Fathom Holdings Inc (FTHM) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to Fathom Holdings Third Quarter 2020 Earnings Conference Call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Roger Pondel, Investor Relations for Fathom Holdings. Please go ahead, sir.

Thank you, Chad. Hi, everyone. I'm Roger Pondel with PondelWilkinson, Fathom's Investor Relations firm, and it is my pleasure to introduce the company's founder and CEO, Josh Harley; and Fathom's President and CFO, Marco Fregenal.

But before I turn the things over to Josh, I want to remind all 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 adding new capabilities and the ability to reduce costs and drive sustainable growth as well as those set forth in the Risk Factors section, a Fathom's registration statement for its initial public offering as was filed with the SEC and copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time.

As a result, actual results could differ materially from those included in the forward-looking statements. 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 management 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 as to the most directly comparable GAAP measure is included in today's press release, which is now posted on the company's website.

And with that, I'm happy to turn things over to Josh Harley. Josh?

Thank you, Roger, and thank you to everyone who's joined the call. I see several investors who have come to know and truly value over the last few months. So thank you for placing your faith on Fathom and, of course, for your continued interest.

As you know, today is Veterans Day and yesterday was my Marine Corps birthday. So little bias there. To all those who've served our great country, thank you for your service. As a Marine Corps veteran, I can fully appreciate your service and your sacrifice. So thank you, and God bless.

I want to take a moment to also thank our agents and our employees for your continued dedication to truly serving and placing on this first. I know for those who are listening outside the company that this may sound strange or altruistic, but I can't stress enough the importance that this plays in the success of our business and, of course, in our company's culture. So thank you to placing your trust in us and, of course, choosing to be part of our Fathom family.

We often hear agents say that they join to earn more commission, but they stay for the culture. And I can't even be going to tell you how much that means to me.

Today, I'm excited to share Fathom's third quarter results with revenue growth of 74%, we beat estimates by over 100%. And I believe this clearly shows our model works, especially in light of the craziness surrounding the pandemic.

But as horrible as COVID is, it continues to prove that our company was built to defend against times like these. We've been very busy since our last call, having bench strengths, entering new markets and making plans to have service that should give Fathom made as a stronger competitive advantage, while, of course, increasing our revenue per transaction.

Now as I mentioned earlier, our impressive third quarter performance included high double-digit revenue growth of 74%, adjusted EBITDA profitability and solid improvements in all of our key metrics, including agent count, real estate transactions and revenue per transaction.

Now Marco will review the numbers in more detail with you in a moment, but I want to point out that by the time our IPO closed and funded, we were only public for the last half of the third quarter. So our quarter growth did not really benefit from the funds we raised.

I think it's fair to say that we nailed this quarter, right? While still operating on a bootstrap budget and spending an incredible amount of time on IPO roadshows, needless to say, we were burning, I won't say, literally, but figuratively burning the candle at both ends.

But we strive on good -- obviously, we thrive on good challenges, and we'll continue to work hard and just hard in growing our business. Now I love that I can say proudly that we came in with the second-highest revenue increase of all publicly traded residential real estate brokerages, again, without having the benefit of being flushed with cash yet. I think it's important to set proper expectations.

I can just hear people say already, that you raised over $30 million and what's taking so long. While yes, we now have money in the bank. We do believe it will take some time to effectively and strategically put those funds to work.

With that said, I'm looking forward to showing you what we can do with it. For those of you who are not familiar of Fathom, I'll spend just a few minutes talking about why we're different, why we're different kind of real estate brokerage and why we believe that we're disruptive in this industry.

For those of you who already know us, I apologize in advance for making you sit through this, but I'll keep it short, I promise. Now like others, Fathom is a full-service residential real estate brokerage.

But those are dime a dozen. In fact, there are around 86,000 brokerages across the United States.

Unlike others, however, we leverage an innovative platform as a service model, which is powered by our proprietary cloud-based technology called IntelliAgent. Our technology platform allows us to operate virtually while providing our agents with all of the major functions that they would otherwise get from traditional brick-and-mortar company. Not only does our technology aid our agents, it also allows fountain to streamline and automate our operations and significantly reduce our costs and personnel requirements.

As a result, we're able to charge a fraction of what other brokerages charge their agents, putting more money in our agents pockets to help them reinvest in their business. This also gives us a faster path to profitability than many of our competitors who are charging monthly fees and large commission splits.

We recently added a new outlet to our Fathom family to continue solidifying our market position. We created a new position of Chief Technology Officer of IntelliAgent, Grady Ligon, who has more than a decade of real estate technology experience, joined us in August to further develop our platform as a fully integrated real estate search transaction, technology and communication hub.

We're excited about the advantages that IntelliAgent creates, including attracting new agents and helping them become more productive, while adding more robust technology to further reduce costs and improve our operational efficiency.

Now I want to reiterate that the previous point about increasing agent productivity through improvements in our technology. Now our focus is not just in adding more agents, but also in developing more productive agents.

I believe we can accomplish that by providing more tools that help our agents get in front of more buyers and sellers as well as reduce the amount of time required to manage the transaction process.

