. And as you can imagine, for real estate agents, having a local social presence is important, right? And so we are working with Locafy in order to create solutions to help our agents improve their social presence and, therefore, being able to generate more business and more leads.

With the advent of AI across all industries, how is Fathom adopting AI?

I'm sorry. Can you repeat -- you broke up a little. Can you repeat the question?

Yes. AI is spreading everywhere. And what is Fathom's stance as regards AI?

Great question. So for those of you who don't know, my background is technology. Prior to joining Fathom, I ran multiple software companies, a telecom company. So I am someone that's been in the technology space for many years. So look, AI is going to change the world in every industry, and that's a given. In the real estate industry, AIs can change and help us in many different ways. So one of the ways we're looking at AI, for example, is the ability to look at the documents, of all the documents and transactions, and use AI to optimize that process, right? Use AI to review documents and identify potential issues with a contract or document. That's an example of how AI can be used in real estate. AI can be used in real estate -- one of the things that is expected of us is to review and monitor how agents market themselves. AI can help with that. And we're already working on that as well. We are looking at AI in terms of optimizing the conversations between a potential client and our technology. So for example, if someone is searching for homes in a specific neighborhood, an AI engine, AI bot can then suggest, take a look at this report. This is a report on this neighborhood. And if you like this neighborhood, let me offer you some other neighborhoods that are similar to this neighborhood. AI is able to 24/7 be able to engage that potential buyer or seller, buyer in this case, in order to give them all the information they want. So there are many different ways in which AI can be implemented in the real estate industry. And honestly, almost every large company is already working towards that. And that's just -- and we're just one of the many companies that are implementing AI solutions.

What are your plans with crypto?

So the thing about cryptocurrency for us is that we -- it's 3 different things, and really 2 are the most important things. One is that we already are getting buyers, especially international buyers, who want to buy properties in the United States who want to use cryptocurrency to do that. So that is potentially one way that crypto can be utilized. Second, agents are already asking, can they get paid in crypto, right? And so we're already looking at that as well. So just like AI, crypto is going to be, especially as the government agencies continue to -- and what I mean by government agencies, I'm talking about state because real estate is regulated by each state government, that those state organizations continue to embrace some of the changes in the arena of crypto. And so we're already preparing ourselves for that. That's kind of how we look at crypto. It will be just one of the many things that buyers can utilize our platform if they want to do that and agents can receive compensation in terms of that. It is going to -- at some point, it is going to be widely accepted, and we're just trying to get ahead of the curve on that.

You recently raised $3 million through a registered direct offering. Can you tell us more about that and about Adam, your newest Board member?

Sure. Well, Adam is a highly experienced investor. I'm not going to go into all the details of his background because we'll be here for a long time. You can certainly learn about him. But he is a very astute, very experienced investor, who has a great deal of experience in growing businesses, as well as, of course, as Scott Flanders, and that's how we got introduced to Adam. So we're certainly very excited about having Adam join our Board and continue to help us grow our business. Adam is a big proponent of our roll-up strategy to a certain extent, and that is part -- there's an enormous opportunity out there for 200 to 300 brokerages who are significantly smaller than we are, who are really going to struggle for the next few years. And so there's an opportunity to really accelerate our growth by looking at these 200-, 300-, 400-agent brokerages that will significant leverage our technology, our operational efficiencies and become much more profitable. So with the $3 million investment, we'll continue to grow our business. We'll continue to look at small acquisitions. And our goal is to be much bigger than we are. And after 2 very difficult years in the industry, we -- I'm excited that in Q4, we're able to return to growth. And I think that over time, as the investors realize the potential for this company, we'll be rewarded in terms of valuation. And certainly, all our stockholders will be rewarded with that as well.

Marco, I'm not seeing any more questions in the queue. Could you send us out with the essential value proposition? Why should investors take an interest in Fathom Holdings right now?

Well, first of all, thank you, everyone, for joining. I certainly appreciate you taking the time to listen to me and what Fathom is about. Look, I think what the value here is that real estate is not going anywhere. We just had probably the 2 toughest years in real estate, and many would argue that we hit the bottom and that transactions will begin to increase going forward. So people are always going to buy houses and sell houses. And the reality is that is part of our economy and is a key component of our economy. Second, Fathom has had a track record, prior to, again, the significant change in interest rates, of a significant growth. And as we demonstrated in Q4 of this year, we got back to 20-plus percent growth -- year-over-year growth, and we anticipate that we'll continue to grow. Our technology provides us an incredible competitive advantage to have the lowest direct cost. And I do believe, like in any other industry, the lowest-cost provider is going to be a significant player. And so when you combine all of this, combined with the potential of the growth in the industry, combined with our track record of growth, combined with our technology, our capabilities of additional gross profit through our ancillary businesses -- and we demonstrated that. We have grown both of those businesses by 50% year-over-year. And given that we think that we'll have significant growth going forward, and once the multiple goes in gross profit from 1 to 2x, 3x, 4x and so on, I think our investors are going to be significantly rewarded. And so we believe that this is a great investment opportunity for those who want to take a look at, as the real estate industry comes back into the positive side of the market. So with that, I want to thank all of you for joining. If anyone wants to have a one-on-one meeting, I'm certainly available to do those. I do many of those on a weekly basis, and we can get into much more detailed conversation about our plans, our technology and how we see the future of Fathom. With that, I thank you.

Thank you, Marco. For more information about Fathom, reach us at 1-800-REDCHIP or e-mail us at [email protected]. Visit RedChip's Investor Information page for Fathom, fthminfo.com, There, you can view and download the investor presentation and fact sheet and sign up for news alerts on Fathom. RedChip is excited to announce the launch of RedChat, our advanced AI assistant designed to empower investors with instant in-depth insights on 4,000 small-cap and micro-cap stocks, including, of course, Fathom. Try it now on fthminfo.com or go to red.chat. Watch Small Stocks, Big Money, RedChip's program featuring exciting small-cap companies, every Saturday at 7 p.m. Eastern on Bloomberg U.S.A. And finally, join RedChip's next webinar with Calidi Biotherapeutics on Monday, March 17, at 4:15 p.m. U.S. Eastern. Register for all RedChip webinars at redchip.com/events, where you can also view an archived version of today's webinar. Thanks again to our many participants today. And thank you, Marco.

Thank you. Have a great day.