And in time, we also intend to generate real estate leads for our agents, which in turn will help Fathom further increase our revenue transaction. Now one of the unique things about Fathom is that we offer a small flat fee commission structure to our agents versus a large percentage split that our competition charges their agents. Our model allows agents to make more money and reinvest those dollars into their marketing efforts to grow their sales.

And as you can imagine, this makes us highly attractive to agents. In fact, we saw a 38% growth in agent count in Q3 year-over-year during a pandemic, ending the quarter with over 5,000 agents.

Our low fee model attracts more ages to our platform, generating more transactions that we can then capture for future potential services such as title, mortgage, insurance and so on.

Now as I mentioned earlier, we often hear agents say that they join Fathom to earn more commission, but they stay for the culture. While I don't want to make too much of our glass door rating, it does validate this feedback.

Our almost perfect glass door rating of 4.9 puts us at the very top of all large residential real estate brokerages and helps with recruiting retention efforts. Although this is just one example that shines light on our culture of service, I'm very proud of what we're creating. I'm also proud that we have the lowest agent attrition rates in the industry of just 1.5% per month. Glass door is nice, but if you want a true representation of whether agents are happy, agent attrition rate is the best indicator.

Now we see -- we might see that number increase a little when or if we make a large brokerage acquisition, simply because it takes time to bring their level of agent service and satisfaction up to our level.

But with time, I feel confident we'll be able to continue to maintain an industry-leading number. To further drive agent recruitment and retention, we also recently added a vice president of recruiting and promoted a 10-year Fathom veteran to Vice President of Broker Operations. As Vice President, Recruiting, Russell Laggan, is now responsible for the day-to-day operations of our agent growth initiative known as talent acquisition. And Russell and his team are working to share our value proposition with agents across the country who had benefit from affiliating with Fathom. Given his expertise, he's also acting as a business coach, sales manager and, of course, subject matter expert on the topic of recruiting and attracting agents. He's been absolutely fantastic for our company, and we're very pleased to have him. As Vice President of Broker Operations, DeJane Kerr, who's been with us for 10 years, will provide support to our growing network of agents, including onboarding and training. She is an amazing leader, and I'm proud that we were able to promote her into this role. She's absolutely fantastic.

Adding new agent is not only a function of recruiting, but also entering new geographic markets. Most recently, we launched operations in Oklahoma and West Virginia, increasing our reach to 26 states and 112 local markets.

Our virtual software-driven model, which I described earlier, is highly scalable, allowing us to quickly expand in new markets at a very low cost. I think that's key.

This will serve us well as we continue to expand across all 50 states and, of course, Canada as well.

Now West Virginia represented an acqui-hire of a great leader who is running a small operation.

She helped us state and we've already begun recruiting and helping her grow that market. Oklahoma is a little bit different. It was a licensing play to preopen the market so that once we hire the right leader, we can hit the ground running in that state.

We're currently interviewing leaders in Oklahoma. So if you know someone you think is strong, please send them our way. We're actively interviewing right now. Now during the third quarter, our cost to acquire 1 agent was $920, making our breakeven on each agent less than what we generate on just their first sale. And that's a tremendous claim to be able to make. I also want to reiterate that lifetime value of an agent is over $18,000 to us.

And the ratio of that lifetime value to our cost of agent acquisitions is over 20x. As we get bigger, we expect our cost per agent to improve even further. However, in the near term, we do expect this number to increase as we devote additional resources and investments to help drive our growth. But again, at 20x LTV to CAC, I think we got a little bit of room to grow.

Now before I get off my soapbox and turn the call over to Marco, I do want to discuss our recent announcement about the planned acquisition of Verus Title. For those of you who followed us since our IPO, entering the title business and signing definitive agreement for acquisition should not come as a surprise. During our roadshow, we said we were looking to add title services to Fathom acquisition. And I'm a big believer in doing what we're saying we're going to do.

And we're doing just that. I'm even more proud of the fact that we were able to do that in 4 months, which should have taken 6 to 8 -- or rather 6 to 9 months, and that's something to brag about, if I was the bragging kind, of course.

Now Verus is a small but growing and very profitable company. Their technology focus matches ours. Their virtual model matches ours. Importantly, our core beliefs of servant leadership are lined as well.

Verus will continue to be managed by its current team, led by its Founder and CEO, Paul Yurashevich, who will report directly to our President and CFO, Marco Fregenal.

I was immediately impressed by, Paul and his team. Paul is an excellent leader. And like me, Paul is driven to win and has a strong passion for serving others. I admire, Paul, and I'm proud to have him on our team as well.

Now I don't want to take -- I don't want to take your time to by repeating what was already in the press release. So I'll stick to a few sailing points. Verus Title currently operates in 19 states as a base close to our home office in North Carolina.

Our plan is to roll them out across all Fathom -- all of our Fathom markets, focusing first on title states. I firmly believe that our experience and our resources should be able to help them reach that goal.

Now it is our goal to acquire a title company to have reach and licensing in many of the current markets, but we didn't want to pay for size. So this is a very strategic acquisition. I just want to make sure I clarify that.

As we knew that we can leverage our size to scale them up quickly. This kept the acquisition cost low, ultimately leaving more funds available for us for additional acquisitions and growth initiatives.

Additionally, we plan to work with our software developers to find new ways to further streamline Verus' operations and services as well as providing more value to our clients and our agents, of course, our shareholders.

Now one question I've seen a few times already is if they're different than a non -- than a traditional title company and that they contract out underwriting portion.

First, I want to say that it's a misconception to assume that all title companies do the underwriting. Verus operates the same as every other title agency and that they operate as an agency, they operate as an agent, not as an underwriter. In general, for title, you have agencies, and we have a few large underwriters that they all work with. Then you may have a few underwriters who also operate as wholly-owned agencies, such as Fidelity National Title Group, who has local fidelity title agencies. Again, Verus operates as an agency with the relationships with many of the largest underwriters to include Fidelity National Title Group, First American Stewart Title, among others.

Part of the value that I want to point out here. Part of the value that Verus brings to the market is that they have relationships with various underwriters and aren't beholding just one. So if one doesn't want to ensure the transaction Verus can underwrite it for another.

That makes it very -- much more competitive with agents or before agents. Now another thing everyone's going to be asking about is attach rate. And I can certainly appreciate that. Obviously, we can't give any predictions of what we think it will be, but I'll try to add a little color here.

As you look at other brokerages and their attach rate for title, you'll find numbers all over the place. For example, real estate companies that operate a franchise generally have a much lower attach rate for many reasons. Now I could talk for an hour about them, but I'll spare you the psychology and resulting poor execution. We've studied the market and also reviewed research conducted by industry analysts.

And we believe that with our model and by not operating as a franchise, we'll be able to enjoy a much higher attach rate than many of our competitors. Again, I'm not ready to identify what that is.

Everything we do is the support of our agents. So the addition of title services should give them additional and significant competitive advantage, providing them with tools that help make the home buying and selling process even easier for clients.

Then Marco will provide more color later, but since the transaction is not closed, there's not too much more that we can say at this point. We do believe that adding title services will help increase our revenue per transaction in a meaningful way.

And I think that's the key takeaway. We're focused right now on identifying new areas of opportunity, which could include mortgage, insurance, lead sales to Fathom and non-Fathom agents as well as additional technology.

Everything we're exploring is designed to bring more value to our agents, increase our revenue per transaction and shorten our path to profitability.

So with that, for that not so short opening, I'd like to give my soapbox. It's my pleasure to introduce Fathom's President and Chief Financial Officer; Marco Fregenal. Marco, it's all your buddy.

Thank you, Josh. Let me start with a brief review of our third quarter results.

As Josh indicated earlier, revenues grew 74% year-over-year for Q3 to $59.9 million from $32.1 million of the previous year.

This increase was primarily driven by growth in transactions and average revenue per transaction, supported by a strong residential real estate market and continued rising home prices.

GAAP net loss for the quarter narrowed to $184,000 or a loss of $0.02 per share compared with a GAAP net loss of $239,000 or $0.02 per share for the previous -- for the same period last year.

Adjusted EBITDA and non-GAAP measure increased to $5,800 for Q3 versus adjusted EBITDA loss of $170,000 for last year's third quarter.

Profitability decreased on a sequential basis, resulting principally from investments we made in driving for future growth and the cost associated with being a public company.

Remind everyone that Q3 was the first quarter that we were a public company. As planned, G&A expenses increased to $2.9 million compared with $1.9 million for Q3 of 2019. This increase was primarily due to an increase in expenses related to being a public company and an increase in growth-related expenses. However, the increase demonstrates the scalability of our model as G&A expenses decreased to 5.2% of revenue from 6% of revenue in Q3 of 2019.

Our marketing expenses increased to $217,000 from $55,000 in Q3 of 2019, and this is mostly due to an increase in our talent acquisition team and an increase in advertising.

We closed nearly 8,100 real estate transactions this quarter, a 56% increase from last year. Transactions grew 38% sequentially.

Average revenue per transaction includes -- increased 12% to almost $6,900 from about $6,200 for last year's third quarter.

Q3 average home prices increased to approximately $272,000 from $247,000. We saw rising home prices in more mature markets as well as our newer markets.

Our agent network grew to 5,026 agents, up 38% from 3,629 agents a year ago.

Now regarding seasonality in the real estate market, I'll remind you that home sales often follow a bell curve. For example, nationwide, Q4 and Q1 will likely always have a significant fewer sales than Q2 and Q3. However, when a business is growing as quickly as we are, the bell curve is turned on its access, which can create the appearance that there is little or no growth between Q3 and Q4. When in reality, we are, in fact, outpacing the normal seasonal decrease.

Moving to our acquisition announcement of last week. I'll provide some additional color on the Verus Title transaction. We plan to acquire Verus for about $1.7 million, including approximately $700,000 in cash and $1 million in Fathom Holdings common stock. $90,000 of the cash portion of the purchase price will be held back closing to settle any working capital adjustment. We do expect the transaction to close before the end of the year, subject to customary closing condition. When complete, Verus will become a wholly owned subsidiary of Fathom Holdings. While we're not providing additional details about Verus financials yet, we do expect this acquisition to be immediately accretive.

Verus is a small but growing company and is currently profitable. Now to help you put this acquisition into context, hypothetically, with about 5,000 total closings transactions per year, we could add about $2 million of EBIT. If closing transactions grow to $10,000 per year, we could add about $40 million of EBIT. And with about 25,000 title transactions, we could see EBIT -- the EBIT number in excess of $12.5 million. Hopefully, this gives you a view of the potential profitability of this business. To be clear, these are hypothetical forward-looking statements and year-to-date, Verus has completed just over 900 transactions.

Now as Josh has indicated, we are very excited about adding title as a critical service to our agents that can add to their toolbox, making them and Fathom even more attractive in the eyes of homebuyers and sellers.

We are continuing to experience a very strong residential real estate market as well as improvement in the U.S. unemployment rate. And hopefully, economy of our nation following the election. For many variables related to the pandemic and potentially new political policies as well as a host of unpredictable economic factors can still pose a high level of uncertainty over the near term. For those reasons as well, many other -- as many other public traders have done, we are not providing specific financial guidance.

To that said, we believe that all -- by all measures, our third quarter results were fantastic. With a much stronger balance sheet and additional resources to fill our growth, we look forward to the future with excitement and optimism.

The entire Fathom team again deserves our thanks and praise for their hard work and dedication for making Fathom the incredible company it is.

With that, I'll turn it back to Josh.

Thank you, Marco, and yes, they definitely deserve that.

As you can probably tell by my excitement, we're moving ahead at full steam with the resources provided to us through the successful IPO, our balance sheet is solid. We plan to put in to work strategically by continuing to expand our agent base, both in existing markets and in the new ones. We've already begun to vertically integrate, as we said we would, and look forward to identifying additional opportunities to make Fathom even stronger.

Whether that be through adding ancillary services, enhancing our technology platform, we're finding new ways to increase agent productivity. It's all about leveraging the high-efficient model that we have built to generate, sustained future growth. Now let's open the call to questions. Operator.

(Operator Instructions)

And the first question will come from Tom White with D.A. Davidson.

Just a high-level one for me. It seems like the pandemic is accelerating some of the digital transformation kind of trends in the residential real estate market. And sometimes when technology disrupts an industry, you can see spreads compress, like, for example, in the industry that I work in, institutional brokerage, that's happened over the last several years. Just curious whether you think that this kind of pickup and disruption that we're seeing in the residential real estate space at the moment. Is this kind of the catalyst that may be finally starts to compress spreads in your industry? And curious what you think that means for your business if that happens.

I think it's a fantastic question. Thank you so much. First of all, the answer is no. I know it's a very short answer. But let me address it this way.

Technology is advancing even faster in real estate because of the pandemic. It didn't -- I don't think it has changed things. It's just speeding up how fast those things change. The main change that we've seen is not really compression in, for example, commissions, but really how fast a transaction happen, right? We've moved to a lot of virtual showing. So instead of a buyer, getting in the car and going and seeing 20 homes over a weekend, God forbid, but it does happen. I got 20 homes every weekend. Now they can look at half those homes using much higher level technology, virtual tours and so forth to say, you know what, that home is up light fit for me. I don't want to be expose or expose my family to COVID. So I'm going to look at 10 homes or 5 homes instead. So technology has done a great job at making the process easier for the agents and the consumers.

And it has really, in some ways, sped up the actual transaction process, the buying process, even the closing process. But I haven't seen it create a compression on commissions. Now if that were to happen. There's 2 things. First of all, there's 2 ways to look at the market is compression on the number of sales, we're actually seeing an increase in sales. Now of course, we're starting to see a decline in mortgages because of a lot of the things, I think Marco will adjust that better than I can. But what we're seeing, though, is, let's say, for example, the market took a downturn. So let's say, there's 20% fewer homes to be sold. In that scenario, that could actually benefit Fathom because of our model.

So what happens when an agent is currently paying a 70-30 split with another brokerage, if they were to move over to Fathom, even though they closed 20% fewer homes and paying they're before they're on a 70-30 split, they move into Fathom now that they're paying $450 per transaction, even though they closed 20% fewer homes, they still make 8% more income.

So even if there is a compression on the market, right? There's fewer homes and so forth, that could actually benefit Fathom and help us grow even faster. Because again, there's only 2 ways to make more money, right? There's increase your sales or decrease your costs.

And during the pandemic, during economic downturn, it's hard to increase your sales. The only other option is decrease our cost and that's where Fathom shines.

Great. And maybe I'll try and slip in one more, if I could. Also sort of another high level one, but curious whether you're seeing any signs that the pandemic may be kind of the catalyst for -- that causes some of the large kind of bricks-and-mortar incumbent brokerages to sort of finally disrupt themselves and maybe try to more aggressively adopt elements of a model that looks like yours or other kind of maybe virtually operated brokerages. Any view on that?

Yes. I love that question because I actually just gave -- I gave a talk on that very subject. One of the things that changed that should come from this is the elimination of offices, right? We've been operating virtually for the last over 10 years, almost going on 11 years now. And yet during this pandemic, company has been scrambling to figure out how to do what we've been doing for so long.

And so it's in even normal times, a lot of these traditional brokerages charge $100 per month, 70-30 split, right, $3,500 per transaction. They're making so much money from their agents, and yet they can't pay their bills.

And usually, the reason for that big piece of that is their office costs. Their office is usually the biggest expect. I wish it was marketing. I wish it was agent recruiting, but it's not. It's their offices. And I think that with this we're starting to see more brokerages realize, you know what, agents can operate from home. They don't need to come in off. In fact the National Association of REALTORS has proven this for years. It showed that only about 1% or 2% of all clients walk into and find the realtor by walking into a real state office.

71% of our clients finding the agent through the agency relationships to the agents marketing. So offices aren't necessary. So if these brokerages want to survive even with -- even regardless of this pandemic, if they want to survive, they need to eliminate their offices. And I think that this pandemic has really helped them start to quickly almost force them to figure out the technology, even if they were opposed to it or pushing it off because they were confused by it. It's forcing them to embrace it. What's interesting about that, though, is that if they do that, if they limit their offices, some of our competitors who have that same traditional splits and are virtual, and that's their big claim to being different, the big differentiator, that differentiation goes away, right? Suddenly, if Kilwins dropped all of their offices, Kilwins is a fantastic company. If they dropped all their offices, EXP has no real differentiator anymore, right? Things like that. So I do believe, by the way, both becomes a great, don't mean to this dismiss them in anyway, I think they're fantastic companies.

But if Kilwins did that or any of these other big companies did that, a lot of the differentiation goes away. And I think COVID, the pandemic is proving that out.

The next question will come from Darren Aftahi with ROTH Capital Partners.

Congrats on the quarter.

I guess first one for me. In a normal world, Marco, to your commentary about sort of a seasonal drop-off in the fourth quarter. I guess we're not sort of living in a normal world right now. So given that, could you possibly shed some light, and I know you don't want to give guidance, on just what you're seeing quarter-to-date in your bigger markets? And has that strong demand you saw in the third quarter kind of spilling over into the fourth?

Darren, Thank you.

So I think when you look at Q3, with the 74% growth, and I think every real estate company had similar experiences, right? Part of the Q3 growth is related to some growth that came from Q2 that got delayed, right?

So I think we have to pay attention to that. And there is seasonality to that. So typically, Q4, there's a reduction in Q4 compared to Q3. Having said that, this is a crazy year, right?

And so there's no question that 2020 will go down in history as one of the craziest years. So we're not seeing that seasonality decrease like you typically see in the previous years. So there will be some, but it will not be as drastic as previous years. I think that's the best thing we can possibly say in terms of that. So I think we can look back in previous years, see what that number looks like. And I think we can look at this year for us. Now other companies may face some different percentage numbers. But for us we're seeing that decrease from Q4 to Q3, thus far, and it was still early in the Q4 is not going to be similar to previous years, right? Because of this sort of delayed issue with the pandemic.

Having said that, we're still very much affected by supply, right? And supply of home is still an issue in the country, even though I think we've seen a reduction in new mortgages applications. We still have a low interest rate, but let's not misunderstand in terms of the numbers in terms of supply, right? And so -- but I think, again, to compare Q4 of this year, looking back at Q4 of last year, we believe the decrease is going to be lower than last year.

Got it. That's helpful. Just on the transactions, the platform consummated in the quarter, is there a way to kind of deduplicate what was kind of in mature tentpole markets for you guys versus perhaps newer markets?

Yes. That's a great question.

We continue to grow rapidly. And so the challenge is what is a new market, right? And so Josh and I look at these numbers all the time, and we're trying to -- is that -- is 25 agents in new markets, 50 agents in new markets, 100 agents in new market. So we don't really look at that yet. Having said that, we did have, in our history of our company, a greater number of markets that hit what we like to call a number of 50 agents. We see that when a market hits around 50 agents, then they start seeing a -- even more increasing rate. So we did see a greater number of markets hitting 50 agents. And I think that as we go forward, that's probably a number that we're going to share, so we give some sort of flavor to our growth. But that's the magic number that we've seen in our history is that that 50 number.

Great. And if I could just squeeze one more in. Josh, I think you mentioned an acqui-hire in West Virginia. I'm just kind of curious, that's a thought what we kind of talk to investors a lot about. What is the general kind of thought process about acqui-hires as you try and ramp from sort of roughly half the U.S. in terms of precedence to all 50 states?

Sure. I appreciate the questions. It's a great question. So when we're looking at expanding, obviously, we can look to hire 1 agent -- I'm sorry, 1 manager and then slowly, they add 1 agent, then 2, then 4, then 5 and just the growth is slow. On the far other side of that, we can do an actual acquisition, acquiring an office that has 30 or 50 agents.

In that scenario, there's a lot more cost to that. And then sometimes, we find a small operation that has 5 or 6 agents. They're just getting their company off the ground. They want to do what Fathom's already doing and they learn about it, like, that's what I want to build. And I'd rather do that with this company.

They may already have 10, 15 agents or it could be a team they're running. They're currently running a team, they're very successful, and they only go to next level being a brokerage. And so in that case, what's nice is that you're not having to make "acquisition." You're not paying tens of thousands or hundreds of thousands of dollars to make an acquisition of agents. They're really -- you're hiring this person and they bring a group of 10 or 15 agents with them.

In this case, that's what happened.

We met her. She's fantastic. She's a great leader. We're really proud to have her, and she brought agents with her. So that's what we mean by acqui-hire.

(Operator Instructions)

The next question will come from Greg Kitt with Pinnacle Fund.

Congratulations on a great quarter.

First question is just on agent recruiting spend. I'm recalling that you spent $1.4 million on agent recruiting in 2019.

And I appreciate you pointing out that 20x LTV to CAC, which is outstanding. And you provided some commentary about putting plans in place to use the proceeds from your IPO, the [$30 million] that you raised from your IPO. And one of those uses of proceeds would be agent recruiting spend or investment.

Can you please help us understand, Russell Laggan, you outlined was a new hire to help build out the team. Is he an important part of building out that strategy to come up with your plans that you put in place to increase your agent recruiting investment? And what are the barriers to you getting that done? Is that something that you think you are able to finish by the end of this year? Or is that something that might take longer?

Yes. I think it's a fantastic question. First of all, with Russ, he is a great hire. I'm very excited to have him, but he's not detrimental to us to accomplish that. We were already doing that before we brought him in. He just really helps take that to the next level.

But we're executing already, bring him in. We're hoping to continue to build that team around him. We've already made some additional hires around him as well, additional recruiters. And so we've got a great place, but recruiting is not the only way we grow.

I just want to kind of point out first, it's a piece of our growth. Another piece of our growth that is very important is through agent referrals.

In fact, about 35% to 40% of our growth is from agents referring other agents. And so that's a big part of our strategy as well. And part of that comes down to how you serve your agents, right? How you love on them, how you serve them, how you make them feel like they're part of the family. And so all of these strategies are very important to us being able to achieve our ultimate strategy. Recruiting team is very important because as we open up a brand-new market with a brand-new leader, they're just learning the Fathom story themselves. They're learning how to pitch the story, tell the story. And so the recruiting team can come up behind them and help feed leads to them as they're making phone calls as well. So instead of one person making phone calls, you've got 2 or 3 people making phone calls, getting Fathom introduced to more people to help feed that market faster as well as more mature markets.

Now they're really focused more on the newer markets, but they still do help us in mature markets as well where we need help, where we see big opportunities. Say, for example, we hear about a brokerage that may be shuttering or they're struggling financially. We'll pull all of our recruiters together, say, okay, here's a group of agents who are about to have be forced to find a new broker, how about it, right? Just having a little bit of fun with that. But yes, Russ is a great acquisition -- a great hire, but he's not vital to what we're doing.

But I do think I'm very excited to have him. So I don't want to -- hopefully, he's not listening, thinking, "Oh, no, they're not bragging about me." We actually love him.

Yes. So again, the other piece that we're actually learning, and we weren't doing before is PR. So Wendy Forsythe, we hired her. She is another fantastic hire, love her to death. She's coming with some ideas that we never really knew how to execute on. That's with the Public Relations, PR getting us -- get us in front of -- I tend to be very humble and modest, and I don't like to be in front of people if I don't have to. I just want to put my head down to work. And she's good about pulling me out of my shell and making me give interviews and speak in front of people and things like that. And so we already -- we don't know what that ROI is going to be of those PR initiatives. However, we're already starting to see a lot of opportunities come out of it.

So we know it's going to be very successful, and that's because of her and because of that hire. So obviously, hiring the right people is going to improve every one of our growth initiatives. But it really comes down to execution. It's more than just one person. It takes the whole team, and we're very blessed to have a really strong team.

So it sounds like -- if I'm understanding correctly, it sounds like a lot of your agent growth has been through the traditional recruiting channel that you've been employing for multiple years and then referrals. But investors that own your stock today haven't yet seen the growth, the agent growth from your early incremental agent recruiting investment that's getting deployed as we speak now.

And so that's -- that will show up in the coming months.

Yes. I actually want to add some color to that because that's a fantastic question. And I think a lot of people immediately say, well, gosh, they raised all this money. They're loaded. Not quite.

We've got the money to be able to do a lot of great things now, but it takes time, right? It takes time to actually spend that money, to put together new initiatives, actually spend the money in it.

And so we have a -- if you look at the balance sheet, we stall almost all the money there outside of paying for D&O and paying off a loan, I mean, it's all there. So we've got a lot of great opportunities, things that we're working on currently, but it takes time.

And so when people know that -- when they know that we've got the funds to be able to invest, it does take time. You're not going to see instant gratification. And like you alluded to, even from the time we start having the conversation with a new agent, it takes time for them to decide to come over, right? Once they're ready to come over, we can onboard them in the same day, right, in most cases or the next day. So it's very, very quick.

But the conversation takes time to get them to get off the fence and make that move. So all of this can take some time, but we are excited about having the opportunity. We're excited about all the investors who put their faith in us.

Because now we have the funds to be able to execute all the things that we wanted to be able to execute on as well as acquisitions of small, medium and even larger brokerages, right? Those conversations are happening. And I'm excited that we can have those conversations now.

Thank you for treating investors' capital with respect because I think one of the fastest ways to lose investor interest is to treat your wallet like there's a hole in it, and you just got to go out and spend the money. So I appreciate you being responsible with the cash that you raised.

Marco, can you cancel all those pool table orders?

I'm glad I said that. On the...

That would never happen. Trust me.

On agent retention, so I'm understanding that agent recruiting investment was historically somewhat constrained by your balance sheet and you're removing that governor with calculated investment going forward. On your Q2 earnings call, you highlighted that your agent attrition is half of the industry average.

And that -- and you reiterated today that a lot of agents come to Fathom for the commission structure but stay for your company culture. I noticed that agents can now receive stock as a part of their commission rather than just cash. Do you think that agents are going to align themselves to Fathom by choosing to receive some of their commission dollars and Fathom's stock rather than cash? And how do you think about the effect that enabling agents to become Fathom shareholders will have on agent acquisition and retention?

I think it's a great question again. So first of all, right now, the answer is no because we're not allowing agents to buy stock in lieu of commissions.

Although that is something we've considered and will continue to consider. But part of the reason why people do that is because they need to raise funds. And so they'll raise funds from their agents. One of our competitors, that's how they were funded for the first 5 years of being public.

They're on the OTC. So they didn't really have that opportunity. The agents funded them through exchanging their commissions for stock. And that really won an awful lot of agents, their stock has really grown since then. So kudos for them.

It's something we've considered. And we'll continue to consider. But right now, we don't need to do that. And if we do that, it's purely to benefit the agents, not because it's something we need to do to help raise additional funds.

With that said, we do give agents stock for every agent they refer and for every sale they close. And that makes every agent a shareholder. And we do believe that, that will help keep agents with our company as stock comes -- the stock we give them comes with 3-year vesting. So they may not want to walk away because they see our stock, in the last several months, go up 100%, they're excited, right? And so they don't want to make a move because they believe in the company and they can see firsthand that we actually live and do what we say, right? You guys get to hear us say things but they get to live it. They know that we actually do what we say we're going to do.

And so they have a little bit of insider, right? They know if they experience it. But part of the reason we did that also is because it shows the agents that we really value them. We recognize that all of our transaction revenue comes from our agents. And we recognize, we also recognize that 35% or 40% of our growth comes from our agents referring to other agents.

And we want to let them know that. Not only do we say thank you but we show it through our actions and by giving them that stock to be able to reward them. And so yes, it gets them excited and more importantly, it really helps them feel like they're the part of the company, right? They're owners in the company. And that does nothing but good things.

Josh, I have 2 more quick ones.

I was unaware of the hire of Grady Ligon, and I looked at his background, and I was highly impressed to see that he was the Chief Information Officer of Berkshire Hathaway HomeServices. Can you quickly touch on why Grady chose to join Fathom and what he saw as the opportunity here?

I want to be very careful not to put words in his mouth, but we've had a lot of conversations and one of the things about being an insider of these really big organizations, is you see that there's time for change, right? I had a chance to listen to every one of the earnings calls for all the competitors. And the fact that competitors are getting excited about 2% growth, I never want to be that person gets excited about 2% growth.

And I think he's in a similar position. He saw that, look, there's opportunities to disrupt this industry. There's opportunities to change. There's opportunities through new models through technology, and he wanted to be part of that. He wanted to be part of something that's going to actually revolutionize the industry.

And so that's things we talked about. I said, look, I can't pay as much you're making before, he's like, that's okay. I want to be part of something that's going to change the industry. And that's something he was excited about. And we're excited to have him because he comes with a significant amount of knowledge, knowledge that we have been gaining over the years, but he's got a decade of it.

He's got connections that we didn't have, right? He's able to get things done quicker because he has those connections and that knowledge and that experience. And so just an amazing guy. He's in Houston right now. He's actually moving up to our Dallas market. And we're very pleased to have him because yes, his resume is legit, but more importantly, he is the real deal.

It's really exciting. And just last comment or last question for me was around Verus Title. I heard you saying that you're not ready to talk about an attach rate. But Marco, I appreciated the commentary. I wanted to make sure that I heard you correctly if you were generating revenue from 25,000 Title transactions. Did I hear you correctly state that, that would be $12.5 million of EBIT?

That's correct. Yes. And that's based on -- I think we talked earlier that Title is different pricing in every state, right? And then the difference in terms of pricing, whether it's a title stay versus an attorney stay, so that's a blended rate. But that is correct, the 25,000 closings, we do believe we can see EBIT of about $12.5 million.

That would be really exciting. Clearly, there's seasonality in your business, but you did an -- annualized 32,000 transactions in this quarter.

And I don't think anybody would encourage investors to look at this as an annualized quarter, but I would -- I would love to see -- if you were able to get 100% attach, and clearly, there's an opportunity there for that. So that's also unrealistic, but there's clearly an opportunity where this could be a very real business and a real contributor to you.

We are very excited about the future of Verus Title and very blessed to have them as part of our team. Paul is a great leader, and so it's a great acquisition.

There's actually a report or a research report done by Inman News and 1000watt Consulting a couple of years ago. And you can find it if you google it, but it actually talked about attach rates of both mortgage and title.

Title tends to be much greater attach rate than the mortgages. Because with mortgage, you're going to be pushing like, "hey, I've got this great lender. I love this lender."

But the consumer ultimately picks who that is. It's a much bigger part of their life, right? With title, it's [6.5 if they isolate it], they don't really care. It's not going to change how much -- how much they have to pay to closing the deal.

So if the agent says, this is who I want to use, it's who I recommend to you. He's like, okay, whatever you say, right? And so our goal, really, our job is to just teach our agents on the buyer side to write in our title company on the contract and on the listing side to fight for our company. So most agents don't have a relationship with a -- or they might have a relationship, but they don't have a financial relationship with the title company because title companies can't pay agents to send business over. So while an agent may say, I really like this company over here Capital Title, whoever, they're not going to die on the hill to make sure that, that company gets the deal.

But if we can show our agents that there's real value as you use our company, hopefully, bring -- generate some more revenue and that revenue hopefully generates higher stock value, which means your stock is worth more, right?

If we can show them the value in sending the business over and build those relationships, then I do think we have a very strong attach rate. And then the numbers Marco gave, he's ultra, ultra conservative. So I'm really excited about what we can accomplish. But take a look at that because I think it will be enlightening. You'll see -- I think you'll see that the companies that operate as a franchise struggle on both the mortgage side and the title side with their attach rate, the lead operate as a franchise, right? So we can have a bit more control on that. So I think we'll be able to do much better than some of the competition has been doing.

I'm very excited about your opportunity to capture more dollars per transaction.

And I'm looking forward to seeing if there are any other ancillary services that you can attach, you mentioned mortgage, insurance and the generation or lead sales to agents. So with that, I'll just say thank you very much, and we're very excited shareholders and good luck with the rest of the year.

And our last question will come from Kris Tuttle with IPO Candy.

And you sound justifiably happy as a really public company. I did have one question also on the title business. And my question is basically, like who actually sort of is the decision -- like the buyer or decision-maker for that business. And in some cases, I imagine, in some states the company who's leading the charge on the mortgage sometimes may sort of make that choice.

But I wanted to understand a little bit better, like what percentage do you think of agents are involved in that decision process with the consumer versus mortgage companies or lawyers or that kind of thing?

Yes. So that's a fantastic question. And it's -- there's a lot of misunderstanding because ultimately -- and it really becomes -- it really depends on the contract itself, but the contract may say that the seller is going to pay for the title, right? They own the home, they're basically ensuring that it is what we say it is. So oftentimes, the fellow will pay for the insurance, pay for the title insurance. But the buyers have to live with it.

So the buyers say, no, no, no, I've got to live with it. I want to use mine. So in that case, the sellers can say, I want to use mine because I'm having to pay for it. The buyers say no, I want to use mine because I have to live with it. And while that sounds good in theory, that's not what really happens. What really happens is the listing agent will put in the MLS, here's the recommended title company. And by the way, this is bizarre, but you know how most people pick the title company, most agents pick the tile company? Based on whichever one has a location that's closest to the house that they're closing on. That's it.

There's no emotional tie to it. There's nothing like that. Just -- it's convenient. Well, with Verus, we can compete with that because we can come to you. It's actually even more convenient. Don't go to the title office, risk COVID or whatever, we're going to come to you through remote closings and so forth. So we're going to come back to make it even easier than before. So ultimately, what happens is the seller -- the listing agent will put in MLS, here's a title company I recommend. However, the buyer agent is the one that actually writes the contract. And so on the contract, there's a place you can fill in the preferred title company.

So either they can just copy what's on the MLS or they can fill in the blank with who they want. That's why we've got to do a good job at teaching our agents to fill in the blank with Verus Title and then showing and demonstrating why and building those relationships to really enforce that.

And then so if we own the buyer side, it's easy because we can fill in the banks, right? If we work on the seller side, the listing agent make it a contract that comes in that says Fidelity Title.

And the agent says, you know, guys, we want to use Verus because of A, B and C. They're going to come to us. They're going to make it easier, so we wrote this. The buyer's agents going to say, "Okay. We're fighting right now on price and these inspection report issues, I'm not going to, again, like I said before, die on the hill over who the tile company is. I'm indifferent. I'm being paid, and the client is not paying any more or less. So why do I care?" Hopefully, does that help?

Again, congratulations.

Thank you. Appreciate you.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Josh Harley for any closing remarks.

Thank you so much.

And thank you, everyone, for your support and of our mission to revolutionize the residential real estate market. We'll continue to work hard for you. We will never lose sight on our long-term goal of growing shareholder value. Marco and I look forward to updating on the next quarter's call. In fact, we're all excited for the next call. So thank you again for spending this time with us today. And, of course, have a happy Thanksgiving. God bless.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.